Alternatives

Trigger Funds: Here’s What You Need to Know

Trigger Funds: Here’s What You Need to Know
clock
2 min 15 sec

Trigger funds are a drawdown private credit fund structure designed to help an institutional investor deploy capital in a timely fashion in distressed debt strategies, for which it is difficult to time the cycle, and in which an event can quickly yield an investment opportunity. The “trigger” is designed to generate a drawdown of investable capital.

There are typically two types of trigger fund structures, which can be either open end or closed end structures:

  • Fund A and Fund B Structure: Fund A provides opportunistic capital through a cycle with no trigger; Fund B provides dislocation capital should there be an event trigger. Investors can make allocations to one or both.
  • Single Fund Structure: Trigger and opportunistic baskets are created within a single fund structure.
    • Basket No. 1: all-weather opportunistic bucket—say 20%-30% of the fund—includes capital that can be deployed throughout the life of the fund in less cyclical, opportunistic ideas
    • Basket No. 2: distressed bucket designed to draw down investable capital once one or more of the predetermined triggers are tripped

In both examples, fund pricing is structured with fees paid on investable capital only—it would be rare for investors to pay on committed capital that may not be triggered during the life of the fund.

There are several types of triggers in the distressed space. In structuring capital drawdown triggers, the triggering event is generally a leading indicator of a distressed investment opportunity or the beginning of a distressed cycle.

Trigger levels are generally set by looking at historical data points that have been leading indicators to distressed cycles. Typical triggers seen in the market recently include:

  • A high yield spread trigger (e.g., high yield spreads blow out 750-1,000 bps)
  • A certain percentage of high yield bonds/leveraged loans trading below 80 cents on the dollar
  • A high yield default rate reaching in excess of historical averages (i.e., 4%-6%)—note that default rates can be lagging indicators

Trigger fund strengths:

  • Provide general partners with dry powder from their investor base that they can swiftly put to work in the case of market dislocation
  • Enable limited partners (LPs) to have a commitment in place that can be deployed should the distressed cycle shift
  • Avoid the need to go through the LP’s investment committee approval process that may not be quick enough to put a commitment in place to capture an opportunity
  • Can be structured with an underlying opportunistic basket that can capture idiosyncratic opportunities outside of a full distressed cycle

Considerations:

  • An LP commitment could sit dormant, with the exception of the opportunistic investment basket, for some time; there is an opportunity cost to having an undrawn commitment sitting in the portfolio.
  • The triggers may not be the right ones or at the right levels, thus not triggering the fund when there is a compelling opportunity.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Private Markets

Private Credit Sees Strong Demand as Rates Rise

Catherine Beard
Catherine Beard takes a look at the private credit landscape in 3Q22 and assesses the year so far.
Private Markets

Private Credit Interest Still High Despite Illiquidity Premium Close to Zero

Catherine Beard
Catherine Beard analyzes the performance of private credit in 2Q22 and explains what is happening with its illiquidity premium.
Private Markets

Private Credit Appeals to Investors in a Low-Yield Environment

Catherine Beard
Catherine Beard analyzes private credit trends for 2021 and the start of 2022.
Private Markets

Seeking Yield in All the Right Places

Nathan Wong
Nate Wong explains how investment-grade private placements can help insurance investors meet their return goals without disproportionately adding risk...
Private Markets

GPs Take ‘Credit’ for Higher IRRs

Jonathan Farr
Jonathan Farr explains subscription credit facilities and how they impact private markets returns.
Macro Trends

The Story Behind Callan’s 2021 Capital Markets Assumptions

Capital Markets Research
An explanation of Callan's 2021-2030 Capital Markets Assumptions, how they were developed, and what changed from last year's projections.
Private Markets

How the Pandemic Affected Private Credit, and What’s Next

Catherine Beard
Many private credit managers are well-poised to generate outsized returns as the dislocation extends into 2021.
Private Markets

Long-Dated Private Equity Funds: Key Considerations for Investors

Ashley Kahn
Public Markets

Assessing High Yield Bonds in the Current Environment

Jay Kloepfer
Private Markets

How to Distinguish Between Growth Equity and Late-Stage Venture Capital

Ashley Kahn

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.