Private equity's appetite for fund overdrafts balloons



The report, which polled 76 senior private equity professionals in the UK, Europe, US and Australia, found that 78% of buyout firms either use – or would consider using – fund overdrafts.

It is the first time that Investec, which sells fund overdraft facilities, included a question about fund overdrafts in its annual survey, which is in its seventh year.

The bank saw a 65% increase in its deal flow for fund credit facilities in 2016, compared with 2015, according to a spokeswoman for the bank.

Matt Hansford, an executive in Investec’s fund finance team, said: “The mid-market is much more educated about these facilities. They want flexibility to use it for maybe not three months, but maybe 12 months. They are comfortable using these facilities for longer.”

By delaying the use of investor cash, buyout firms can increase the annualised return, which takes into account the duration of the investment, as well as its overall performance. However, fund overdrafts do not boost distributions to investors because these returns are often offset by interest payments due on the facilities.

CVC Capital Partners told investors this year that it would bill them once a year instead of every time they do a deal and Swedish private equity house EQT was also mulling the idea of having fewer capital calls in a year, Private Equity News reported in July. Boston-based Advent International also told investors earlier this year that it will collect money in September and March.

Meanwhile, HgCapital, which is homing in on £2.5 billion for its latest fund, is also expected to add a fund overdraft facility to its latest fund, which would allow the firm to delay using investor money for up to a year.

Investors are divided about these overdrafts. Some are in favour of it because their own measure of success is also linked to internal rates of returns, but others are not supportive as they believe that it is a way of artificially boosting returns.

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