As an impact or emerging fund manager, let’s say you have hard-won LP commitments, in writing. And let’s say you have a sweet deal or two ready to close. When should you call that capital from your LPs?
Such operational questions can bedevil first-, second- and even third-time fund managers. Too many small capital calls can annoy your investors; one big call risks having money sitting idle, depressing your returns. And few lenders are willing to front you the $5, $10 or even $20 million you need to fund the deals.
Large and established asset managers, such as Ares Management or Blackstone, have access to capital call lines of credit that enable them to move quickly and keep their costs of capital low.
Community Capital Management and Mission Driven Finance have teamed up on a new private credit strategy to meet the same short-term liquidity needs of impact and emerging fund managers. The joint venture, Bold Line Capital, will offer a lending facility to help GPs manage their capital calls, enabling them to call capital on a regular schedule while still moving on deals. The loans will be collateralized by those uncalled capital commitments from their limited partners.
“We need more good emerging managers that are focused on improving people and planet to be able to scale to Fund Two, Fund Three and Fund Four. And this is one of the tools they need in their toolbox,” Mission Driven Finance’s David Lynn told ImpactAlpha.
The new initiative complements MDF’s Capital Partners Fund, which offers emerging managers bridge financing, working capital advances, deal warehousing and capital for co-investments.
For the portfolios of institutional and other investors, Bold Line’s capital call lending facility represents a short-duration private credit strategy that offers a low-risk alternative to cash holdings with a clear impact thesis: to help impact and emerging managers succeed by giving them the same infrastructure and support that larger and more established managers enjoy – and LPs expect. The one-year tie-up is expected to deliver returns of 5.5%, increasing to 6% as more capital is deployed.
The risk is low because, while the borrower is the fund manager, the loans are secured through agreements with the limited partners themselves. Community Capital Management’s David Sand said the strategy can deliver long-term impact without a long-term commitment. For a variety of reasons, many investors can’t make longer-term, illiquid commitments.
“So it works out really well for an entity to make a one-year commitment, but know that that one-year money is going to be supportive of the types of managers and funds that are committing patient, long term, catalytic capital in the impact arenas.”
Bridging gaps
For Ft. Lauderdale-based CCM, which manages more than $6 billion in fixed-income investments, the joint venture represents a move into the growing private-credit market. San Diego-based Mission Driven Finance, with $251 million in assets under administration, has launched more than 30 private credits funds since 2016. Bold Line opens channels to the larger pools of capital needed by emerging managers who are writing checks of $3, $5 or even $10 million.
For such GPs, a $500,000 line of credit is not going to be helpful, Lynn said. “The numbers get very large, very fast, which is why a partnership with CCM made sense to try and see if we could take something to institutional scale as fast as possible.”
The strategy is available to CCM’s fixed-income separately managed account clients, who would lend their assets to Bold Line Capital. CCM’s Andy Kaufman said the strategy has soft commitments of about $25 million toward a near-term goal of $250 million. He said the first loans could go out in the next several weeks. The joint venture partners say they’ve had to turn away managers looking for up to $27 million in capital call lines of credit before the fund was up and running.
Bold Line will charge borrowers a 1% annual commitment fee, with interest charged only when capital from the line of credit is drawn. Other lenders often charge multiple fees, including on unused lines of credit. Kaufman said Bold Line can offer rates about 2.75% above the Federal Reserve’s Secured Overnight Financing Rate, about 100 basis points above what larger financial firms can obtain.
“Our goal is to be relatively competitive with banks,” Lynn says.
Bold Line will extend lines of credit to managers that have secured at least $30 million in signed capital commitments from their LPs and have completed at least one capital call on their own. The facility is limited to US-based funds.
Bold Line expects the borrowers to include US-domiciled impact funds of funds and providers of impact private debt and private equity, as well as funds for venture real estate and affordable housing and employee ownership conversions.
To quality, fund managers must be seeking to increase inclusive economic opportunities for historically marginalized communities and have processes for impact management, and reporting. CCM’s clients can expect reporting on job creation and employment, investments into underserved communities, greenhouse gas reductions, homeownership and affordable housing indicators and a focus on the social determinants of health.
“We’re looking at impact and emerging managers and we have a built out definition of what that means,” says CCM’s David Sand. “We’re very aware of who the GPs will be, both in terms of their track record and their demographics.”
Right to win
The 50/50 partners said bold stands for “building opportunities and lowering deterrence.” Despite consistent evidence that first-time and emerging managers outperform their more established peers, many are being defeated by daunting fundraising and operational obstacles.
“We’ve heard from LPs that have gotten frustrated with emerging managers,” Lynn said. A fund manager struggling to manage the capital calls on Fund One is in a poor position to raise Fund Two.
Large asset managers that invest in emerging managers, like GCM Grosvenor and General Catalyst, say they look for managers that have earned the “right to win” through their operational excellence (for background see, “CalPERS and CalSTRS find alpha in emerging managers”).
To demonstrate the Bold Line Capital thesis, Mission Driven Finance’s Capital Partners Fund last year warehoused an initial $500,000 capital call line of credit for Founders First Capital Partners, which makes revenue-based loans to diverse-led small businesses. To bridge timing challenges, Founders First has drawn and repaid the capital line six times – and reduced the time needed to close loans from three weeks to three days.
For VC fund managers, the capital call line of credit could relieve operational headaches by allowing them, for example, to issue a single capital call each quarter, which many LPs prefer.
Emerging managers are bringing to market new products and innovations, focusing on underserved markets and adapting quickly to opportunities in the market.
“They’re moving faster and quicker because they’re new and they’re innovative. Yet they’re not getting the tools they need to ultimately become as successful as we’d hope,” Kaufman said.
“We want to make sure that not only can we lower the deterrents, we want to make sure these new technologies and this positive theory of change is able to be supported, so it grows and brings the effective innovation that we hope to see.”
