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Private credit managers throw open warehouses for cash-strapped PE firms
by Lisa Fu
Private credit managers are breaking new ground by extending warehouse lines to cash-starved private equity firms desperate to win deals.
Warehouse lines are typically used by CLO managers to build large loan portfolios, but some private credit managers are finding they can offer them to help PE firms that want to acquire assets ahead of their next vintage fund.
In a tough fundraising environment, PE sponsors fear missing out on deals if they have to wait too long for outside investors to commit capital to a new fund. As a result, they are increasingly seeking to buy assets on credit via warehouse lines.
“This last year especially, fundraising has been difficult,” said Brandon Elliott, special counsel at McDermott Will & Schulte, a global law firm. “It just creates this perfect environment for people to want to do these warehouse facilities and for private credit to see that opportunity to step in and be a lender as well.”
Warehouse loans serve to store assets, often for less than a year, and are paid off when the new PE fund is finally established. They have been used by huge PE funds and newcomers alike.
We’re solving a real issue
Jon Boltuch
Director
ATLAS SP
ATLAS SP Partners, a global investment firm and a subsidiary of Apollo, offers warehouse lines to a variety of general partners. Depending on the GP, a line may be used to buy a single asset, support a succession of quick purchases, or park a portfolio of fund interests, according to Yomi Akinyemi, head of fund finance origination at ATLAS.
“There are more lenders that are able to do structured lending, so there’s a greater level of familiarity with pushing the envelope on structure and risk appetite,” Akinyemi said. “Both of those things mean that more lenders can try to address these issues for their sponsors.”
Other managers active in the fledgling market include Crestline, which offers lines to PE firms, a spokesperson said. Partners Group can provide warehouse facilities as part of its broader fund financing capabilities, according to a source familiar with the firm. The same goes for 17Capital, two sources familiar with the business said. Partners Group and 17Capital declined to comment.
“You’re providing real utility at a corporate level, freeing up capital for managers and creating goodwill,” said Jon Boltuch, a director at ATLAS. “We’re solving a real issue that increases our capacity to do other business with them as well. These are usually good deals that also enhance our relationship with the sponsor.”
Private credit managers are natural providers of warehouse lines because banks find it tough to lend against assets that are not generating income, said Jeffrey Griffiths, global head of private credit at Campbell Lutyens, a private markets advisory firm.
Warehouse loans typically finance highly concentrated, illiquid equity positions — exactly the sort of asset that banks cannot take as loan collateral on prudential grounds, Griffiths said. “This will be highly complex, heavy due diligence lending,” he said.
Because warehouse lines are bespoke, pricing varies greatly. Costs are higher than might be expected for a NAV loan or subscription line, though guarantees and other tailored agreements can reduce the cost, according to Akinyemi.
Warehouse debt is usually structured as either a term loan or a delayed-draw term loan with payment-in-kind interest, because the acquired assets do not yet generate returns, Elliott said. Loans are typically priced at an all-in rate in the range of 6% to 9% — a price worth paying if the GP secures a winning asset.
If interest rates keep falling, M&A activity may pick up and ease private equity’s liquidity headaches. This could make it less urgent to resort to warehouse financing, but the technique is unlikely to disappear, said ATLAS’s Boltuch.
In an increasingly competitive market for fund financing, the onus is on lenders to come up with creative solutions to help their clients, Akinyemi added.
