17Capital partners directly with GP teams to finance their firms growth and expansion. Here we outline some of the considerations for managers looking at financing their firm’s development.
How we got here
Over the past 20 years, private equity sponsors have evolved from boutique, founder-owned fund managers into multi-faceted corporate entities with various revenue streams, assets, and liabilities.
A host of industry developments (larger fund sizes, product expansion, evolving client needs, etc.) have forever altered what was once a ‘capital-lite’ business model. Today, private equity sponsors need durable balance sheets and readily accessible working capital to best serve their clients and enable multi-generational firm growth.
A host of industry developments have forever altered what was once a ‘capital-lite’ business model”
As with other growing industries, the demand for capital at private equity management companies is outpacing organic earnings growth. This dynamic is increasingly causing sponsors to access third-party financing on GP commitments, carried interest, and/or management fees to fund their development.
Where we are today
The financing options for GPs continue to evolve.
Traditional banking products, referred to as management company lines of credit, have been around for years. These facilities provide modest access to working capital, but typically come with restrictive features such as personal guarantees, clean-down provisions, and short-dated maturities.
Permanent capital needs have increasingly been addressed by sponsors selling minority stakes in their management companies. This trend has accelerated over the past decade due to a proliferation in the number of dedicated investment vehicles (i.e. “GP stakes funds”) targeting these investments. While minority stake sales can generate substantial capital for both primary and secondary liquidity needs, managers should be mindful of the potential unintended consequences, such as LP perception, internal conflict among partners and, perhaps most importantly, their perpetual nature. These considerations have driven managers to consider more flexible forms of long-term capital to fund expansion and manage succession planning.
The way forward
Structured solutions, in the form of non-dilutive preferred equity or senior debt, enable management companies to access a large quantum of capital without the constraints of bank finance or the perpetual nature of equity.
These transactions can be tailored to address the specific objectives, priorities, and concerns of each individual manager. When thoughtfully structured with an eye towards alignment, non-dilutive solutions can drive transformational growth and create long-term value for all stakeholders.
How 17Capital can point the way
17Capital is the leading investment firm providing strategic financing solutions across the entire private equity industry.
We pioneered preferred equity investing at the fund level in 2008 and have built an extensive track record of financing successful GPs. We are increasingly applying our innovative approach to meet the holistic needs of management companies, providing financing on a combination or subset of GP commitments/co-investments, carried interest, and fees.
We take a blank canvas approach to each investment, creating bespoke structures to meet our clients’ key objectives, and we aim to build longstanding partnerships.”
17Capital invests via two complementary products, preferred equity and NAV-based credit, delivering bespoke financing solutions designed to meet the unique goals of our GP partners. We take a blank canvas approach to each investment, creating bespoke structures to meet our clients’ key objectives, and we aim to build longstanding partnerships. As such, we can offer a competitive quantum of capital with a long, but not permanent, duration. Our overarching objective is to create alignment with best-in-class GPs – when you succeed, we succeed.
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