The
Double
Dip
Double
Collateralized Credit Enhancement
FinaTech’s Double Dip solution mirrors the Enhancer in its use of investment-grade debt to launch and recapitalize funds without relying on LPs, enabling GPs to achieve faster capitalization and greater flexibility. The key difference between the two solutions rests with the source of the credit enhancement: Double Dip solutions are backed by collateral, while the Enhancer relies on the creditworthiness of the credit enhancer.
Three applications for the Double Dip are outlined below:
-
Launching new funds,
-
Recapitalizing existing funds, and
-
Permanently financing funds.
Alts for Fixed Income Investors
FinaTech's Double Dip solution brings the world of alts to fixed income investors, expanding the pool of eligible credit enhancers beyond sovereign wealth funds and pension funds to include:
-
corporate treasuries,
-
family offices,
-
bond investors, and even
-
real estate investors.
With the Double Dip, investors in fixed income securities have the opportunity to pledge a portion of their securities as collateral to enhance the financing of PE Funds, earning credit enhancement fees on top of the return they receive from their fixed income securities. In doing so, they would also earn additional entitlements, such as the first right of refusal to invest in future securities issued by the fund.
Likewise, the preferred returns earned by the Class A and B units with the Double Dip solution are ideal for fixed income investors, as are the returns earned by Class A and B units in a fund that has been enhanced with a Revolver.
Launching New Funds
With the Double Dip
Launching a Fund Without LPs
Step 1 - The figure below illustrates how a private equity fund can be launched without LPs by using a credit enhancer to guarantee debt or bonds issued to fund the acquisition of a fund's portfolio. For this example, we'll look at how the math works for a credit enhancer who provides collateral to enhance the fund's debt for the fund’s first 3 years who receives:
-
6% per year in credit enhancement fees,
-
5% per year from their collateral, and
-
7% per year of the fund’s carried interest, for a total of 21%.
Note that the GPs retains 79% of the carried interest at this stage—nearly four times the share they would have under a conventional fund structure.
The Credit Enhancer Guarantees Debt to Seed the Portfolio
Recapitalizing the Fund in Year 4
Step 2 - The figure below illustrates how the enhanced bonds are retired through the issuance of LP units and new debt, releasing the credit enhancer from any further obligations. In this example:
-
the credit enhancer acquires the fund’s subordinate LP units—representing 25% of the equity stack—by investing $62.5 million of the $180 million earned in credit enhancement fees during the first three years of an exemplary $1 billion fund.
-
The credit enhancer also keeps its 21% carried interest in the fund.
The senior and mezzanine LPs receive preferential returns of 12% and 16%, respectively, while the subordinate LP interest acquired by the credit enhancer receives 35% of the fund’s carried interest.
Under this structure, the GPs retain a 44% carried interest—over twice the share typical of a conventional fund—while the credit enhancer secures a 56% carried interest without investing any capital.
The Credit Enhancer Exits, Buying the Subordinate LP Units
The Math
Because of the GP’s increased carried interest, their annualized return on AUM rises to 7%, compared to 5.5% under a conventional structure. The credit enhancer earns 12.4% per year during the enhancement period and 6.3% per year for the remainder of the fund’s life—all without investing any of its own capital.
The table below summarizes the returns for all the parties involved assuming a portfolio performance that would have generated a 14% ROI for LPs under a conventional 2& 20 structure. A sensitivity analysis is available upon request.
Comparison of Annualized Returns
Tables Are Not Available on Mobile Devices
Assumptions
With the Double Dip
Taking Out the LPs
The figure below illustrates how credit enhancement can be used to accelerate the return of capital to investors or to continue a fund without having to sell assets. For this example, we'll look at the math for a credit enhancer who uses collateral to enhance debt for paying off the LPs after 5 years and receives:
-
4.75% per year in credit enhancement fees for the fund's remaining 5 years, and
-
a 30% carried interest in the fund.
Under this structure, the GPs regain a 70% carried interest—more than triple the share typical of a conventional fund—while the credit enhancer secures a 30% carried interest without investing any capital.
The Credit Enhancer Guarantees Debt to Pay Off the LPs
The Math
Because of the GP’s increased carried interest, their annualized return on AUM rises to 6.5%, compared to 5.5% under a conventional structure. The credit enhancer earns 12.1% per year for the remainder of the fund’s life—without investing its own capital.
The table below summarizes the returns for all the parties involved assuming a portfolio performance that would have generated a 14% ROI for LPs under a conventional 2& 20 structure. A sensitivity analysis is available upon request.
Table of Annualized Returns
Tables Are Not Available on Mobile Devices
Assumptions
Permanently Financing Funds
With the Double Dip
Permanent Financing
It's not always necessary to take out a credit enhancer. The table below illustrates how permanently financing a PE fund using the Enhancer can raise a GP’s annualized return on AUM from 5.5% to 7%, while the credit enhancer earns 12.5% per year on the fund's AUM, without investing capital. The returns shown assume a portfolio performance that would have produced a 14% ROI for LPs under a conventional 2 & 20 structure. A sensitivity analysis is available upon request.
Table of Annualized Returns
Tables Are Not Available on Mobile Devices
Assumptions
