Ira Kustin Quoted in Hedge Fund LCD on Direct Lending by Hedge Funds
Akin Gump investment management partner Ira Kustin has been quoted in the Hedge Fund Legal & Compliance Digest article “Stepping in Where Banks Step Back: Trends, Considerations and Structures For Hedge Funds Pursuing Direct Lending Strategies.”
Since the financial crisis, the first installment of the article series notes, many banks have shied away from a range of lending operations, leaving borrowers without financing options. In response, hedge fund managers and other private fund managers, according to the article, have taken on part of the role of traditional banks and started to provide lending of their own.
As for why hedge funds are pursuing a direct lending strategy, Kustin said, “Managers get into direct lending for the potential returns. There were shops that were in the space but involved in direct lending activities without being fund managers. Now that there is more of an interest in this area as an asset class, institutional investors are dedicating funds to the asset class. There is more of an opportunity for managers to create commingled funds instead of engaging in one-off loans or co-investments.”
Kustin elaborated further, saying that those managers best suited to offer direct lending strategies are those with strong credit backgrounds. “These managers are going to have some previous experience in the credit space, either as a lender or just investing in credit generally. It would be unusual for a hedge fund manager with no experience in the credit area to suddenly launch a direct lending fund.”
Part two of the series addresses key considerations for establishing a direct lending fund, which Kustin said is important for managers “to determine their investor base and how much they are interested in investing.” There is also some discussion of typical structures used by direct lending managers. Kustin said the direct lending funds he has seen “tend to look more like private equity funds. They tend to be closed-end vehicles because the portfolio of investments is less liquid. There is a level of complexity in the structuring that doesn’t exist for plain vanilla hedge funds.”
Kustin also commented on management fees for direct lending funds, noting he has seen some ranging from 0.7% to one percent of committed capital, sometimes with a component that allows for a combination of a lower fee on unfunded commitments combined with a higher fee on funded commitments.