Banking for Secondaries Funds

Banking infrastructure for secondaries funds supports both routine treasury operations and the credit facilities that often facilitate transaction execution. The opportunistic nature of secondary market investing creates particular demands on banking relationships, as funds may need to move quickly on attractive deals while managing cash flows from numerous underlying positions. Establishing appropriate banking infrastructure supports operational efficiency and deal execution capability.

Primary Banking Relationships

Secondaries funds typically maintain accounts with established banks experienced in serving private fund clients. Key account types include:

• Operating Accounts: Used for management company operations including payroll, rent, and general expenses funded by management fees
• Fund Accounts: Separate accounts for fund-level activities including capital calls, distributions, and investment transactions
• Custodial Arrangements: Depending on structure and regulatory requirements, funds may use custodians for certain assets

Banks familiar with private funds understand the cash flow patterns, documentation requirements, and operational needs specific to these vehicles. This experience supports smoother day-to-day operations and faster resolution of any issues.

Subscription Credit Facilities

Subscription credit facilities (also called capital call facilities) have become common in secondaries funds, though their use may differ somewhat from primary fund applications. These facilities allow funds to borrow against unfunded LP commitments, providing flexibility in transaction timing and capital call management.

For secondaries funds, subscription facilities offer several potential benefits:

Transaction execution speed. Secondary deals may require funding on compressed timelines. Having credit facility capacity allows the fund to close transactions quickly and subsequently call capital from LPs on a more typical schedule.

Capital call efficiency. Rather than calling capital for each individual transaction, funds can use facility borrowings and call capital periodically, reducing LP administrative burden.

Bridge financing for large acquisitions. Major portfolio purchases may require capital amounts that benefit from staged LP capital calls rather than single large calls.

Facility Structure and Terms

Subscription facilities for secondaries funds share many features with those for primary funds, though some terms may reflect the strategy's characteristics:

• Commitment Size: Typically a percentage of unfunded LP commitments, often ranging from 20% to 50%
• Borrowing Base: Calculated based on eligible LP commitments, with concentration limits and eligibility criteria
• Interest Rates: Usually floating rates tied to SOFR plus a spread, varying based on fund size, LP quality, and market conditions
• Facility Fees: Commitment fees on undrawn amounts and potential usage fees
• Covenants: Financial and operational covenants including borrowing base maintenance and reporting requirements

Secondaries funds with shorter investment periods may have different facility sizing considerations than primary funds with longer deployment horizons.

NAV Facilities

Some secondaries funds use or consider net asset value (NAV) facilities that borrow against the value of existing portfolio positions rather than unfunded commitments. These facilities may be relevant for:

Funds later in their lifecycle where unfunded commitments have been substantially drawn.

Situations where the fund seeks additional investment capacity beyond what subscription facilities provide.

Bridge financing against expected distributions from underlying funds that have not yet been received.

NAV facilities involve different considerations including valuation methodology for collateral, advance rates against portfolio value, and covenants tied to portfolio performance.

Cash Flow Management

Treasury operations for secondaries funds involve managing cash flows from multiple directions:

Inflows include LP capital contributions in response to capital calls, distributions received from underlying fund positions, and any credit facility borrowings.

Outflows include payments for new acquisitions, fund expenses, management fee distributions to the management company, distributions to LPs, and credit facility repayments.

The unpredictable timing of both acquisition opportunities and underlying fund distributions creates cash flow forecasting challenges. Treasury teams maintain liquidity buffers and monitor expected cash movements from underlying positions to inform planning.

Foreign Currency Considerations

Secondaries funds frequently acquire positions in non-USD-denominated funds, creating foreign currency exposure. Banking infrastructure must support:

Multi-currency accounts for holding and transacting in various currencies.

Foreign exchange execution for converting currencies when needed, with attention to execution quality and costs.

Hedging arrangements if the fund chooses to hedge currency exposure, which may involve forward contracts or other instruments.

Key Banking Responsibilities

• Account Management: Maintaining appropriate account structures for management company and fund operations
• Credit Facility Administration: Managing borrowing base calculations, draw requests, and covenant compliance
• Cash Flow Forecasting: Projecting liquidity needs considering acquisition pipeline and underlying fund distributions
• Payment Processing: Executing wires for acquisitions, capital calls, and distributions efficiently
• Foreign Exchange: Managing currency conversion and any hedging activities
• Bank Relationship Management: Maintaining productive relationships with banking partners

Lender Selection Considerations

When establishing credit facilities, secondaries funds evaluate potential lenders on various factors:

• Experience with secondaries funds and understanding of the strategy's characteristics
• Pricing competitiveness including spreads, fees, and total cost of capital
• Flexibility in facility terms and responsiveness to amendment requests
• Operational capabilities including speed of funding and quality of service
• Relationship potential including other services the bank might provide

Some funds use club facilities with multiple lenders to diversify banking relationships and access larger facility sizes.

Questions to Address for Banking

• What subscription facility size is appropriate given our fund size, deployment pace, and LP base?
• How do we balance facility usage against the impact on reported returns?
• What is our approach to multi-currency transactions and any currency hedging?
• How do we forecast cash flows given uncertainty in both deal pipeline and underlying fund distributions?
• What covenants and reporting requirements apply to our credit facilities?
• How do we evaluate whether NAV facility capacity would benefit the fund?