Leading into the first quarter of 2020, the preceding 12 months saw a rapid increase in the demand of the size, complexity and frequency of fund finance transactions. While the private nature of fund finance transactions makes hard data to quantify, the increase is difficult to compile, the anecdotal evidence among practitioners, lenders and sponsors is overwhelming.
Fast forward to May 2020 and the world outside our windows is a very different place. Most of us who work in professional and financial services were able to quickly adapt to the "new normal" but there has inevitably been an impact on deal volume and, perhaps more noticeably, timing and pricing.
All this notwithstanding, the anecdotal message remains the same, albeit with a few small adjustments:
- Early in the pandemic there was a spike as pipeline deals were brought forward to ensure pricing could be fixed at pre-pandemic levels.
- The previously reported trends on the increasing popularity of NAV and hybrid facilities have continued. Concentrated NAV facilities (where debt is made available by reference to a smaller and more concentrated portfolio of assets than has historically been acceptable) have been particularly popular, even with larger managers. Many managers are also recognising the benefits of hybrid facilities as they can increase liquidity without risking the potential immediate loss of the portfolio on an LTV breach.
- The use of preferred equity arrangements is also on the rise, but they remain an expensive option.
- The subscription line market remains active. Initial fears of investors defaulting on capital calls and lenders left exposed seems for the most part unfounded. We have come across very few investor defaults, a view echoed by the FFA's highest level sponsors. For those with subscription lines already in place, there is little evidence that there has been a notable increase in capital calls or cash hoarding. Contrarian views seem more popular with managers not wishing to call capital for what is (hopefully) a short term issue.
- As well as new deals there has been a marked increase in work on existing facilities as they are amended, extended and increased as funds restructure their affairs to address the challenges posed by the global pandemic. In particular, many funds have sought to accede portfolio companies as additional or replacement borrowers to assist with liquidity.
- There is no escaping the practical impact the pandemic has had on everyone's daily routine. New deals are taking longer to process which, combined with greater scrutiny from lenders who are also spending more time spent servicing existing clients, is pushing out timescales.
- It is not just funds that are looking for increased liquidity. Managers, general partners and advisers are also looking to put in place liquidity and co-invest facilities.
- At the time of writing there are indications that enforcement options are being explored but there appears to be little appetite, at this stage, to aggressively pursue these strategies.
After the initial rush, it does seem the curve is flattening as deals are now taking a bit longer to close but with demand still high the market outlook is positive and we, like many others, are looking forward to a very busy year.
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