Five Intangibles of Capital Call Lines: What Private Funds Need to Know

By Michael Sinclair, Fund Banking Market Leader, People's United Bank

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HIGHLIGHTS

  • As their popularity has grown, capital call line credit structures have become less differentiated across banks, but they are not commodities.
  • Thoughtful consideration to intangible dimensions beyond credit terms is required for private fund managers to realize greater value over time.
  • Consider experience and specialization, technology investment, a solutions-oriented approach, high service standards and the cultivation of relationships over transactions.

While the credit structures of capital call lines may be similar across banks, these facilities are not a commodity. Alternately known as subscription facilities, capital call lines have become a popular tool for private funds, bridging liquidity gaps between GPs and LPs. Both sides of the fund structure benefit when a fund can act quickly and nimbly on investment opportunities. As capital call lines have evolved in the banking community and become more widely accepted in the market, they have taken on a fairly uniform design. On the surface, terms may not appear materially different between banks. However, it’s a common mistake among fund managers to think of capital call lines as a commodity.

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According to Preqin, the global private capital market has $2.4 trillion of dry power to deploy. This translates to approximately $1.2 trillion in subscription facility borrowing capacity assuming a 50% advance rate.

In this discussion, we take a look at the more intangible dimensions of capital call lines – characteristics that can be valuable to private funds when selecting a banking partner.


Choosing the Right Capital Call Line Provider

Beyond the term sheet, banks offer clear-cut differences to private funds. In our experience, these are the five factors that have separated the banks in this market over time:

1. Experienced and Specialized Team
The banking professionals who originate and underwrite capital call lines range from industry experts to industry newcomers. The capital call line has been around for several decades, but industry data suggests that is has gained substantially in popularity since around 2010. Though this industry data is limited, it shows a higher usage trend among more recent fund vintages – in the current market, the majority of funds rely on capital call lines for efficient deal execution. Higher demand, as in any industry, attracts new suppliers – a key driver of the range of market experience (or inexperience) that funds will find among bankers.

2. Technology Investment
Tech continues to evolve at a rapid clip in the banking industry, but not all banks have made the investment to keep pace. For many private funds, the capital call line is just one of the product offerings they’re using at a bank – so the tech investment is a relevant point not only for their credit facility, but for treasury management and other functions as well. Leading banks enable their business customers to adopt digital payment and cash management processes that power remote work productivity, improved security measures, and working capital optimization efforts. Solutions that automate accounts payable and cash collection while mitigating payment fraud risk—drastically heightened in today’s environment—are critical for the modern business to thrive.

3. Solutions-Oriented Approach
Bank platforms vary widely, which also means that they are not equally equipped to provide private funds with customized and flexible solutions (as opposed to one-off bank products). Teams operating from broader platforms should have the ability to recognize a variety of client needs, and then offer solutions to the client. Examples beyond the subscription facility itself include financing solutions for portfolio companies, loan syndications and capital markets, and Integrated Payables for streamlining the distribution process.

4. Service Standards
In a competitively priced field like banking, cost-cutting can significantly erode service standards. The banker-to-client ratio is not standard throughout the industry, nor is the culture of service standards from one bank to the next. The value of service doesn’t show up in the term-sheet process; it’s an intangible that surfaces later, when a fund needs responsiveness and reliability from its banking partner.

5. Relationships
In true commodity transactions, there is no need for relationships; price and availability are the primary value drivers. But in the world of private funds, strong banking relationships can be extremely important, and can lead to deal referrals, investor referrals, even talent referrals. These touchpoints can be part of the bank/fund interaction, but only if a bank cultivates the partnership as a relationship rather than a commodity transaction.


Picking a Promising Partner

For fund managers in the process of evaluating subscription facility providers, the above characteristics can serve as a checklist. Managers are likely to derive more value from selecting a comprehensive banking partner, rather than focusing on term sheet metrics alone.

  • Expertise
  • Robust and intuitive technology
  • Relevant capabilities beyond credit
  • Superior service
  • Culture of building relationships
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“People’s United has been a consistent and reliable partner to our firm for many years, and across multiple funds. Their dedicated Fund Banking team delivers a high level of service that has contributed meaningfully to our success.”

– Edward Martinson
Maxim Capital Group


Michael Sinclair is the manager and lead originator for the Fund Banking team. He has over 20 years of banking experience. Michael was previously with East West Bank for seven years, where he co-founded the Private Equity team and managed the Eastern U.S. market. Michael held prior banking and investing roles with SVB, Raymond James, TSG Equity, and BankBoston. He has an MBA from the Tuck School of Business at Dartmouth, an A.B. in Biology from Bowdoin College, and he is a CFA Charterholder.

Your success is our mission

Michael Sinclair, Fund Banking Market Leader

(617) 877-9030

michael.sinclair@peoples.com

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