The tectonic shifts in market dynamics are more profound than at any time since the global financial crisis (GFC). As central banks continue to tighten financial conditions and economies absorb the consequences of reduced liquidity, weakening growth and higher inflation, volatility across investment markets has heightened.
In parallel to market demand, first loss capital is the advanced financial solution gaining traction among new and emerging funds seeking to bridge the equity gap and capitalise on current price dislocations where funds typically need to provide certainty of deal flow and have the operational flexibility to execute deals quickly. The current market size is around $30bn across less than 500 teams, and with an abundance of undiscovered talent and new managers continuously coming to market, the potential is still huge. First loss capital, as the name suggests, bears the first-loss investment in a fund providing a cushion which protects the capital of all other class of fund investors. The financial arrangement falls under the same umbrella as seed capital and founder share classes and can be structured to cover a pre-defined first loss amount. The benefits of first loss capital, also known as accelerator capital, helps to accelerate the investment capacity, fund equity participation and capital deployment time horizon. A very useful tool for the new or emerging manager or fund.
In the current environment, operational reliability and access to sufficient capital are essential to managers that favour volatility, arguably increasing the utility of first loss capital. During turbulent market phases, the capital can also act as a catalyst for funds to secure further allocations from interested investors who wish to participate in the programme. First loss capital helps to align interests between limited partners and managers, supported by the team at Falcon. Increased access to capital supports investment pipeline execution which supports a fund’s investment track record. In turn, this can help establish a virtuous circle of trading activity.
Falcon Investment Management’s Accelerator Capital programme is among only a handful of first loss capital options in the UK and Europe. The investment programme has proven popular among small to mid-sized funds. However, there have been cases in which more established managers have redistributed a portion of their capital to first loss, in order to leverage up and double their AUM – a manager with $100m might move $10m from their master fund into a first loss programme, obtain 10x and add an additional $100m to their available liquidity. There are many managers and traders with great products that need the right platform to help develop their strategy, grow in size and put the right structures in place. These managers are often new or emerging in the field, coming from a bigger bank or hedge fund. The offering provides a solution to managers who may not have the time, resources or expertise to raise assets independently. Data from Bloomberg supports the requirement of alternative investment channels like accelerator capital, with 79% of fresh subscriptions in Q1 of this year going to funds with assets of $5 billion or more.
First loss capital fills a gap in the market created by the retreat of the traditional financing market, which began after the GFC and has accelerated after the onset of the pandemic and the more recent economic downturn. At Falcon, we work with our clients to build the right structure and put the right processes in place. Our experienced in-house professional teams will understand the strategy, work with the manger to refine their approach and build a secure risk management framework. This aim is to encourage consistency and continuous success, with long term partnerships and growth being our ultimate goal. There are some providers willing to facilitate much larger allocations in return for a greater share of the profits. Large multi-strategy funds offer up to $500m capital in exchange for 85% of the performance. Falcon only charges 20% on positive performance, and this arrangement of significantly lower fees allows a manager to get similar compensation without putting additional risk at work.
We believe that new and emerging managers need to surround themselves with a team that will work to support a fund and collaborate. Falcon can provide the advice and knowledge to help any manager or fund to scale and grow. Capital is at risk.