Independent sponsors and emerging managers are, at their core, entrepreneurs building investment platforms from the ground up, often without the institutional infrastructure or capital base enjoyed by larger, established private equity firms. However, unlike founders of VC-backed startups, these entrepreneurs are expected to invest a significant portion of their personal wealth in every deal they complete. It’s simple math that as their firms grow, being able to write another check for 1-5% of the equity commitment may become difficult or impossible. This mounts on top of other working capital needs, such as paying for a team, hiring placement agents, or legal and diligence fees - all crucial to close deals. Coupled with the relatively low fee base to pay for the rising cost of running a fund, far more money may be going out the door than coming in the first decade or two of being a sponsor.
LPs don’t view rising costs and being fully invested in previous funds or deals as a valid excuse for low GP commitments. But traditional banks and private lenders offer few solutions, often requiring loan sizes so large that they are impractical for most emerging managers. Another liquidity solution, selling a GP stake, is only available to established managers or very expensive and dilutive, while reducing internal (team) and external (LP) alignment. Henry Capital helps fill this gap by offering non-dilutive credit to emerging managers with flexible terms and check sizes under $10 million.
Managers can leverage their existing assets to fuel future growth without giving up ownership or upside. In order of prevalence, sponsors can use liquidity providers to (i) help fund the GP commitment to a new deal or fund, (ii) generate working capital at the management company level, oftentimes to reinvest in the company by hiring more staff or pay for placement agents, and (iii) help accomplish strategic objectives, such as buying out a retiring partner.
Henry Capital can lend to individual partners, entire partnerships, funds, or LPs. We can lever the GP’s assets in three different ways: first, by lending against the net asset value (“NAV”) of their existing investments, second, by lending against the future income of the management company, and third, by combining these two.
As long as the sponsor is invested in at least three different companies, Henry Capital can provide a loan against the NAV of those investments. The interest can accrue until there are realizations, at which point they would sweep the proceeds the sponsor receives to repay the loan first. These loans typically have a maximum term of four years, which means the past investments should be long enough into the ground to be expected to generate realizations within that window, unless there is some other structured paydown arrangement.
In some cases, we may be able to lend against carry from funds or individual deals, but these must be mature and in the money.
The ultimate LTV will be decided by many factors. If the sponsor does not have at least three active investments, options 2 or 3 may offer a solution.
Henry can leverage the future income of the management company by looking at contractual management fees or monitoring fees from portfolio companies with a scheduled quarterly paydown.
Options 1 and 2 can be combined to create a more comprehensive solution that potentially offers greater loan proceeds and flexibility. These solutions are bespoke and may have features of both options, including accruing interest, a sweep on realizations, and a scheduled paydown in the last year.
When lending to sponsors, our role is to bridge the funding gap that can otherwise stall promising investment strategies, giving sponsors the flexibility to grow, reinvest in their businesses, and act decisively when opportunities arise.
Unlike other liquidity providers, Henry Capital typically lends in the $250,000-$10,000,000 range. Managers seeking loans in this range are overlooked; Henry takes a standardized approach to address this gap in the market while leaving room to tailor each deal to the specific needs of the sponsor.