Contracts such as Prime Brokerage Agreements and ISDAs form the backbone of an investment fund’s trading and financing relationships with banks and dealers. As your firm evolves, various factors can justify a review and potential upgrade of these contract terms. Here’s a guide to understanding when and why you may be entitled to upgraded terms.

Key Factors that Influence Contract Upgrades

Increase in AUM:

Fund-Level AUM Increase

• When a single fund raises more capital or grows due to strong performance, the Assets Under Management (AUM) increase.
• A larger fund means more capital is available to support its obligations, making it more appealing from a credit perspective.

Manager-Level AUM Increase

• Launching additional funds under the investment manager’s umbrella boosts the overall AUM.

Increased AUM can enhance the P/L opportunity for your banks and dealers.

Changes in Personnel:

In-House Portfolio Risk Management and Compliance

• Having dedicated in-house personnel for Portfolio Risk Management and Compliance/Regulatory roles is more appealing to banks compared to outsourcing these services.
• This demonstrates a higher level of internal control and risk management, which can justify improved contract terms.

Organizational Growth

• As your firm grows and hires additional employees, particularly in critical roles, this expansion can entitle you to upgraded terms.
• Increased staffing in key areas signifies enhanced capacity and stability, valued highly by counterparties.

Changes to Key Personnel Risk

• Significant changes in key personnel, whether due to hiring or restructuring, can impact your firm’s risk profile.
• Strengthening your management team can warrant an upgrade in your contract terms.

Changes To Your Portfolio:

Increased Liquidity

• Enhancing the liquidity of your portfolio makes your fund more attractive to banks. Liquid assets are easier to value and trade, reducing the risk associated with your positions.
• Greater liquidity provides more flexibility in managing assets and meeting obligations, which can justify better terms in your contracts.

Diversification of Positions

• A well-diversified portfolio mitigates risk by spreading investments across various asset classes, sectors, and geographies.
• Diversification reduces the potential impact of any single asset or market event on your overall portfolio, presenting a lower risk profile to your counterparties.
• A lower risk profile due to diversification can entitle you to more favorable contract terms as it enhances the stability and predictability of your fund’s performance.

Leveraging Third Parties with Dynamic Upgrading Technology

In the complex and fast-paced world of investment funds, keeping track of factors that may entitle you to contract upgrades can be challenging. Consider working with third-party providers that offer dynamic upgrading technology. These software tools:

• Automatically assess your client rank.
• Generate potential upgrades based on real-time changes to the factors influencing your contract terms.

By integrating such technology, you ensure that your trading agreements are always aligned with your current client profile. These third-party providers can also assist with approaching your banks and dealers and negotiating targeted Amendments or Amended & Restated Agreements to implement these upgrades.

In conclusion, recognizing when to ask for an upgrade to your trading and financing contract terms involves monitoring key factors such as AUM growth, changes in personnel, changes in your portfolio, and the overall risk profile of your firm. By staying proactive and leveraging advanced technology, you ensure that your critical contracts remain fair and reflective of your firm’s performance and credentials.

How can quadrangle help

QDS and Quadrangle can assist your firm with assessing your rank, monitoring factors as your firm grows, and upgrading your contracts terms.

Click below to request a call or demo to learn more about how QDS can benefit your firm.

Stay tuned next month for our vendor contract terms upgrade post!