Emerging managers' fund terms, extending credit
in a rising interest rate environment, and the supervisory regime
for third-party AIFMs are among the topics discussed by Peter D.
Greene, Stephanie R. Breslow, and Joseph A. Smith from Schulte Roth
and Zabel
What are the trends in structuring and terms for
launches of well-pedigreed emerging managers?
Peter D. Greene: In the past few years, it's
certainly been a more competitive and challenging landscape for
well-pedigreed emerging managers, but funds are launching
successfully. From a terms perspective, founders (or anchor)
classes – which are day-one investors in size –
continue to benefit when it comes to fees and capacity. What's
new is that many managers are now launching not just with a
commingled product, but with a commingled product alongside several
separately managed accounts (SMAs). These are less optimal for the
manager, as they're owned and controlled by the investors. This
means investors can turn off the SMA more quickly than they can
withdraw from a commingled fund. The seed market may be emerging
from its winter, though seed amounts are smaller, while revenue
share percentages have remained flat (or have even increased).
Finally, greater regulation means emerging managers need to invest
more in their back and middle offices.
What are the effects of rising interest rates and
failing banks on funds ability to obtain and extend
credit?
Stephanie R. Breslow: Interest rates have risen
wildly, far quicker than people are used to. As a result, some
banks failed, leaving the unbanked, where successor banks did not
take over the banking relationships, and the more expensively
banked, who rely on credit in some respect or another. When
interest rates go up on a subscription line or a net asset value
facility, returns go down. On the bright side, there are funds
making money from this. Loan origination funds make far more sense.
In the past, to hit mid-teen returns, you would need to be dealing
with distressed borrowers. Now, you can go to somebody for whom
bank financing has become unavailable, but who isn't
necessarily distressed, and loan them money at a double-digit rate.
If you have fixed-rate instruments and the interest rates keep
rising, then the value of your instruments goes down. But, if
you're buying now, you're getting a better return than you
used to. Credit investments are now more competitive with equity
returns.
How is the supervisory regime for third-party AIFMs
changing and what impact will this have?
Joseph A. Smith: As you know, private fund
managers are regulated in the European Union (EU) under the
Alternative Investment Fund Managers Directive. US managers seeking
to raise capital in the EU without building out local EU offices
have traditionally avoided the need to become regulated in the EU
by relying upon reverse solicitation or national private placement
regimes, or hiring a third-party alternative investment fund
manager (AIFM) to manage parallel EU funds.
The practicality of reverse solicitation has diminished, so non-EU managers without a presence in the EU now find it's important to utilize a third-party AIFM at the inception of their fundraising process. Additionally, the common operational model whereby a third-party AIFM 'delegates' portfolio management back to the non-EU manager has come under increased scrutiny. However, some third-party AIFMs follow a 'discretionary' model in which the third-party AIFM has actual power to approve or reject transactions proposed by the non-EU manager. It's become clear that EU regulators favor the latter approach.
Originally published by Service Providers in Alternatives 2023: Preqin Report.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
