From February 24th to February 27th, the Fund Finance Association (FFA) hosted the annual Fund Finance Symposium, where sponsors, funds, lenders, rating agencies and legal counsel gathered to discuss recent trends in the fund finance industry.
What you need to know
Our key takeaways from this year's conference panels include:
- Tremendous growth. The market continues to see tremendous growth within the two verticals of fund finance (subscription or "capital call" facilities and NAV (net-asset value) facilities).
- Securitization of fund finance. Goldman Sachs completed the first securitization in the fund finance sector last year and believes that there will be more to come. Other panelists agreed that we are at an interesting intersection of fund finance, securitization and capital markets.
- Financing the end-of-fund lifecycle. One thing that the fund finance industry is grappling with is having more options for funds that are nearing the end of their lifecycle. Many are of the view that the path and process to transact is not as efficient as it should be and there will likely be a lot of innovation to come in the secondaries market to find effective solutions for returning capital to investors.
FFA panel sessions
This year's conference had several interesting and thought-provoking panels. Bank and non-bank lenders both agreed that a lack of awareness and education is preventing the fund finance space from reaching its full potential. Lenders emphasized that it is their responsibility to educate investors, managers and general partners on the "art of the possible". We have recapped some of our favourite sessions below:
The golden age of private credit?
- Panelists took varying positions on whether private credit has reached maturity. Some believe that private credit is still in its infancy, while others posited that we are in the golden age of private credit.
- Credit fundamentals have been quite strong, and with the expectation that interest rates will fall within the next year many experts believe that asset-based finance is an area ripe for maturation as insurance companies and other investors look for higher quality assets.
- To date, private credit growth has been funded by institutional investors. Many panelists argued that over time high-net-worth individual investors will become deeply involved in the private credit industry.
- So far, the direct lending market has focused primarily on sponsor-backed businesses. However, within the next two to five years panelists noted that they expect the direct lending industry will grow to focus on privately owned, family-run businesses, which are currently viewed as an untapped market.
NAV lending to buyout funds
- Since the Institutional Limited Partners Association (ILPA) guidelines came out last year, there has been a heightened focus on the use of proceeds from NAV facilities. Typically, the main purposes of a NAV facility include financing a follow-on investment, bridging a sale, or bridging additional equity coming into the fund; however, panelists pointed out that there are situations where borrowers want to use NAV proceeds to make distributions.
- One of the key aspects of fund formation is ensuring that the limited partnership agreement includes certain financing permissions (and limitations, depending on the perspective). These can include permitting subscription and NAV credit facilities, providing for a permitted debt basket (which does not require investor consent), and evaluating the scope of cross-collateralization restrictions.
Non-bank lender perspectives in fund finance
- Many panelists noted that the NAV financing space is a natural place for non-bank lenders to get involved in fund finance, given their expertise in asset-backed lending.
- There has also been a rise in non-bank lender participations in subscription facilities, which many believe was caused by the U.S. regional bank crisis. Many fund managers were scrambling for capital, which led to managers engaging non-bank lenders.
- The participation of non-bank lenders in subscription facilities can create different considerations compared to traditional bank lenders. For instance, funds will typically not want to share all their information with non-bank lenders (who are often their competitors), which can lead to a delicate negotiation of how much information to disclose.
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