The second SVG Capital fund of funds securitization – SVG Diamond 2, again arranged by Nomura, has further developed the concept of private equity collateralized fund obligations. This is a managed deal where the assets are selected over time by SVG to deliver enhanced equity returns. Some €175 million of equity risk in the form of preference shares in the fund was sold to various external investors. This is drawable equity, meaning that this most expensive form of capital is not utilized until it is needed, thus enhancing the efficiency of the CFO. The rest of the financing comprises €328.5 million of rated paper (seven tranches ranging from triple A to triple B).
The portfolio is “buyout” focused, with ultimate exposure to more than 35 funds and approximately 500 small and medium-size mature companies. This level of diversity significantly reduces the volatility of returns of the portfolio. Unlike a traditional CDO, the preferred shares do not receive distributions until all the rated notes are repaid. There is no leakage of subordination as a series of commitment tests provide protection to the senior noteholders by constraining the manager’s ability to make new investments upon deterioration in liquidity or profitability during the five-year reinvestment period.