Managing fund banking, credit facilities, and cash operations for lending strategies
Banking relationships for private credit funds extend beyond the custody and treasury services required by most alternative investment funds. Private credit managers often utilize leverage at the fund level through subscription credit facilities and asset-based lending facilities, creating more complex banking relationships that directly affect investment capacity and returns. Effective management of these relationships requires understanding how fund-level financing interacts with investment strategy and investor expectations.
Private credit funds typically maintain multiple banking relationships to address distinct operational needs. The core banking infrastructure includes deposit accounts for holding cash, payment processing capabilities for capital calls and distributions, and potentially foreign currency accounts for funds with international lending activities.
Selecting appropriate banking partners involves considerations beyond pricing and service quality. Banks with experience serving alternative asset managers understand the unique cash flow patterns of private credit funds, including large inflows from capital calls, ongoing smaller receipts from loan payments, and periodic distribution outflows. Familiarity with fund structures and investor servicing requirements helps ensure smooth operational execution.
Many private credit funds utilize subscription credit facilities (also called capital call facilities) to enhance returns and improve operational flexibility. These facilities provide short-term borrowing capacity secured by unfunded LP commitments, allowing funds to fund investments before calling capital from investors.
Subscription facility terms typically include borrowing base calculations based on eligible LP commitments, advance rates that determine how much can be borrowed against each dollar of commitments, and covenants restricting leverage levels and requiring minimum investor credit quality. Private credit funds may face different facility terms than buyout funds if lenders perceive different risk profiles.
Some private credit funds utilize asset-based facilities secured by the loan portfolio itself. These facilities allow funds to lever their investments, potentially enhancing returns while introducing additional complexity and risk. Asset-based facilities are more common in certain private credit strategies, particularly those focused on broadly syndicated loans or other relatively liquid credit investments.
Asset-based facility terms typically include borrowing base calculations tied to portfolio composition and quality, with advance rates varying by loan type, rating, and concentration. Facilities may include mark-to-market provisions that require additional collateral or repayment if portfolio values decline. Understanding these dynamics is essential before implementing leverage at the portfolio level.
Managing fund-level credit facilities requires ongoing attention to compliance, reporting, and relationship maintenance:
The income-generating nature of private credit portfolios creates distinct cash management requirements. Unlike buyout funds that may have limited cash activity between investment and exit, private credit funds receive ongoing interest and principal payments that must be managed efficiently.
Cash management considerations include determining appropriate distribution frequency (quarterly distributions are common), managing cash reserves for follow-on investments or unfunded commitments, and investing excess cash pending deployment. Some funds establish target cash levels to balance liquidity needs against the drag of uninvested cash on returns.
Private credit funds with international lending activities must address foreign currency management. Loans denominated in non-USD currencies create translation exposure that affects reported NAV and may create realized gains or losses when principal is repaid. Managers should consider whether currency hedging is appropriate and how currency effects will be reported to investors.