December 17, 2024 - It seems not a day goes by without a new bank-credit fund partnership being announced. However, often there is not much color on the partnership other than its existence. The LSTA recently hosted Stephen Boyko and Jennifer Crystal, partners at Proskauer, and Mark Cohen, managing principal at Bradley Credit Partners to dive into the headlines. In the “Bank and Credit Fund Partnerships” webcast, these experts explored the different types of partnerships – joint ventures – that are being entered into and the key considerations when weighing one’s options.
What is driving the trend?
Despite the oft-cited competition between banks and funds, the truth is that a significant opportunity for collaboration has emerged. In simple terms, banks are short capital to lend and long origination pipeline where credit funds are short(er) origination pipeline and long capital. Banks have pulled back from leveraged lending as regulatory capital requirements have weighed on the profitability of this business, but banks have large teams of bankers with strong relationships with sponsored companies and non-sponsored corporates. Some of the largest credit funds may have comparable origination funnels, but many credit funds see working with a bank to meaningfully widen the opportunity set for loans. LPs recognize this as well and see these partnerships as important for scalable platforms. On the other side, banks can offer their clients turnkey financing – whether that be BSL or PCC.
How do you pick a partner?
Alignment, alignment, alignment. As our speakers explained, the most successful partnerships involve institutions that are highly familiar with each other as a result of a long track record of working together. What we see increasingly are relationships that are specific to asset classes and/or geographic regions – which may well extend beyond PCC. As we explore further below, there is a spectrum of potential partnerships. On one side, it can be a simple, informal affiliation where the two sides have agreed upon intercreditor/AAL templates. These loose affiliations were common 10 or so years ago. Moving along the spectrum, parties may conclude sourcing arrangements which have become increasingly common. Here the banks receive a fee on credit opportunities the credit fund pursues. These arrangements may be bilateral or they may be programmatic where the banks offer several funds a first look at deals – some of these may have a requirement that a fund can only pass on an opportunity a specific number of times. In addition, banks and funds may embark – and increasingly are embarking – on more formal JV relationships. Here the bank and credit fund must align on the “credit box” (i.e., the target investment criteria), who on their teams will be dedicated to the JV, what joint approval will look like, and the amount of investment and split of economics. These decisions are important and take time. And, despite this high amount of alignment, parties are reluctant to enter into these partnerships on an exclusive basis. We have started to see exclusivity for certain strategies, but often the relationship is not exclusive or only provide that the parties will not engage in competing JVs.
How do you structure the JV?
There is no one size fits all. Even among the more formal, JV arrangements, there are various paths that parties can take which are determined by preferences, amount of capital to be invested, and importantly, regulatory considerations. Many bank partners want the JV to be established outside of the bank regulatory platform. To accomplish this, banks will think through Volcker Rule implications, “controlling influence” factors under the Bank Holding Company Act and consolidation under applicable accounting principles. There are also considerations around control with respect to the Investment Company Act. Minute 26:00 of the replay begins the detailed discussion of these considerations and the different ways banks may address their needs in a senior/junior JV structure. In other cases, the bank and the credit fund may desire a more formal, closer partnership with joint control and a full split of economics (so they are willing to deal with regulatory issues). Here, the bank and the credit fund establish a Registered Investment Adviser JV and essentially run a credit platform together. This is a newer partnership model, but one that is growing in popularity.
What is the timeline?
Put simply, the closer the partnership, the longer it takes to form it. Simply picking a favorite relationship to work more with requires no process, where sourcing arrangements require more upfront work. The speakers shared that JV relationships can easily take a year from beginning to end and may involve a process where a credit fund or bank is looking at 5-10 potential partners.
In sum, the bank–credit fund partnership landscape is incredibly dynamic and that looks unlikely to change. There will continue to be a proliferation of these partnerships and, as explained above, the myriad “choose your own adventure” options means that continued evolution is also expected.
