How does governance come into play for institutional asset managers. One key area is how leverage is managed, according to Richard Wheelahan, III, and Zac Barnett, the Co-Founders of Fund Finance Partners. Over the past decade Richard has advised fund sponsors and lenders, both as an adviser and as a principal at a $3 billion asset management firm. Zac has worked for twenty years as one of the leading attorneys the fund finance space; during this time he has represented investment banks and fund sponsors on some of the largest, most complex fund financings in the industry. The full interview with CorpGov is below:
CorpGov: In Asset Management, what is the role of corporate governance?
Messrs. Wheelahan and Barnett: All funds have governance standards which the asset management team must abide by. Registered funds, like BDCs and REITs, are subject to the same corporate governance standards that public operating companies are, even though they aren’t operating companies in the traditional sense. Private fund requirements are primarily negotiated by the fund sponsor with large investors and are usually also imposed by SEC regulations.
CorpGov: Can you talk about the use of leverage by private equity and other asset class funds, and how they are governed?
Messrs. Wheelahan and Barnett: While leverage is now more common than not, how the fund sponsor goes about obtaining and utilizing it must be permitted by the relevant regulatory limitations and the fund’s governing documents – its agreements with its investors. For Regulated Investment Companies (’40 Act funds), some of which are publicly traded, the limitations on leverage are prescribed by the Investment Company Act of 1940 (although this is subject to change as seen in the past year) as well as the Investment Company’s offering materials. Private funds’ use of leverage is potentially limited – or unlimited – by the private fund’s governing docs.
Whether managing a registered or a private fund, fund sponsors have a fiduciary duty to their investors to obtain the best terms, pricing and structure on any leverage they utilize. Relying on an unbiased intermediary – one which isn’t in the business of lending to funds but is solely engaged to optimize the funds’ borrowing terms to run a competitive process – is a good way to satisfy that fiduciary duty.
CorpGov: What are best practices in corporate governance for fund sponsors?
Messrs. Wheelahan and Barnett: Fund sponsors should be deliberate in their leverage strategy, especially early in the life cycle. Strategic leverage considerations and regulatory limitations should be communicated to the board in the case of a registered fund or considered carefully by the sponsor in consultation with the fund’s larger investors, and a private fund’s governing documents should provide for maximum flexibility.
These are deliberate decisions, and boards with oversight responsibility should be informed about both the strategy and specific tactical plan to accomplish these fiduciary responsibilities. Unless the fund sponsor has a robust debt capital markets and leveraged finance capability with the bandwidth to run a competitive process, fund sponsors and boards of directors should seriously consider engaging a professional intermediary.
Messrs. Wheelahan and Barnett: We believe that next to asset performance, leverage strategies are at the very heart of maximizing returns, and we provide innovative options that are lower-cost and more flexible for funds. As a sponsor’s strategy evolves we can help rethink or change how to efficiently pivot the fund sponsor’s approach to capitalizing these funds and maximizing the performance of the underlying collateral.
These shifts and pivots can trigger fund sponsor obligations in both the governing documents, as well as public disclosures and board involvement for registered funds. An advisory firm like ours which has experience with all types of fund leverage and all types of funds, including registered ones can provide valuable guidance in optimizing the fund’s leverage strategy. We do this while maintaining a constructive, risk-reducing dialogue with corporate governance constituencies.
Fund Finance Partners (“FFP”)is led by a team of finance and asset management professionals which has collectively executed more than 600 unique fund finance transactions. FFP is dedicated to innovation and growth of the market of debt capital solutions to fund sponsors and investors. For further information go to https://fundfinancepartners.com/
Read full article here