Reed Smith Client Alerts

Generally, the funds finance market is holding up well and will continue to thrive through this COVID-19 lockdown period albeit with a slightly different emphasis in terms of growing existing relationships, increased emphasis on NAV facilities and a watchful eye on the behaviour of institutional investors.
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The feedback we are receiving from asset managers on their fundraising is mixed. Many funds which were partly through their fundraising seem to be full steam ahead to first close, and some have even exceeded fundraising targets (as investors look to place cash in safe havens away from the turmoil in the stock and bond markets). However, for small and mid-market funds, there seems to be a slowdown or delay on fundraising until the COVID-19 lockdown is relieved. This is particularly true for asset managers who are dependent on investors from outside the circle of institutional investors (e.g. pension funds), where direct contact and marketing with investors is critical but currently challenging. For the upper mid-market and large cap funds, most seem to have a continued ability to raise and close their funds successfully. For mid-market funds we therefore envisage a backlog of fundraising which will give rise to a substantial number of fundraises occurring once the lockdown ends.

Subscription line facilities

Subscription line facilities are still available and being put in place, where funds are closing successfully. For fundraises that have been stalled, the subscription line facilities are also being put on hold or delayed. A lot of our lender clients are focusing on existing clients and existing relationships for new business rather than providing facilities to funds where they have no existing relationship. In a limited number of cases, lender clients have put deals on hold or cancelled deals, as they (1) focus their lending on key sectors of the general economy and (2) devote resources to sorting through existing positions (outside fund finance) which have become or could become distressed. Whilst that trend is concerning, we also have a group of lender clients that see the current market as an opportunity and would like to take over new relationships as other lenders put deals on hold or indicate there will be delays on closing. We are aware of a trickling upwards of pricing on sub-lines in the U.S. and in Europe, and we have seen deals priced at 25-40bps higher than they would have been a month or so ago for new plain vanilla subscription line facilities with European based managers.

NAV facilities

At present, the market for NAV facilities has not changed drastically since the COVID-19 lockdown started last month. That said, NAV facilities have become a point of interest for asset managers, particularly considering that the current market turmoil has produced a complicated picture for liquidity and exit strategies. With both liquidity and exits under pressure, we predict a big increase in demand for NAV and other asset-backed facilities. NAV facilities will be particularly appealing to a fund that is heavily invested and has limited undrawn commitments, but still wants to deploy capital in investment opportunities given the recent decline in valuations. NAV facilities also attract interest from asset managers with funds approaching maturity, where investor capital is fully drawn. In this context, asset managers face a combination of challenges, including (1) finding capital to support portfolio companies which are under pressure due to market turmoil; (2) delaying exits at low valuations; and/or (3) returning some cash to investors, in line with expectations and to support raising new funds. A NAV facility can help in these circumstances because it can be structured with recourse against the cashflows coming from an existing heavily invested portfolio rather than against undrawn commitments of limited partners (LPs). There are an increasing number of lenders who are willing to make NAV facilities available to private equity, infrastructure, real estate, secondary and credit funds.