How to choose your financing solutions partner?

Institutional investors: facing a complex choice

Choosing a financing partner is not an easy task.Let’s assume you are a chief financial officer (CFO) or treasurer of an alternative fund manager, for example. Among other things, you regularly put in place lines of credit for the funds managed by your investment firm. Depending on the fund type and strategy, this might be asset-based financing for leverage; it can be capital-call financing for a private capital fund or simple revolving lines for bridging.

The funds themselves can be regulated or unregulated, open or close-ended, with the possibility of using leverage or not, they may invest in more or less liquid assets, their portfolio rebalancing frequency can vary as well. They may also engage in foreign exchange hedging generating a need for cash collateral. With so many parameters, who can advise you on the best solutions to choose, and how should this affect your decision when it comes to partnering with a financing counterparty?

Let’s consider the following six inter-related factors when choosing a financing partner

A sustainable relationship with a banking partner

This is by far the most important criterion: a long-term relationship with a partner that can anticipate your needs, rather than a provider you merely buy from. A long-term partner is more likely to support you in an adverse market conditions, compared with a bank that hasn’t known you for long and may treat you on a purely transactional basis.

One of our clients put it nicely when he said he didn’t want to be repairing his roof when it was raining It’s better to check and repair your tiles when the sun is shining…

In other words, he wanted to be prepared: to have a relationship with a solid and resilient financing partner in place as a safety in case of market turmoil. Wisely weighing the credit lines you receive from your financing bank against non-financing fees you pay them should also contribute to maintaining a good relationship over the long run. If you’re always relying on one bank for your advisory business, and getting all your financing from another, you may struggle to get more financing from the latter at some point.

Robustness coupled with commitment to the asset management industry

You want to see commitment from your financing partner to your segment, your type of strategy. Is there strong support for this type of activity within the banking group? Are they planning for the future? Have they anticipated and addressed upcoming regulation, like Basel IV which deals with a bank’s risk framework and overall solvency safeguards?

You should also want a bank that keeps investing in technology to support your activities. How much, for example, is your financier investing, year after year, in its client portal? It’s always baffled me why there’s such a huge gap between retail banking and institutional access to accounts and systems, bearing in mind the importance of the latter in terms of the sums involved. What steps is your financier taking to narrow this gap, for example: have they developed new applications that make your job smoother?

A universal bank, preferably your custodian

I would be seeking a financing partner with broad market reach and expertise needed for my type of investment strategy, preferably a universal bank with a wide range of desks.

Even better if your partner is also your custodian bank, as they will have a deeper understanding of your assets, their value and associated flows. This will most likely smooth the way you obtain financing – as well as getting ancillary services from them.

Some fund managers, especially in Europe and APAC, are sensitive to responsible lending principles and have a clear ESG strategy. Here, it’s sensible that your financing partner has sustainability-linked loans (SLLs) expertise. For such financing facilities, performance targets are defined contractually with economic impacts on your cost of financing. If the fund meets their ambitious annual targets, they benefit from reduced margins on their loans, and increased margins should they fail to meet them.

Daily user experience when managing your lending facilities

When you have a revolving credit line in place, you want your partner bank to offer a good service layer to support the facility. That it’ll be responsive, that the teams you’re in contact with have the skilled people who understand your business.

Price of the financing

Your cost of financing will always be important, but it should not be the only factor. Because there’s a cost involved in putting a financing bank in place, the workload it generates, the legal expenses. And you don’t want to be changing your bank too often. Here you should really consider the value you obtain for the price paid, weighing all the factors.

So, there is great value in appointing a financing bank as your long-term relationship partner, one that is committed to your business, with broad expertise – preferably a universal bank with custody services. One that offers excellent daily user experience and one whose long-term strategy is aligned with yours.

Our financing solutions combine securities services with banking solutions to offer the financing that adapts best to our clients’ business requirements.
Financing Solutions – Securities Services