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 Managers Outperform Leveraged Loans

Daniel Brown
Callan experts analyze private credit performance in 3Q24.
Private Markets

Nonprofits: Same Mission, but New Approach to Allocations

Tony Lissuzzo
Callan expert discusses changes in nonprofit allocation trends over the last 20 years.
Private Markets

Gains Outpace Leveraged Loans Over Time; Spreads Contract

Constantine Braswell
Callan experts analyzes private credit activity in 2Q24.
Private Markets

Private Credit Gained in 4Q23 but Lagged High Yield Benchmark

Constantine Braswell
Callan expert analyzes private credit activity in 1Q24.
Private Markets

Private Credit Performance Tops Leveraged Loan Index Over Long Time Periods

Alternatives Consulting Group
An update on private credit performance in 4Q23
Private Markets

Private Credit Returns Exceed Those of Leveraged Loans

Roxanne Quinn
Our analysis of 3Q23 private credit activity.
Private Markets

Private Credit IRRs Stay Steady and Range from 8%-10%

Alternatives Consulting Group
Our analysis of private credit activity in 2Q23.
Private Markets

Our First Private Credit Fees and Terms Study: What We Found in 2023

Alternatives Consulting Group
We provide a summary of our Callan 2023 Private Credit Fees and Terms Study
Private Markets

Private Credit Interest Focuses on Relative Value and Downside Protection

Alternatives Consulting Group
Our assessment of private credit performance and fundraising for 1Q23.
Private Markets

Investor Appetite for Private Credit Continues, but Strategies of Interest Shift

Alternatives Consulting Group
Our assessment of private credit performance in 4Q22 and for 2022 as investor appetite for the asset class continues.

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.