Fund finance tracker: 2nd edition
As the complexities of fund management intensifies from all corners - whether it be increased investor demands, a swelling regulatory regime, or heightened uncertainty in the face of macroeconomic headwinds - fund finance is emerging as a valuable tool for GPs and LPs alike.
The second instalment of the Fund Finance Tracker reflects not only the mainstream use of fund finance products, but also how lenders are responding to evolving GP needs and a more competitive market.
Despite launching this project only 6 months ago, the tracker has already picked up new players entering the space, as well as existing lenders expanding their product offerings in response to client demand.
Until fairly recently, the use of capital call facilities was sporadic and by no means commonplace. However, as the benefits of the product are better understood by managers, their adoption has accelerated. One of the main purported advantages of using a subscription line is smoothing out capital calls.
Investec recently analysed 10 years’ worth of financial statements from 45 GPs to find out the impact of subscription lines on capital call down frequency. Their analysis revealed that yes, adoption of subscription lines has dramatically reduced the number of drawdowns GPs make, from around four to five each year to two or three. “These findings validate the theory behind subscription lines,” says Oliver Bartholomew of Investec.
“Reducing the number of call downs each year delivers tangible benefits for GPs, namely from a time saving perspective; it reduces how often managers are working with their fund administrators on capital calls, which for smaller GPs is operationally intensive, and complex for larger GPs with numerous LPs.” Bartholomew explains.
“We also know that reducing the frequency of call downs also benefits LPs,” adds Bartholomew. “The majority of institutional investors have multiple fund interests, so if the number of call downs reduces across the board, they can better manage cashflows and mitigate surprise capital calls.”
The most notable development in the NAV line space is the increased number of lenders providing this product. “Institutions are more open to these facilities so it’s not surprising to see more lenders entering the space,” says Bartholomew.
However, the tracker also points to a degree of tightening when it comes to loan sizes. Three of the lenders we tracked have decreased their maximum loan amount. Bartholomew suspects the increasingly challenging macroeconomic environment could be driving a more cautious approach to these loans. “Given where we are with things like inflation, supply chain issues and wider macroeconomic uncertainty, lenders will likely be more conservative when it comes to NAV lines.”
Another reason for tightening the size of these facilities could be managing exposure. “Banks are limited as to how much they can lend to each manager, so there could be a rebalancing of limits if they have been pushing on sub lines,” explains Bartholomew.
A major development for GP facilities is the number of lenders providing this product. According to Bartholemew, this finding responds to a major uptick in demand. “Increased provision in this space is completely client driven. We are seeing huge demand for GP facilities,” he says.
What the findings do not tell us is the drivers behind that demand. The growing need for GP facilities could be driven by a slow down in distributions or more managers embarking on succession plans. Whatever the reasons, rising levels of demand and the ways in which lenders respond is likely to be a stand out feature of the fund finance market for 2022.