By Sean Wilke, Head of Growth Strategy, U.S.
Scenario: Fund portfolio company needs cash injection, but options are limited
A U.S.-based fund sponsor operates several investment vehicles, assets in which include commercial real estate as well as private equity and private credit.
The sponsor’s 2020 vintage Delaware fund (the “2020 Fund”) is the owner of Office Building A and the land on which it’s situated. The 2020 Fund’s investment period expired in 2024, and no extension was sought. The anchor tenant of Office Building A, renting approximately 50% of the space in the building, is MediaCo, an operating business majority owned by the sponsor’s 2024 vintage fund (the “2024 Fund”), which is also domiciled in Delaware. The lease agreement predates the 2024 Fund’s acquisition, which was funded through a combination of cash and debt financing.
MediaCo is experiencing a cash crunch and requires a capital infusion to stay afloat and continue operating as a going concern. The 2024 Fund has deployed all committed capital and exhausted its credit facility and, regardless, an additional investment in MediaCo would violate its stated concentration limits.
The 2020 Fund has several million dollars sitting in money markets – these were proceeds from an earlier sale and the cash reserve was earmarked for potential add-ons investments. However, such an investment may not be necessary as a U.S. banking institution has offered to provide MediaCo with financing. The proposed interest rate is relatively high though, and the deal would require subordination of the 2024 Fund’s debt interest.
Meanwhile, a wealthy family office from Eastern Europe has offered to provide financing on more competitive terms. The catch this time? The family appears to have tenuous ties to allegedly corrupt foreign officials, although there have been no court findings and there are no definitive prohibitions on conducting business with such family.
All things considered, what is the best course of action?
- Can the 2020 Fund provide financing with its cash reserves?
- Is accepting financing from the U.S. bank consistent with the sponsor’s fiduciary duty?
- Is it possible to enter into a deal with the Eastern European family office?
Our analysis and approach
There is no clear right or wrong answer in this case. Ultimately, it’s up to the discretion of the fund sponsor to determine which course of action is in the best interest of its fund clients.
In situations such as this, IQ-EQ’s role is that of a consultant and educator – we assess the fact pattern, ask key questions to help paint a full picture of the various outcomes, inform our client of the corresponding risks, and map out the steps necessary to pursue each option and mitigate exposure.
Except in rare occasions, we do not say “no, you cannot do this.” We facilitate the correct choice, but that choice always remains with the sponsor.
Here is our approach to each of the scenarios above:
1. 2020 Fund provides the financing
2. U.S. bank provides the financing
3. Eastern European family office provides the financing
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This case study is intended to be illustrative of IQ-EQ’s strategic, business-first approach to dealing with regulatory issues. We’re not the decision makers; we are the seasoned consultants who enable the decision makers to make fully informed decisions. Whether compliance or commercial in nature, we raise the issues that our clients need to consider when confronted with conflict ridden scenarios.
Find out more about our U.S. compliance consulting services, or get in touch with our expert team today to see how we could support your firm’s decision-making.
