Who's Screwing Whom?

It's not often I'm speechless, but there are some times when words fail me. And this one of those times. The news that the Investec Specialist Bank’s Fund Finance team has provided a €15m loan to F&C European Capital Partners LP, a private equity fund of funds focusing on the European mid-market of private equity including buyout, mezzanine and co-investments, leaves me scratching my head.

What, I wonder, do they mean by that? Is there any broader significance behind the loan of such a modest sum? Is there any qualitative difference between this form of finance and traditional bank lending to private equity? Should the use of the words innovative and compelling be sounding any alarm bells?

To put it in words that my immortal first editor might have used: Who is screwing whom? In my own words, the more bells and whistles there are attached to a loan, the more questions should be asked.

The three-year loan facility is, we are told, being provided to the F&C European Capital Partners LP fund. That closed in June 2008 with commitments of €173m from a variety of Dutch, German and British public pension funds and insurance companies as well as private clients.

Investec says the loan will enable F&C to introduce a moderate amount of gearing to this maturing fund and also enable it to manage the investment inflows and outflows and smooth potential future draw downs.

Simon Hamilton, Investec Fund Finance, says: “This innovative loan has enabled the management team at F&C to maximise value out of their top performing fund set against the current market conditions. With volatile distributions and funds holding assets for a longer term the facility is designed to return money to investors in the short term whilst minimising future drawdowns.

“Overall, we are seeing increased demand for our fund finance offering. Funds have recognised that by using our expertise they can look at new and innovate ways to structure their deals. Our global reach also allows us to work with funds where other local banks may have withdrawn from the market.”

F&C European Capital Partners is part of F&C Private Equity, which was established in June 2005 when F&C acquired the team from Martin Currie Investment Management. The F&C Private Equity team is described as an experienced specialist private equity fund of funds manager with a proven track record of identifying and accessing strong performing mid-market and emerging managers.

Hamish Mair, director, head of private equity funds,  F&C European Capital Partners says: “It has been great to work with a bank which remains committed to private equity, given recent market turmoil, and enabled us to structure this compelling deal.  Investec continue to provide innovative fund financing with their deep knowledge of the market and their recognition of the needs of investors.”

The Investec Fund Finance team, we are told, focuses on the financing needs of leading private equity funds and the professionals behind them.  Investec says it offers a broad range of financing facilities tailored to the unique requirements of the private equity sector. Typically, the loan sizes are greater than £5m and can extend to between £50m and £75m at the higher end. The loans are usually structured against the private equity investments, management company cash flows or investor commitments.