- Will have a lead bank and be syndicated out
- Facility needs to be large for Fund IX
- Apollo never had a dedicated capital-call facility
Apollo Global Management is causing a stir in the market as it sets up its first dedicated capital-call credit line.
The firm is seeking for the first time a subscription line of credit, sources told Buyouts. Such credit lines secured against a fund’s undrawn commitments have become commonplace in the industry and Apollo is one of the last large firms to establish one.
It’s not clear whether the firm has officially established a credit facility or if it is still negotiating with banks.
Apollo’s Fund IX, which closed on $24.6 billion last year, gives the firm the ability to fund investor capital calls through a credit line for up to a year, with certain exceptions that would stretch that out even further, sources said.
Large facility expected
Because of the size of Apollo’s ninth fund, the credit line will be large, potentially around $3 billion or more, one source said. Such credit facilities generally come with interest rates of 3 to 3.5 percent, sources said.
Apollo has in the past bridged capital calls for short periods but has not set up a dedicated credit facility like this, sources said.
Certain banks like Wells Fargo and Bank of America provide such lines of credit. Sources said Wells Fargo will likely be lead arranger for Apollo’s subscription line of credit, but because of the size it will be syndicated out to other banks.
Charles Zehren, spokesman for Apollo, and Jessica Ong, a spokeswoman for Wells Fargo, declined to comment.
Private equity GPs invest in companies using capital from limited partners who have committed to their funds. GPs gradually call down those commitments as they make investments.
Generally, LPs have a short period to meet capital calls, like a matter of days. To smooth out the capital-call process, GPs use credit lines with banks to fund the LP portion of the investment for a time. The LPs have to meet the capital calls in the future, sometimes as long as a year from the time the GPs called capital.
The use of capital-call facilities has been on the rise. More than two-thirds (68 percent) of North American buyout funds have the ability to obtain short-term loans to fund deals before drawing LP capital, the Buyouts PE/VC Partnership Agreement Study for 2017/2018 shows.
Other large firms that make use of capital-call credit facilities include Carlyle Group, Blackstone Group and Kohlberg Kravis Roberts. A recent article in the Financial Times said TPG is using a capital-call credit facility in its most recent Asia fund.
TPG has been using capital-call facilities since 2015 and works alongside its LPs to set guidelines for each fund, according to a person with knowledge of the firm. The firm reports the use of the facilities to LPs, the person said.
‘A kind of arms race’
“It has become a kind of arms race,” the founder of a PE group that has chosen not to use such a facility told the FT. But he notes the decision has pressured his company: “Not to do it is like showing up at a gunfight with a knife.”
Indeed, capital-call credit facilities can have the effect of boosting an investment’s internal rate of return by keeping an LP’s capital in an investment for a shorter period of time. This can skew investment returns between funds that use such credit and those that do not.
And until recently, many GPs didn’t separately disclose returns affected by use of credit facilities. LPs have quickly caught up to GPs and have been demanding specific disclosure of levered and unlevered returns.
Use of such credit facilities can lower an investment’s return multiple because of the interest cost.
Many LPs like the use of capital-call facilities because they can give a slight boost to IRR. Some have argued, though, that they can artificially juice returns, putting a fund over its hurdle rate so the GP can start earning carried interest.
Investors also may be subject to data requests by lenders trying to determine how good a credit risk they are. Some may not be comfortable providing this level of information about the organization, Andrew Ahern, partner at Debevoise & Plimpton, told Buyouts in a prior interview.
Along with being subject to data requests, LPs may find themselves subject to capital calls directly from banks in the event something goes wrong with the GP, Ahern said.
And of course, if the market turns down as these lines are extended, LPs may have to fund a capital call, plus interest, on a deal that is marked to zero.
LPs seek more disclosure
LPs have also been pushing for more disclosure around the use of capital-call facilities and their effect on investment returns. While LPAs generally enable GPs to use this type of credit facility, LPs now are looking to include more limits.
“You’re seeing more attention paid to it and more disclosure by the GPs, particularly at the advisory-board level,” Sam Green, a former PE investment officer for Oregon State Treasury, told Buyouts in a prior interview.
“The provisions were pretty wide open. They allowed the GPs a fair amount of discretion as to who they’ll do this with, under what terms they’ll do it with, how long the facilities could remain outstanding on any particular company. The terms around it are tightening a bit.”
The Institutional Limited Partners Association published best practices last year about use of capital-call subscription facilities.
The guidelines include GPs outlining their internal policies for using the facilities, and providing specific detail about how they can be used, how much of a fund’s uncalled capital they can represent and the maximum period they can be utilized.
Action Item: Check out the ILPA guidelines here: http://bit.ly/2sV8MDv
Leon Black, chairman and CEO of Apollo Global, takes part in the Private Equity: Rebalancing Risk session during the 2014 Milken Institute Global Conference in Beverly Hills, California, on April 29, 2014. REUTERS/Kevork Djansezian