The effective use of the CVRDN in support of a capital raise for a hedge or investment fund hinges on the availability of credit support for the investment strategy being employed by the Fund. In a conventional capital raise, both capital and related credit support are derived from a single source -- investment commitments from investors seeking to invest in the Fund. In the case of a CVRDN, capital is sourced from a specific segment of the capital markets that has an appetite for the high-quality credit the CVRDN has to offer, while credit support for the Fund's investment strategy is derived solely from the same group of investors that would have otherwise sought to invest cash in the Fund. With the CVRDN, however, those investors have the luxury of conserving cash and still gaining exposure to the Fund's investment strategy through the issuance of specifically formatted letters of credit as a credit enhancement to the CVRDNs issued by the Fund.
At its root, the concept is a simple one; United FT has devised a methodology that disaggregates cash from credit, thereby giving each group of investors precisely the focused risk profile for their investment that they seek and by so doing, creating new opportunity for the Fund Manager and investors alike. The execution of this model, however, is both complex and elegant in its structuring.
To enable the issuance of the letters of credit by the investors that have the risk/return appetite for the Fund's investment strategy, a specialized Credit Aggregator (see "Preferred Vendor" page) has designed a credit enhancement vehicle in which the Credit Aggregator will agree to provide a letter of credit issuance facility to the Fund. This is accomplished through the execution of a letter of credit issuance and related security agreement with the Fund Manager. The Credit Aggregator will then cause the issuance of an Enhancement CPC Series (see Master Credit Participation Certificates or "CPC" page) that will be purchased by the proposed investors in the Fund with the required letter of credit being the currency of choice for such purchase. Those investors will then technically be acting both as Participating Lenders in the Credit Aggregator's master network of participating lender institutions and will also be benefiting as an investor in the Fund.
Interestingly, however, although those investors will be required by the Credit Aggregator to agree to all terms of investment in the Fund as if the investor had made the investment directly, the investor in fact has a participation interest in the credit enhancement facility established by the Aggregator for the benefit of the Fund. That facility and the CPCs issued as fractional undivided interests therein have characteristics all their own that are equally beneficial to the end investor/participant, inclusive of a return model that mirrors the underlying behavior of the Fund. Particularly, there are two ancillary yet important benefits to the parties involved. First, the Participating Lender/Fund Investor is receiving an actual clean security in the form of the Enhancement CPC that represents clear title to its ownership interest in the credit facility established by the Aggregator for the Fund. Unlike some direct fund investments, this CPC can be custodied by a Fund Administrator or Global Custodian just like any other standard fixed income security, allowing the investment to be better managed and consistently priced/valued in a more standardized environment than a one-off investment in an appealing investment strategy.
Second, and as to defining an interesting benefit to the Fund, because the Fund only directly engages the Credit Aggregator for the establishment of the Facility in which the Fund investors ultimately participate, the performance detail and other reporting required of the Fund during its operating term can be accommodated through the one touch-point of the Aggregator. With that data in hand, the Aggregator's reporting systems and methodologies then take over to avail CPC performance details to its Participating Lenders as the ultimate parties holding the exposure to the Fund's strategy, which details include first and foremost Fund performance. This can potentially significantly reduce the Fund's workload with regard to investor relations and management when compared to admitting direct investments from the same number of investors as may be participating in the CPCs through the Aggregator. Additionally, the administrative and governance systems and controls to be employed upon the engagement of the Aggregator will also enhance transparency to the investor base, thereby adding further key value to the Fund from an investor's perspective.
To learn more about the role of the Credit Aggregator and originating the credit enhancement facility referenced above, please contact the Credit Aggregator at firstname.lastname@example.org.