Introducing the Fund Finance Tracker
The fund finance market has reached a level of maturity where borrowers have plenty of options when it comes to active lenders, which in turn makes it more difficult to navigate. It is against this backdrop that we have created the Fund Finance Tracker.
The Tracker aims to shine a light on the main three products available to fund managers: subscription lines, NAV facilities and GP finance, to provide insights on how a selection of lenders approach these loans.
To create this first edition, we interviewed a cross section of the lending community to find out their approach to fund financing. Of course, with any kind of loan, the end product will always be subject to the lender’s risk appetite coupled with the GP’s track record, investor base and portfolio. Therefore, the information provided here is simply an indication of a lenders’ core strengths and strategic focuses. It is designed to give managers an idea of who is active in this space and the types of funds they typically look to work with.
The subscription line market is estimated to be worth over $1trn globally, with around 50 active lenders in Europe alone. “The size of the market today is a response to growing client demand and the size of the loans being facilitated. When a market develops to that kind of scale it’s impossible to understand it simply through conversations. There is a real need to understand the various options available to borrowers, the active lenders, types of facilities and key terms,” says Michael Slane, part of Investec’s fund solutions team.
A wonderful finding from the research was the range of loan amounts now available; from as little as £3m, right up to €700m from a single lender. “This finding illustrates the maturity of the market, and the challenges borrowers might face in navigating it. It can be difficult to know which lender to approach, especially if a borrower has more esoteric needs,” adds Slane.
Unlike subscription financing, NAV lines are only starting to reach maturity, meaning much less standardisation. Indeed, when it came to pricing, we found huge variances; from 3% up to 12%. According to Matt Hansford of Investec’s fund solutions team, this is because of the various levers involved with these sorts of loans. “There are a few balancing factors involved in this. One is concentration versus diversity. The other is the size and scale of underlying assets, and the other is loan to value. Some lenders will specialise at one end of the spectrum, or a specific point based on pricing and risk.”
Indeed, NAV financing is a more varied market from a lender perspective, and because of the nature of these loans, it’s about finding the right partner. “Experience and a partnership approach are crucially important here. Ultimately, NAV finance is putting in longer term financing at the fund or portfolio level, so you want someone with experience to navigate the structural challenges in setting it up, and who is also prepared to work with you through various economic cycles,” adds Hansford.
Perhaps the least developed facet of the fund financing space is GP financing. A major reason for that is it has largely been relationship based, with banks offering it to GPs on a reactive basis.
“Structure and terms vary significantly when it comes to GP financing, as it is a rarer product. Because of this, experience and partnership are also really important here,” says Hansford.
“Both NAV lines and GP financing are important solutions for the continued growth of private equity. Both products provide important liquidity to help with key industry trends, namely, more investment into more longer term holds of assets,” concludes Hansford.