In the PERE article “Does it matter how investors fund their commitments?”, Morrison & Foerster’s Jason Nelms, corporate partner advising on fund formation, and Yemi Tepe, partner in the finance and projects group were quoted on how institutional investors (LPs) are using financing to leverage their balance sheet, and whether funds will have visibility on the underlying source of capital contributions.
The California Public Employees’ Retirement System (CalPERS) recent consideration of the employment of leverage in its portfolio to capitalise on market opportunities has cast a spotlight on the risks and merits in institutional investors taking on systematic borrowing. The question from a fund’s perspective is then on the considerations required in the acceptance of capital contributions. “How they (investors) fund their capital contributions is totally up to them and the fund will not necessarily have any visibility on the underlying source of capital contributions.” said Yemi. Jason added, “Funds are typically comfortable that, if they have a creditworthy investor that has been funding its capital contributions, they are protected against the risk of future defaults.”