Reed Smith was a proud sponsor of the Fund Finance Association (FFA) 12th Annual Global Fund Finance Symposium in Miami, on February 8-10, 2023. The FFA symposium brings together investors, fund managers, bankers and lawyers for education and networking within the fund finance market. Below is a summary of our key takeaways and industry perspectives from the conference.

Key takeaways and industry perspectives

  • The general takeaway from the symposium is that the fund finance industry will continue to grow this year but, due to a slowdown in fundraising, there will be an increased emphasis on NAV, hybrid and preferred equity-type facilities, as well as rated note feeder structures.
  • Lending capacity limits set against increased demand creates opportunities for regional and smaller banks to enter the subscription line field, while private lenders will seek higher value opportunities in NAV. Pricing will remain a challenge, with funds looking to standardization and efficiency in use of lines to offset higher costs.
  • There continue to be constraints in the balance sheet of a large proportion of banks that can be deployed to subscription line facilities. Furthermore, fund raising is lower in 2023 than it was in 2022. This is driven by global uncertainty in the economic markets, inflationary pressures and importantly the so-called “denominator effect” which means that investors require distributions to be made from investments in existing funds before committing to new funds.
  • Funds are expanding their banking relationships as they seek additional balance sheet from bank and non-bank lenders. There was a significant increase in sponsors at the symposium which supports this trend in the market.
  • The effect of this demand for balance sheet is to create an upward pressure on pricing as this demand starts to outstrip supply in certain circumstances.
  • There is a consequential increase in the demand for NAV and hybrid facilities and preferred equity, as funds are encouraged to offer asset level recourse to support their fund finance facilities. Many banks in the market that traditionally provided only subscription line facilities are now branching out and offering NAV and hybrid facilities.
  • Our debt fund clients who specialize in providing NAV facilities have been inundated with requests for term sheets from sponsors. Interestingly, the large upper market direct lending funds that specialize in leveraged finance facilities are now prepared to provide NAV-like facilities to sponsors.
  • However, upper mid-market and top tier sponsors continue to successfully raise funds and obtain balance sheet from their key relationship banks, although even these sponsors are now looking more at NAV facilities and widening their bank relationships. They are also looking to non-bank lenders to provide these facilities, a number of which are sitting on large amounts of dry powder.
  • There was much discussion about banks and non-bank lenders combining together to provide a sort of term loan A facility and term loan B facility, or a unitranche facility (including use by non-bank lenders of back leverage arrangements with banks), that would have the term loan B lender incur the first loss on any default. The idea is that a more traditional bank would provide the term loan A facility or more senior debt (on enforcement), with the non-bank lender providing the term loan B facility or less senior debt, or providing back leverage. We believe this structure could be successful and will reflect to some extent the development historically in the leveraged finance market.
  • In order to get around regulatory and capital retention issues, both bank and non-bank lenders are keen to explore obtaining a rating of the debt that they provide. This would facilitate a bank or non-bank lender’s ability to syndicate the facility to certain market participants such as insurance companies.
  • For the first time, there were many rating agencies present at the symposium and a number of the people they have hired were previously bankers who specialized in fund finance.