Traditional forms of financing – such as cash prime brokerage, securities lending and plain-vanilla repurchase agreements – continue to account for a large portion of the financing available to private funds and asset managers. These financing arrangements, however, tend to be available only for more liquid assets and are generally either callable on demand or committed for six months or less. As funds seek to use greater leverage; finance esoteric, illiquid assets; and obtain financing on a more committed and longer-term basis, bespoke financing arrangements have become increasingly popular, most of which can be categorized into three buckets: (1) total return swap (TRS) financing; (2) structured repo financing; and (3) special purpose vehicle/entity (SPV) financing. In this guest article, the first in a two-part series, Fabien Carruzzo and Daniel King, partner and associate, respectively, at Kramer Levin, review the main features of TRS financing, and highlight the comparative advantages and disadvantages to private funds of using this structure, taking into consideration the flexibility, the complexity of the legal documentation and the level of asset protection afforded by the structure. The second article
will provide a comparative overview of structured repo financing and SPV financing transactions. For further discussion of financing available to private funds, see “Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers
” (Mar. 16, 2017); and “How Fund Managers Can Mitigate Prime Broker Risk: Preliminary Considerations When Selecting Firms and Brokerage Arrangements (Part One of Three)
” (Dec. 1, 2016). For additional commentary from Carruzzo, see “OTC Derivatives Clearing: How Does It Work and What Will Change?
” (Jul. 14, 2011).