This week we chat with Dee Dee Sklar, Vice Chair of Subscription Finance, Asset-Backed Finance, Wells Fargo Securities. ABF provides direct structured lending as well as the underwriting and distribution of asset-backed securities for over 550 clients and a risk portfolio of approximately $122BN across consumer, commercial, residential, corporate debt finance and subscription finance.

The Lead Left: Dee Dee, tell us about what a subscription finance lending business is all about? What is the origin of subscription lending? What were the key events that led to the evolution of subscription finance as we know it today?

Dee Dee Sklar: Subscription financings (sometimes referred to as capital call lines) are revolving debt facilities secured by the uncalled capital commitments of the investors in a fund. The uses are governed by the fund’s Limited Partnership Agreement (“LPA”), and are typically utilized to acquire investments, bridge capital calls, pay fund expenses and for working capital purposes. The LPA also defines the size of line, which is typically between 25-35% of total capital raised and could be slightly larger depending upon the fund strategy (i.e. for project development funds). Initially, subscription financings were utilized by pensions/insurance companies committing to real estate sponsors/developers in a joint-venture or single investor fund structures in the late 70’s. It is not until the very early 90’s with investor activity purchasing assets from the RTC that I recall larger subscription financings supporting multi-investor funds.

Some may recall there were large sponsors raising buy-out and other strategy funds in the US and Europe that were able based on fund size and diversification to access Asset Backed Commercial Paper (“ABCP”) conduits for their subscription financing. However, the vast majority of funds were only able to access bank balance sheet financings due to size and limited diversification notwithstanding LPAs did not clearly allow for the pledge of uncalled capital. The bank market was fragmented and lacking market consistency. Between ABCP conduit regulatory capital treatment changes along with other aspects of the financial crisis, the total ABCP market became almost nonexistent. Causing the vast majority of subscription financing to be provided primarily by bank balance sheets.