The current status of the Funds Finance Market and predictions for the months ahead

9 April 2020 Reed Smith Client Alerts

主页观点 The current status of the Funds Finance Market and predictions for the months ahead

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.

作者: Leon Stephenson Bronwen Jones Kevin-Paul Deveau Nick Stainthorpe

Fundraising

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.

Coinvestment, management company(ManCo) and general partner support facilities

There has been a significant increase over the past year or so in the number of these facilities that are available as a wider range of lenders become willing to provide these to their important clients. We have seen some recent increases in pricing of these facilities, but they are still highly attractive to a fund that deploys capital quickly and where the individual partners and employees need to continue to invest their ‘skin in the game’ on a regular basis. We have seen these facilities set up as simple unsecured overdraft facilities, coinvest facilities secured against the coinvest interest, ManCo facilities secured against management fees, and sometimes also secured against carried interest. The financing structures available are varied, and we have also seen some LPs and other funds making these facilities available both to funds they are invested in and also to other funds they are not invested in.

LP liquidity and secondary market

We are not aware of any defaults which have fed through to existing sub-line facilities. Managers are, of course, conscious that their LPs might face disruptions to their normal operations and might be facing increased demand for drawdowns (as managers across the industry stockpile cash by drawing on sub-lines and investors as protection against any further dislocation to financial markets). As with the global financial crisis, managers are engaging with their LPs extensively to (1) provide updates on portfolio health and defensive measures and (2) communicate funding expectations in order to anticipate and deal with any operational or funding disruptions. It might also be the case that certain LPs are facing more capital calls than they would normally expect and might require bank assistance with liquidity constraints. There are some lenders in the market who are also able to provide certain LPs with liquidity secured against that LP’s stake in various funds. This type of financing may become particularly appealing as the slowdown continues and LPs are asked to make capital contributions to funds and at the same time retain cash for other purposes, such as distributions which need to be made by pension funds to their pension holders.

Activity of funds

We understand a number of the credit funds and special opportunity funds are aggressively fundraising and also flexing the uncommitted accordion provisions of their fund finance facilities in order to access more cash to make investments. We envisage the deployment of this capital will increase significantly a couple of months following the last calendar quarter, once the March quarter-end valuations become available and the right purchase price for such potential investments is easier to ascertain.

Finally

Generally, the funds finance market is holding up well and will continue to thrive through this 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. We believe that the long-standing relationships that lenders have with their existing fund clients will continue to provide the comfort they need to keep making funds finance facilities available, and so providing the liquidity that was so lacking during and following the last global financial crisis.

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