2. Risk Management in Fund Finance: Evolving Frameworks in a Shifting Market

Market Trends: The fund finance market is continuing to expand and diversify, with net asset value (NAV) facilities, hybrids and structured capital-raising tools gaining share. Macroeconomic and regulatory pressures (including Basel reforms) and (more so than ever) the geopolitical climate are all impacting risk management and driving product innovation.

Investor bases are becoming more concentrated, with greater high-net-worth, family office and retail participation.

Sponsors are increasingly structuring their funds with open-ended vehicles and rated note feeders.

More generally, subscription lines are now used for interim/warehouse leverage, post-investment liquidity and, at times, pure leverage. Additionally, tenors are lengthening, which is pushing pricing/terms and causing a greater focus on balancing risk and reward.

The use of recallable capital as part of the borrowing base for facilities is rising, and general consensus in the market is that recallable capital is workable where the limited partnership agreements (LPAs) clearly define recallability and the limited partners (LPs) are aware of and acknowledge the position around recallable capital. The more pervasive use of recallable capital requires greater transparency with LPs.

Continuation vehicles are continuing their trajectory of increasing popularity, which has transformed the secondaries market. This trend can be easily explained in view of the limited number of exits on investments.

Risk mitigation:

• Stress testing: Heightened stress testing is being undertaken in the context of the increasing geopolitical shocks that we have seen worldwide recently, and the increase in sponsor and counterparty concentration, both of which necessitate active portfolio limits management.
• Credit risk insurance:
  • There is growth of credit risk insurance for large exposures and concentration relief and European RWA efficiency. This results in silent/on-balance-sheet treatment that preserves lender control, facilitating larger tickets.
  • The standard LMA confidentiality provisions in underlying facility agreements should allow insurers access to documents to provide credit risk insurance. However, sponsors are increasingly requiring further restrictions to the confidentiality provisions, which can inhibit insurers gaining necessary access to documentation, and that in turn inhibits lender risk mitigation. So, whilst the rationale for amending the provisions is understood, the unintended consequence of restricting access to insurers should be considered when such amendments are made.
• Legal risk mitigation is achieved through increased and enhanced due diligence and ensuring the security package is robust.

3. GP Financing Solutions (Trends and Developments)

Broadening Lender Base and Increasing Complexity: The fund finance market has evolved significantly, with a notable expansion in the range and complexity of solutions available to general partners (GPs). Historically, GP financing was a relationship-driven financing solution, often facilitated through private banking divisions. Today, the market is seeing a broadening lender base with the entry of private credit providers and institutional investors such as insurance and pension funds. This has led to the development of more sophisticated financing products.

One of the most significant trends in GP financing is the increasing use of innovative structures such as securitisations in the form of collateralised fund obligations, with notes issued to insurance companies or pension funds that need to hold rated paper. These financing structures allow GPs, particularly larger ones, to package and sell notes to institutional investors, unlocking larger pools of liquidity. The entry of private credit has provided GPs with more options, enabling them to tailor financing solutions to their specific needs, such as pref-equity solutions that were not previously available. The appropriate financing solution will vary from fund to fund and will normally depend on the fund manager’s objectives, which can range from succession planning to employee co-investment programmes to fund consolidation. This drives the increased complexity seen in funding solutions as growing funds with new product lines start to develop their operations, such as introducing employee co-investment programmes.

Relationship Considerations: Despite the growth in available financing solutions, emerging funds and funds without established relationships with lenders are still facing financing challenges. The market is still largely dominated by a relatively small number of finance providers who are willing to offer tailored solutions or smaller facility sizes, which gives the more established fund managers an advantage when seeking financing. This makes close relationships crucial for securing this type of financing, with lenders, particularly through their private wealth arms, looking to fulfil the needs of their long-standing clients with good track records in a way that solves their financing challenges. The increased liquidity that comes with new entrants into the market, such as private credit and institutional investors, means that there are other options for GPs, which may focus more on the yield rather than on a long-standing relationship.

Transparency and Disclosure: LPs have generally become more sophisticated and focused on financing arrangements, which has led to greater transparency and the need for negotiation at the establishment of new funds. For example, LPAs of older vintages often require LP consent in respect of the GP’s ability to pledge its commitment, whereas more recent LPAs do not, suggesting that GP financing solutions are now being considered at the formation stage of a fund. LPs are more engaged and are likely to scrutinise the use of leverage, the security packages, the potential impact on the economics of funds and the effect on the managers’ ‘skin in the game’. The private nature of many GP financing transactions means that transparency and disclosure are ongoing areas of negotiation between GPs and LPs. Additionally, regulatory, tax and credit brokering aspects are important considerations for funds and lenders, who aim to find a balance between confidentiality and the need for oversight.

4. Securitisation and Fund Finance Products

The panellists on the “Securitisation and Fund Finance Products” panel discussed the definition of securitisation, why securitisation benefits the fund finance industry, and proposed amendments to the current regulations.

What is securitisation? This is the process of packaging financial exposures, which are sold to an SPV. The SPV then issues new, tradeable securities to capital markets, backed by the cash flows from these underlying assets. The credit risk needs to be tranched, and payments on the product must be dependent on the underlying exposures. How does this apply to the fund finance market? Securitisation is mainly applied to subscription line facilities (backed by investor commitments) and NAV facilities (backed by the underlying portfolio):

• NAV facilities: NAV facilities lend against the fund’s underlying portfolio. Lenders to credit funds typically look at the fund’s overall portfolio and cash distributions and, compared to subscription line facilities, there are increased concentration limits and eligibility criteria. For private equity and infrastructure funds, lenders may go deeper, reviewing underlying assets and speaking with management teams. These can be less predictable than subscription line facilities, and lenders may only securitise a portion of the risk.
• Subscription line facilities: These facilities are backed by investor commitments. They can be structured as private securitisations, where the lender passes on the risk through forward-flow arrangements. This process frees up the bank balance sheet while maintaining a relationship with the manager.

Why Securitisation is Used?

• Cheaper and more flexible financing: By transferring some risk off the balance sheet, banks can reduce their capital charges and offer more competitive terms.
• Risk management: Subscription line facilities can carry significant exposure to one fund manager or one investor, and securitisation provides a way to spread or reduce that risk.
• Broader capital access: Securitisation structures can attract investors who would otherwise not participate, including those restricted from holding equity.

Securitisation of NAV and subscription line facilities can provide numerous benefits as detailed above. However, the trade-off is that it can be expensive to comply with securitisation regulations and increased reporting requirements. The sponsor (original lender) is required to maintain risk retention, which is often structured by the sponsor retaining at least 5% of the risk in the deal through subordinated debt (the ‘skin in the game’ element). Detailed quarterly reporting is required on each underlying exposure (which is often outsourced to third parties) and credit funds themselves need to be careful that they do not fall within the definition of ‘securitisation’, which restricts what they can invest in. The increased reporting tends to be the most onerous obligation on lenders, particularly for credit funds where reporting is required for each individual credit asset, which can include hundreds of individual assets.

Regulatory Shifts:

• UK vs EU rules: Since Brexit, some differences are emerging, particularly with the implementation of the Securitisation Regulations Framework, which bring the rules within the remit of the FCA. However, most cross-border deals still need to comply with both regimes, which is not beneficial given there will be dual reporting requirements. The UK rules are likely to move further away from the EU rules, allowing for changes in line with current UK market conditions.
• Reforms on the horizon: Regulators are looking to ease the burden for private securitisations, allow simpler reporting for complex or unusual asset classes and make it easier for insurers to invest in these products.

Looking Ahead: Over the next year, NAV and subscription line securitisations are expected to grow as fund finance borrowers and lenders look for cheaper capital, better risk management and a more diverse investor base. While regulation makes these deals more complex and costly, the potential benefits mean securitisation is likely to become a bigger part of the fund finance toolkit.

5. Institutional Investor Panel (Insurance, Pension Fund etc)

The panel brought together leading voices from insurance, pension and asset management to explore the evolving role of institutional investors in the fund finance market. The discussion highlighted the increasing participation of insurers and pension funds, driven by the search for attractive credit assets to back their long-term liabilities. Panellists agreed that fund finance, particularly subscription lines, offers a more compelling risk-return profile and greater diversification benefits than traditional public credit.

A key theme was the regulatory environment, especially for insurers and pension funds, which shapes product preferences and investment structures. The panellists acknowledged how the fund finance market has, over the last few years, geared up to address these needs, with offerings such as term loans, prepayment protections and the ability to be rated, accounting for the regulatory requirements of certainty in cash flows and risk.

From the borrower’s perspective, the increased supply and competition from institutional investors is a positive development, but the panellists stressed the importance of long-term partnership and alignment with lenders, which is often easier with traditional banks than investors, who may only dip into a market while it is attractive. The panel recognised that while institutional capital is welcome, it must be matched with product structures and relationship dynamics that suit both sides, and that where a borrower is looking for long-term liquidity, there may be a misalignment of interests. Another point to consider was the use case, as most institutional investors look for term financing, whereas funds typically favour revolving facilities, particularly given their frequent (6 or 12-month) clean-down requirements. On the other hand, it can be more suitable for other strategies, such as secondaries.

The panel highlighted the varied types of institutional lenders, including pension, insurance and endowment, and the importance of matching the right investors with the right choice of vehicles and the right choice of jurisdictions. Consensus emerged around the need for greater market choice and flexibility to accommodate such diverse investor requirements.

Appetite among institutional investors for fund finance products continues to rise. The panel concluded that continued innovation, transparency and collaboration between banks, managers and institutional investors are essential to unlocking further growth in the fund finance sector.

6. Secondary Market Transactions – Latest Trends

The secondaries market has experienced significant growth in recent years and is now markedly different from its earlier form. In the past, GPs were hesitant to allow LPs who had sold their interests on the secondary market to re-enter their funds. This is no longer the case, reflecting a broader shift in attitudes and practices. The types of transactions and asset classes available for secondary sales have also diversified. Where the market was once considered fairly straightforward, today it encompasses a wide variety of transaction types. Notably, the secondary market now accounts for approximately 50% of investment in mid-market private equity funds.

A key question is why investors are selling and who these sellers are. The private equity market is currently under pressure due to a lack of exits, which has resulted in less capital being returned to LPs. Consequently, LPs are being forced to cut their commitments or reduce the pace and scale of their investments. The secondary market has become an invaluable tool for investors seeking to manage their portfolios more actively. Selling on the secondary market allows investors to address their liquidity needs, and there are now fewer distressed sellers than in the past.

Historically, investors preferred a buy-and-hold strategy and were reluctant to sell. However, a trend originating in the United States has seen investors shift towards a more active approach to portfolio management. Every few years, investors now review their portfolios and may choose to sell some LP interests, using the secondary market to realign their investments. The growth and maturity of the market have made this shift possible. Importantly, investors do not always have to compromise on pricing; in 2024, 40% of LPs who transacted were able to sell at the value they originally invested. However, if there is no discount, it can be more challenging to attract LPs to secondary funds unless the underlying asset is of particularly high quality.

The last five years have seen remarkable growth in the secondaries market. The market was valued at $26 billion in 2019, doubled to $51 billion in 2023, reached $71 billion in 2024, and stood at $48 billion in the first half of 2025. In terms of capital raising for secondary investment strategies, funding was previously concentrated in flagship funds. While this remains the case to some extent, there are now additional vehicles being raised, either for LP-led or GP-led transactions.

GP-led secondary transactions require GPs to make strategic choices between different opportunities. There is an inherent tension between the need to deliver liquidity and unlock fundraising for the next fund, and the desire to retain the best assets. In LP-led transactions, existing LPs in funds sell their interests to secondary funds and are becoming increasingly knowledgeable about the secondary market and its benefits.

The panel also discussed the differences and similarities between mid-market and large-cap secondary funds. Fundamentally, the transactions are similar and involve the same processes and set-up in a secondary strategy. However, mid-market GPs tend to behave differently from their large-cap counterparts. Growth strategies in mid-market deals are often more aggressive, as it is generally easier to grow a business with £30 million–£40 million EBITDA than one with £1 billion. Mid-market GPs also tend to be more selective about who they allow into their funds, whereas large-cap GPs, with their extensive investor lists, are typically less concerned with the identity of the investor.

7. Rated Note Feeders and Collateralised Fund Obligations

The panel covered a brief background on what rated note feeders (RNFs) and collateralised fund obligations (CFOs) are, covering current structures and asset pools and what the future looks like for CFOs and RNFs.

RNFs and CFOs – Structures and Asset Pools:

• RNFs are a type of feeder product that sits on top of a private fund. There are broadly two types:
  • The vertical structure, where you have investors purchasing a vertical slice of the capital structure (notes and equity). In this structure, the investors effectively get the same economic experience as if they had purchased the corresponding interest in the private fund.
  • The horizontal structure, where different investors purchase either the notes or the equity. These products offer equity investors the opportunity to invest in the underlying fund on a super-level basis by benefiting from the leverage resulting from the notes.
• RNFs add rated tranches at the feeder level to accommodate rating‑sensitive investors.
• By comparison, CFOs are usually (though not always) collateralised into multiple funds, and their workings and structure are similar to those of a collateralised loan obligation.
• CFOs securitise diversified portfolios of fund interests or NAV exposures with tranched notes and structural protections.
• Both RNFs and CFOs can lower the weighted average cost of capital, but require alignment of waterfall, fees and governance with existing LPs.

Market Trends:

• RNFs and CFOs are increasing in popularity as they channel insurer and private wealth capital into private markets while providing sponsors with permanent-like, non-recourse leverage and broadened LP bases.
• The ability of these products to increase liquidity explains the recent surge in demand for them.
• Insurer demand is strong given regulatory benefits for rated notes (specifically the Solvency II regulatory mechanism of matching adjustment). This insurer appetite favours more straightforward, predictable cash flows and standardised disclosure.
• From a rating agency perspective, there is a focus on manager quality, asset diversification, and cash‑flow resilience under stresses (i.e., downside protections).

Outlook for the Next Year:

• There is consensus on the continued growth trajectory for these products, which is especially pertinent in a climate where liquidity is an increasing focus.
• There should be increased documentation convergence and increased secondary liquidity.
• Open-ended funds will bring new challenges. Will the funds themselves need to be rated?
• There is an expectation that the market will attempt to create structures with longer tenors. With longer maturities, the ability for distributions to be reinvested through reinvestment cycles may need to be considered.

8. Ratings in Fund Finance - Where Are We Now?

The fund finance market has grown rapidly over the past two decades, evolving from a niche sector to a vital part of the financial system. With this growth comes an increased demand for transparency, regulatory compliance and independent credit opinions. Ratings have become a central feature of this evolution, providing a standardised assessment of risk for increasingly complex fund structures. The demand for ratings in fund finance is primarily fuelled by regulatory requirements for banks and insurance companies. Non-bank and institutional investors are looking for third-party assessments to navigate the risk of investment. Ratings offer transparency, helping fund managers communicate their risk profile to diverse investors in a standardised manner. For funds, ratings offer enhanced liquidity by attracting institutional investors. For banks, ratings can reduce capital charges.

Public vs Private Ratings: GPs are generally open to private ratings on transactions but are cautious about public ratings due to concerns over disclosing information about their funds. Private ratings are treated differently across jurisdictions. For example, private ratings are generally accepted by insurance companies and pension funds in the US and certain banking regulators in Canada and Japan, whereas European banks tend to only accept public ratings. The result is twofold: there is a growing demand for public ratings as they are required by European regulators and there is an increase in liquidity as institutional investors enter the market to fill the funding gap.

Methodologies and Ratings Outcomes

• With subscription lines, the key drivers are the quality and diversity of LPs, and the advance rate. There are also other quality considerations that take into account the GP’s reputation, any drawn commitments and LP transfers. In terms of trends, the expanding role of institutional investors in the subscription line market has led to innovations such as term tranches. Standard revolving credit subscription lines are not suitable for institutional investors who require certainty of drawn utilisations. Instead, term tranches of one or two years offer greater certainty to institutional investors.
• In terms of NAV ratings, the two key pillars are funding liquidity and leverage, with leverage being the biggest factor behind the rating quality. Across the NAV market, leverage is generally moderate, with LTVs broadly around 15-20%, which allows many NAV transactions to be rated investment grade, provided there is sufficient diversity in the portfolio. Challenges arise with rating continuation funds and secondary vehicles due to their high degree of concentration, requiring more due diligence at the asset level. NAV ratings are relatively stable given they tend to be investment grade.
• Rated feeders are rated depending on whether it is a closed or evergreen fund. Ratings criteria look at asset coverage, fixed income coverage, financial policy, and investor and manager quality. Previously, the majority of assets were direct loans. However, there is a trend towards more real assets and higher-quality assets, which is largely a result of managers seeking higher leverage. Leverage is more a determinant of the ratings outcome than asset quality, so an increase in leverage may reduce the impact of higher asset quality on the ratings outcome.

Future Risks and Outlook: Asset quality has held up well and rates are expected to fall (or at least stabilise), which reflects a resilient market that is expected to grow. The main risks to the market come from regulatory uncertainty. As the fund finance market continues to grow, it will also grow in systemic importance, which may raise regulatory concerns. Regulators are concerned with the lack of transparency, illiquidity and the interconnectedness of financial markets, which may result in regulatory interference.

Another source of risk stems from certain new products, such as rated feeders, collateralised fund obligations and continuation funds, where leverage is increasing and asset concentration is high. The opacity in the market may create uncertainty risk, which can amplify difficulties faced by poorly performing funds, creating an element of contagion. This, coupled with the growing role of retail investors, liquid funds and evergreens, means that fears over the performance of a certain fund can spread to other funds.

9. The Evolution of NAV Facilities to Private Equity, Real Estate and Infrastructure Funds

NAV Facilities: From Niche Liquidity Solution to Core Portfolio Management Tool: The panel discussed how NAV lending is evolving across private equity, real estate and infrastructure funds. Speakers explored its rapid move from niche liquidity tool to mainstream financing solution, the impact of ILPA’s 2024 guidance on disclosure and governance, the changing structures and underwriting standards used by lenders, the widening range of strategic use cases, and the risk controls shaping the market.

Progression into the Mainstream: NAV financing has quickly moved from the margins to the mainstream of fund finance. Initially associated with pandemic-era liquidity management, NAV facilities are now a common feature of private equity, real estate and infrastructure funds. Sponsors are using NAV facilities earlier in the fund lifecycle, not only to manage late-stage cash flows, but also to capitalise on growth opportunities and follow-on investments.

This broad adoption is driven by three factors. Firstly, volatile markets and refinancing needs have increased the appeal of flexible, non-dilutive capital. Secondly, frequent deployment of NAV facilities has increased familiarity with the product among LPs and investment committees. Thirdly, the publication of ILPA’s 2024 guidance has given the market a clearer governance framework, helping to normalise NAV facilities as a prudent portfolio management tool.

Clearer Guardrails and Better Disclosure: ILPA’s 2024 guidance has been a turning point. It encourages explicit language in fund documents to address NAV borrowings and recommends consent or consultation with LP advisory committees (in particular for use cases related to distributions back to investors). It also calls for fuller reporting on the key terms of NAV facilities, such as the purpose, tenor, pricing, repayment profile and impact on leverage.

Rather than dampen NAV financing activity, these standards have improved transparency and trust between GPs and LPs. Although new fund documents rarely contain detailed NAV facility permissions (which can slow down the fundraising process), many sponsors now include ‘signposting’ in their LPAs, acknowledging the possibility of NAV financing as a tool for the future and setting the scene for dialogues between managers and investors at a later stage of the fund lifecycle. The result is that market participants are better informed, and NAV financing tools can be deployed more efficiently where appropriate.

Financing Structures that Match Portfolio Reality: Lenders have adapted facility structures to the nature of underlying assets. The older ‘belt-and-braces’ approach of broad cross-collateralisation and blanket share pledges is giving way to more targeted security packages. New NAV financings are frequently relying on limited pools of key assets, with mechanisms to refresh collateral as a fund moves through different stages of maturity.

For strong managers with well-diversified, low-leverage portfolios, some NAV lenders are comfortable offering ‘unsecured’ NAV facilities (relying on account security, other controls and distribution rights rather than direct asset pledges). Aspects that remain key for lenders are independent valuation rights, robust LTV covenants, cash sweep mechanics and pricing ratchets.

Strategic Applications of NAV Facilities: Applications of NAV facilities continue to broaden. Sponsors are using them to fund bolt-on acquisitions, refinance asset-level debt on more favourable terms, and bridge capital needs when co-investors exit. For real estate funds, NAV facilities are being put in place on day one to support acquisition pipelines, to be refinanced with asset-level debt further down the line. For semi-liquid and wealth-management funds (which are fully funded at launch and therefore are unable to access subscription lines), NAV financings are now frequently adopted as the primary source of leverage.

Each of these applications reflects a shift from defensive liquidity management to proactive portfolio enhancement and value creation.

Outlook: For managers, investors and lenders, NAV facilities have become a permanent and familiar component of the fund finance toolkit. Better transparency, more sophistication and continued market discipline are expected to lead to sustained success in deploying NAV lines into the future.

10. Market Developments, Future of Fund Finance, AI and Regulatory Outlook

Panellists discussed the evolving fund finance landscape against a backdrop of economic uncertainty, regulatory change and rapid product innovation.

Market Environment: Speakers noted the challenges posed by high interest rates, geopolitical instability and regulatory pressures on traditional bank lenders. Non-bank lenders are playing an increasingly important role, reshaping the competitive landscape.

GP Perspective: General partners face a crowded market with diverse financing options – from subscription lines to securitisations and NAV facilities. The key challenge is navigating a wide lender universe and securing the right long-term partners who can deliver value and structuring flexibility for investors.

Lender Perspective: Banks highlighted the impact of Basel IV and CRD VI, which are increasing capital requirements and pushing banks toward ratings, risk transfer tools and partnerships with private credit providers. Regional differences remain stark, with the US far more reliant on private credit than Europe or Asia, but convergence is expected.

Regulation: Upcoming EU licensing and capital rules will reshape cross-border lending, particularly for non-EU banks, creating both risks and opportunities. Regulators are also expected to scrutinise non-bank lenders more closely as their market share grows.

Technology: Technology adoption is still limited, with many GPs managing facilities manually. However, purpose-built fund finance platforms are emerging, promising efficiency, risk management and scalability – critical as financing products become increasingly complex.

Looking Ahead: Panellists expect continued product innovation, spread compression and the mainstreaming of once-niche solutions (such as rated bonds and NAV financing). Regulation and technology will be major drivers of change, with early adopters of modern infrastructure best placed to benefit.

11. Single LP SMAs – The Continued Growth in the Market

The panel discussion on Single LP SMAs highlighted the significant and ongoing expansion of SMAs within the fund finance sector, providing insights into the drivers, structuring and risk considerations shaping this growth.

Market Drivers: The growth of SMAs is attributed to increased demand from large institutional investors seeking greater control and transparency, as well as tailored investment mandates. GPs are responding to these preferences by offering financing to SMAs alongside financing in relation to traditional commingled funds, often to secure larger commitments from key LPs. This is coupled with GPs being under pressure to fundraise in a challenging environment.

Structuring and Legal Nuances: SMAs present unique structuring challenges due to their lack of investor diversification and the legal documentation works to provide greater protections to lenders to mitigate the lack of diversification in the LP pool. Lenders and legal advisors emphasised the need for tighter documentation, including stricter exclusion events, tighter transfer restrictions and tailored events of default, including in relation to the insolvency of the LP. Investor letters are a standard inclusion in such transactions, ensuring direct acknowledgement of the financing and consent from the LP. Due diligence at the inception of the transaction is key. It should seek to establish the ultimate beneficial owner and structure of the LP, and be equivalent to that carried out on LPs in a commingled fund subscription line facility agreement.

Credit Risk and Underwriting: The panel agreed that credit risk is heightened in SMAs due to single-LP concentration and lack of diversification. As a result, underwriting focuses heavily on the credit quality of the LP, the robustness of fund documentation and the operational strength of the manager (Manager). Generally, SMAs create more work for the Manager and ensuring confidence in the Manager is almost as important as confidence in the LP – an SMA is almost as much an underwrite of the Manager as it is of the LP. Advance rates and pricing are negotiated on a case-by-case basis, with some convergence in pricing between SMAs and commingled funds as the market matures.

Consensus and Differing Perspectives: While all speakers recognised the continued growth and institutionalisation of SMAs, there was discussion around the operational complexity for Managers and the evolving approaches to risk mitigation. The consensus was that SMAs will remain a prominent feature of the fund finance landscape, driven by investor demand and increasing lender familiarity.

Conclusions:

• Ensure thorough due diligence and well-negotiated protections in finance documents to mitigate the lack of diversity in the LP pool.
• As institutions manage more SMAs, focus should be on finding the right balance between adapting finance documents and fund documents to facilitate specific LPs, and looking to develop a uniform approach to enable Managers to operate effectively. Currently there is diversity, but greater uniformity can be expected where SMAs are completed at scale.
• SMAs are almost as much an underwrite of the Manager as they are of the specific LP.
• Lenders should look to develop their own SMA terms as the market expands to prepare for multiple SMAs.

12. The CFO View – Planning Finance Around the Fund Lifecycle

Whilst unfortunately there were no CFOs participating on this panel (a fact repeated numerous times during the session), the panellists considered a wide variety of thought processes and considerations that CFOs are mindful of in planning finance around the fund lifecycle:

Initial Considerations:

• A number of factors are generally considered and planned from the outset, including what is being financed, what is the set-up that the financing has to work with, what are the circumstances at that time (e.g., initial funding requirements, the fundraising process) and what needs to be planned for in the future.
• Input is required from other stakeholders, including business teams, deal teams, tax teams and investor relations teams (it being stressed that investor direction can be paramount – managers do not want to put off investors). Much of this requires navigation in considering the financing needs, with the CFO/finance team collaborating closely with these other teams.

Ongoing Considerations:

• Planning evolves during the fund lifecycle – it is ongoing. Exposures are managed as the portfolio is managed, with the aim of ensuring the financings are right-sized and supportive of the fund strategy, noting, of course, complexities that may arise, especially towards the end of a fund lifecycle.
• Again, it was stressed that ongoing considerations include keeping investors on side.

Structural and Foundational Views:

• The panel also highlighted imperative and long-term holistic considerations, including the importance of relationships and partnerships. Whilst investor sensitivities and considerations must be kept in mind, the panel also highlighted the importance of the relationships CFOs have with their financiers, not only in deliverability of the financing but also in the provision of support services and other banking facilities, and noted that those funders will be supportive, helpful and pragmatic if complexities arise (including refinance risks). Linked to this, the panel highlighted CFOs’ consideration of diversification of sources of capital to mitigate risk if there are issues with a funder.
• The panel noted that a CFO’s understanding of the variety of products and their use throughout the fund lifecycle is key, and that often CFOs are reliant on their lawyers, funders and other advisors to help understand what tools are available, and the risks, costs and benefits which come with the relevant products. The panel agreed that consistency is key – advisors are trusted when they are consistently there for the fund/CFO.

Other Concerns and Views:

• The panel also considered other possible concerns and perspectives, such as interest rate movements, although it did note that whilst it is good to see rates falling, this is not dictating the use of financings (the financing use case being the primary driver).
• The panel also highlighted that, generally speaking – and as shown by the lack of CFOs on the panel – CFOs prefer to remain behind the scenes.

13. Evergreen Funds – The Rise of Evergreen Funds and the Challenge for Fund Finance

The session commenced with an overview of what is meant by an ‘evergreen fund’ – essentially, an investment vehicle which blends characteristics of both open-ended and closed-ended funds, often containing features such as unlimited duration, ongoing capital raising and periodic liquidity for investors.

The use of such structures has become more extensive in recent years, primarily to address limited partner needs, particularly around the ability to redeem and liquidity. For managers, they represent an opportunity to access untapped capital to accommodate the needs, for example, of high-net-worth individuals and family offices.

In terms of financing such structures, which can encompass subscription lines in respect of uncalled capital commitments of investors at the top of the structure or NAV lines to fund assets downstream, speakers emphasised the need for lenders to understand the product they are financing. For example, whether it is more akin to a closed-ended or semi-retail/open-ended fund needs to be borne in mind, since the two would have different financing requirements.

The panel identified several areas where the perspectives of the lender and manager will differ in structuring such financings, particularly regarding how to deal with redemptions over the life of the fund, investor eligibility and diversification criteria, advance rates and LTV covenants, potentially more onerous reporting requirements on the fund, and the flexibility of security packages.

Wrapping up with the speakers’ perspectives on future prospects, the evolution of the market for evergreen funds is expected to continue as interest from both investors and managers continues, particularly as fundraising for closed-ended funds slows. Innovations in fund finance continue to develop in order to address the unique needs of evergreen structures, which could see the increased use of hybrid facilities and a refinement of the asset-backed lending solutions which have been employed to date. As these products become more mainstream, there is an expectation of convergence in terms, pricing and structuring approaches, similar to the evolution experienced in the subscription line market over the last several years. The continued growth of evergreen funds is likely to drive further innovation and adaptation in fund finance solutions.