Japan’s largest bank aims to expand its business with financial investors in the German-speaking region. Mitsubishi UFJ Financial Group (MUFG) wants to be a „one-stop shop“ for this client group, says Natascha Winberg in the private markets podcast „Betting Billions“. Since February 2024, she has headed MUFG’s financial institutions business in the German-speaking area. Earlier this year, the Japanese also brought on board Nadine Henker, an experienced leveraged finance expert.

In leveraged finance, a bank provides acquisition loans to private equity firms to finance company takeovers. Many banks have recently withdrawn from this risky business or have been displaced by private credit funds, which operate under much lighter regulations. According to Winberg, MUFG is pursuing a clear global initiative to build this business and aims to become a major player in leveraged finance.

Banks like MUFG have other ways to work with financial investors. They not only finance portfolio companies of private equity firms but also finance investors at the fund level – throughout the entire lifecycle of a private markets fund. Initial contact points arise at the start of fundraising via so-called capital call facilities: credit lines banks provide to fund managers as bridge loans until the committed investor capital is received.

For managers of private equity, private debt, real estate, or infrastructure funds, these credit lines allow immediate investments. After the investor funds have been drawn, the bank loan is paid back. According to Winberg, capital call facilities have become industry standard and are used by nearly every fund. Due to their bridging nature, these loans historically had a term of about one year. But longer terms are now also common.

For fund managers, bridge loans improve the internal rate of return (IRR), making returns look better. For banks, the appeal is a different risk profile than leveraged finance. Risk is based not on the creditworthiness of a highly leveraged portfolio company but on the creditworthiness of institutional investors who have made binding capital commitments to the fund manager and serve as security for the bank.

Towards the end of the fund lifecycle, so-called NAV loans come into play. These loans are needed by a financial investor who has fully drawn down committed capital but requires additional funds. In this case, they can take a loan from a bank by pledging their existing portfolio. Private equity investors can buy time if an exit from a company fails and they must hold it longer. However, these loans are also subject to criticism because some private equity managers have used them in the past to pay out leveraged dividends to their investors.