The current economic environment with low/negative interest rates has made it difficult for investors to achieve target returns by investing in traditional fixed-income instruments. As a result, more investors are exploring alternatives such as the private debt market to find premium returns due to perceived complexity and illiquidity. One of those asset classes is capital call financing.
What is capital call financing?
Capital Call Financing is short-term investment-grade loans (rated A or better) made to private capital funds to bridge asset acquisitions and help smooth working capital needs. These loans are secured by the uncalled commitments of the funds’ investors (“Limited Partners” or “LPs”), which are large, reputable, and highly creditworthy institutions.
The capital Call Financing market is estimated to be over €750bn serviced almost exclusively by the banks market, with the majority of General Partners (GPs) recognizing and using capital call financing as an effective cash management tool. Capital Call Financing has grown exponentially over the last 10 years driven by record private capital fundraising as well as the current macroeconomic environment, creating lasting conditions for sustained capital supply/demand imbalance.
Compared to similar IG public/private debt products (cash/near cash investments) capital call financing provides a strong premium with expected investors returns of EURIBOR (0% floor) + 1.70%-2.00%. As a result, over the last 5 years, a number of non-bank institutional investors have recognized capital call financing as a viable alternative with superior returns to traditional short-term investment-grade assets. However, due to the structural/operational complexities of these loans, only a select few market participants have been successful in bridging this gap.
| Capital Call Financing | Cash/Cash Plus Fund (MM) | Treasury | CLOs | |
| Annual Returns | EURIBOR (0% Floor) + 1.7%-2.0% | – 0.69%1 | -0.70%2 | 1.15%3 |
| Credit Rating | A-AA | AA-AAA | AAA | AAA |
| Tenor | 6-12 months (with options to roll) | 1-6 months | 12 months | 3-5 yrs behavioral life |
| Liquidity | Illiquid, but short term contractual maturity | Daily liquidity available | Highly liquid | Pool of B rated corporate loans with .ca1.6x-1.7x overcollateralization |
| Collateral Pool |
Large and highly diversified pool of cross collateralized institutional investors Loan is at least 1.3x overcollateralized at any point |
Certificate of Deposit, Financial Company, Commercial Paper & Other Instrument (Time Deposit) | Sovereign |
Highly divers collateral pool Overcollateralization |
| Key similarities with Capital Call Financing | N/A | Can achieve same tenor
High-quality risk profile |
Can achieve same tenor
High-quality risk profile |
Highly divers collateral pool Overcollateralization |
| Key differences with Capital Call Financing | N/A | Returns profile
Liquidity profile |
Returns achieved
Liquidity profile
|
Returns profile Longer maturity CLOs are relatively liquid depending on macro economic environment Capital Call financing has significantly higher quality collateral |
1JPMorgan Liquidity Funds – EUR Liquidity VNAV Fund 2020-2021 return
2European Central Bank 12-month yield
3Bank CLO tracker
Why NLC platform?
No Limit Capital team has a proven track record of raising and deploying over €3bn of non-bank institutional capital in capital call financing. NLC is the only lender with direct origination, structuring, underwriting, and risk management capabilities that has been set up exclusively for non-bank institutional investors.
The NLC investor participation structure is specifically set up to meet institutional financial objectives and create the most efficient capital treatment for investors.
The capital call financing market is served almost exclusively by the bank market, which is increasingly struggling to keep up with the demand due to regulatory pressures on capital (Basel IV) and internal sector and single counterparty limits. All these factors create a unique market opportunity for non-bank institutional investors to partner with NLC and drive the future growth of the capital call financing market.
