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A new asset class arrives

by Alice Murray 7 March 2022

At the recent Fund Finance Association Symposium, held in Miami last month, it’s clear that this market is no longer a subset of the private funds industry, but rather a burgeoning asset class in its own right.

Set in the iconic Fontainebleau Miami Beach hotel, last month’s Fund Finance Association Symposium attracted more than 900 delegates, spanning the banking, legal, funds and professional services sectors. But it wasn’t simply the sheer size and grandeur of this event that made it an impressive and informative gathering, rather it was the reflection of the fund finance’s burgeoning weight and power.

Since its inception in the mid-80s, the fund finance market sat at the fringes of the private capital fund space. The basic structure of subscription line facilities remained relatively unchanged since the first loan was facilitated back in 1987. While the market saw an uptick in activity during the 2000s as it moved out from its real estate roots into private equity and infrastructure, and beyond its US foundation into Europe and Asia, it was the 2008 downturn that really brought the space to life.

As the GFC sent shockwaves throughout financial markets, investors in private capital funds needed to pause capital calls, which saw GPs explore the ways in which sub lines could provide much needed flexibility and certainty over investor cashflows. The fund finance market’s ability to provide much needed solutions to a major investor headache during the depths of the crisis brought about a new level of maturity and alignment.

Since then, as private capital fund structures have seen an explosion in complexity, the fund finance market has kept pace. Alongside the market’s problem solving capabilities, recent years have also seen a proliferation of new products - dubbed Fund Finance 2.0 - with the arrival of portfolio financing, NAV lines, preferred equity and GP
solutions, providing financing solutions throughout the life of the fund.

Beyond the evolution of fund finance products, the space has also witnessed a major influx of non-bank lenders, with a growing number of dedicated funds now catering to the market and providing access to institutional investors. Furthermore, over the past 12 months, ratings agencies have joined the party, opening up institutional access even further.

The fund finance market is still driven by private capital funds - these loans wouldn’t have seen such explosive growth if it weren’t for the boom in alternative assets. The creation of new products and the broadening reach of these loans wouldn’t have come about without increased complexity in the funds space. This is neatly evidenced by fund finance’s latest innovation, ESG-linked loans, which neatly reflect private capital funds’ hunger for greater ESG credentials.

But, what is clear is this is a market with its own ecosystem; comprising a growing variety of lenders, dedicated legal teams, an influx of investors and even the emergence of dedicated tech solutions. And this ecosystem sets itself apart from other financial services subsets thanks to its collaborative, cooperative and collegiate culture, which was hugely apparent at the recent industry conference.

And perhaps this is the fund finance market’s greatest challenge as it becomes an asset class in its own right. With every lender and law firm desperate for talent to keep up with relentless demand, this industry is about to undergo a massive uptick in headcount. As its number of participants swells, how will it maintain its unique and surprisingly friendly culture?

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