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How technology can streamline fund financing

We discussed subscription lines with Andrew Frazer Smith, the founder of Bridge, an online marketplace for fund financing that connects borrowers to lenders.

Subscription line financing has long been an important tool in a fund manager’s kit, but a climate of rising interest rates and constrained supply has made these facilities more costly, changing the landscape for borrowers and lenders alike.

Also called sublines, they’re a type of bridge financing facility typically secured against and repaid by LP commitments. Sublines are a useful way for fund managers to have greater control over their cash flow. However, securing them can be a lengthy and difficult process, particularly in a market where supply is constrained.

One UK company has set up an online finance marketplace that seeks to address some of the inefficiencies in the market and to connect borrowers with lenders.

Bridge, founded by Andrew Frazer Smith, formerly a director with NatWest Group, launched in the UK and Europe in November and has now is making its debut in the US. We sat down with Frazer Smith to get a better understanding of the state of the fund finance market and how technology is being used to improve it. The interview has been edited for length and clarity.

Andrew Frazer Smith, founder of Bridge

Frazer Smith

PitchBook: Can you give us an overview of why sublines are important and how they are typically used?

Frazer Smith: The main reason that they’ve been used is the operational benefits they provide. So rather than a fund calling on its investors’ capital every time it makes an investment—which usually operates on a basis of time of a capital call plus 10 days—it uses a subscription line.

[Calling capital] can be operationally intensive for the people running the fund, and it can also put you at a competitive disadvantage in terms of a bidding process. If one fund can draw down on a revolving line of credit on the same day or the next day to make an investment and another one says it’s going to take 11 days, then all things being equal, you’ll go with the former.

It’s also beneficial to the investors in the fund. Particularly for large LPs that have significant stakes across a wide number of managers. It’s far easier for them to manage their capital if they are, for example, receiving [semiannual] requests for capital.

It has often been noted that fund managers use sublines to boost IRR by delaying capital calls. Is this still the case, and have rising interest rates had any impact?

The rising interest rate environment is important, but the main reason that they have become less effective isn’t higher underlying interest rates: It’s actually the increase in margins.

What we have seen is that the size of sublines that are being asked for has reduced. So GPs still want sublines in place for the operational benefits they provide, but they are right-sizing those so that they meet the operational needs without using larger facilities to boost IRR.

How has the current economic climate, and the withdrawal of lenders like Silicon Valley Bank, impacted the market?

We’ve seen a constriction in supply, particularly in the US. I think there’s a great opportunity for existing players who are well-positioned to pick up on that demand where the supply hasn’t kept pace. I think there’s a great opportunity as well for non-bank institutions and new entrants into the market.

We’re seeing some alternative lenders who are connecting institutional capital into the market, and I think they’re doing a great job. I think they are well-positioned to capitalize, and I think institutional investors coming into the market directly on a primary basis also give them a great opportunity, whether that’s the UK, Europe or the US.

We’ve also seen a slight contraction in demand, simply where exits have slowed down, which in turn has slowed fundraising and the capital call facility cycle. But actually, I think that demand is still very much there, and supply on a relative basis hasn’t quite kept pace with it.

Why is there a need for a matching platform like Bridge?

There’s been a need for the past five or six years, and Bridge came about from listening to market participants and their frustrations.

On the lender side, we often saw smaller lenders or new entrants who were looking for a way to grow their book and be connected with the right borrowers who could match their appetites quickly. Secondly, there is the ancillary opportunity of finding a way to support borrowers with other banking products. Third, in the case of syndicated deals, a platform like ours supports syndication and it can help lenders see where every other lender is in terms of that deal process at any point in time. We also give lenders a way to bolster their portfolio management capabilities.

For borrowers, meanwhile, it can be time-consuming to go out to a variety of lenders and obtain term sheets to then be able to say to investors that you have run an appropriate market-wide process to get the best value for sublines. For a GP, the platform connects you to a universe of lenders where you know that their appetite matches what you’ve put into the system within seconds, and that’s something that I think the markets needed for a long time.

Do you think the emergence of platforms like Bridge is a part of the broader trend of more technology-driven intermediaries?

First and foremost, we see ourselves as a tech solution that improves existing processes for people. I think that is absolutely a trend that will continue not just within the finance space, but across everything.

It is challenging insofar as there is some great tech out there that’s really sophisticated, but a lot of that is too costly for people to get a significant benefit. I think as time progresses, and as tech advances, the stuff that is out there now—that is really useful but frankly too expensive—will become cheaper.

At that point we’ll see more people using secure, user-friendly tech that will make the difficult annoying processes easier for them, and in turn free up their time so they can focus on where they can add true value, which for GPs is generating better risk-adjusted returns for investors.

Featured image by Marco Bottigelli/Getty Images

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