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Fund Finance Advisory: From Sidekick to Superhero?

Published August 02, 2023
FFA Nextgen spoke with Adam Heaysman, Guillaume Leredde, Georgina McCreadie, and JP Peters to understand the trends that are affecting borrowers’ financing needs and how they are helping GPs to navigate an increasingly complex landscape.

The past year has seen a big shift in the dynamics of the fund finance market. The supply of capital call facilities has struggled to keep pace with demand and a challenging macroeconomic environment has made it tougher for fund managers to arrange orderly asset disposals, causing difficulty in realising returns for investors. FFA Nextgen spoke with Adam Heaysman, Guillaume Leredde, Georgina McCreadie, and JP Peters to understand the trends that are affecting borrowers’ financing needs and how they are helping GPs to navigate an increasingly complex landscape. 

Navigating Lender Appetite
The main challenge for borrowers in today’s subscription finance market is finding an adequate and reliable source of liquidity, meaning that many borrowers are turning to advisory for time-effective solutions. Adam Heaysman explained, “Alpha Group offer a tech-based fund finance platform, providing real time access to the market for both lender and borrower. Borrowers are struggling to find active lenders. By working closely with them and screening the lender universe, we can help borrowers access pools of capital from across the whole lender universe and already have a client base of over 800 fund clients who we are engaging with.”  

While Alpha Group aims to provide an intermediary platform, Avardi Partners was one of the first advisors focused solely on borrower-side fund finance advisory. Guillaume Leredde explained how they are guiding borrowers of all shapes and sizes through a difficult market: “Avardi are a team of 8 people working with borrowers across Europe and the US, ranging from smaller managers raising their first fund, through to managers with €100bn+ AUM with more complex needs.”   

Guillaume continued, “Lender appetite is harder to read, so borrowers need somebody who knows the market. They are looking to explore new banking relationships and expand their syndicate due to a less predictable lender landscape. We help borrowers find the right lender relationships to match their needs.”

The balance sheet constraints faced by many major lenders has also driven increased selectivity in the borrowers they provide subscription financing to, given the product’s relatively low return on RWAs and factoring internal risk exposure caps. This has made advisors who know the lender market even more important, Georgina McCreadie of Deloitte explained:  “The Deloitte Fund Finance Advisory team is a team of 7 solely covering fund finance as part of a 130 strong Debt and Capital Advisory team in the UK. We have assisted a range of borrowers to source optimal financing solutions by building long-term relationships with strategic lenders that can serve their holistic financing needs. Lender-borrower relationships have always been key to fund finance, and our role is to help the GP achieve the best financing for its LPs within this longer-term context.”

Kombit Consulting meanwhile provide a boutique consultancy service focused on generating value for both GPs and their LPs and stretching beyond pure debt advisory: “Fund finance is about delivering solutions for managers but for the benefit of LPs. Kombit places a huge emphasis on how our services can provide the best value for a fund’s investors and help our clients across the full spectrum of their banking and financing needs” stated JP Peters. He continued: “There is no greater shortage of supply (of sublines) than there has ever been. Lenders will occasionally have capacity constraints that cause them to rebalance appetite, but the growth in fund sizes has increased the scale of demand, which means that these appetite fluctuations are more noticeable. There are now more lenders active and lenders who are focused across different product verticals. Advisory can  help borrowers to figure out who is active and where in the market to ensure the solutions used best fit a fund’s current needs and future ambitions.”

Later Stage Fund Liquidity Needs 
This supply-demand imbalance on sublines combined with a tougher macroeconomic environment has also increased the demand for NAV-based financing solutions in the later stages of fund lifecycles. “The NAV financing market can be split depending on sector” explained Guillaume Leredde. “Demand from Secondary and Credit funds has always been high. Now dislocation has increased demand across PE, Real Estate, and Infrastructure. The main driver for PE funds is the lack of exit opportunities while managers need to return liquidity to LPs. GPs want to optimise their financing to drive higher returns via earlier distributions, as they don’t want to realise assets at the wrong price.” 

JP Peters agreed: “The secondary market and NAV financing both provide liquidity where asset disposals wouldn’t achieve the best outcome for LPs in the near term.” He continued “What people forget is that NAV facilities are and have been a core solution used in this market for a long time. They arguably existed before subscription lines (in the mid-2000s), with the latter developed as an innovation to support lenders’ existing clients with a working capital solution earlier in a fund’s lifecycle than had previously been the case. The thing that is new is the number of lenders, including non-banks, who are entering the NAV financing space.”

Perhaps one of the biggest current themes in NAV financing is the dual use of facilities. Georgina McCreadie stated “Against the backdrop of more challenging fundraising, there is also a general trend of funds holding onto assets for longer to drive enhanced value, slowing distributions to LPs. NAV facilities can be used to both downstream funds for follow-on investments and also upstream proceeds to LPs in this scenario, providing a flexible source of additional capital to support a range of purposes. On top of growing demand, new lenders such as debt funds are a key driver of the recent rise in supply of NAV financing liquidity, providing innovative and flexible solutions, which have helped increase the uptake by managers.” 

The surge in lender interest in NAV facilities can partly be attributed to the increased publicity the product is receiving – as demonstrated by Carlyle recently announcing it closed a EUR 1bn+ NAV financing deal for CEP V. Another consideration for lenders is how best to deploy balance sheet, stated Adam Heaysman: “The influx of NAV financing providers is making it easier for funds to access liquidity later in their lifecycles. 50% of our lender-side calls over the past week have been on NAV financing. These facilities generally consume less balance sheet and typically drive higher returns for lenders than capital call facilities.” 

Looking forward
Economic uncertainty lies ahead for both lenders and borrowers. Higher interest rates and the potential for a recession continue to weigh on banks forecasts for cost of capital, while GPs must grapple with the liquidity challenges this creates on top of fundraising, investing, and realising assets in a volatile market. It is no coincidence that so many managers are turning to advisors to help them deal with uncertainty. 

“Most of the biggest challenges for managers over the past 12 months have come from macroeconomic shocks, which have had a knockon effect on our market”, explained Georgina McCreadie. “Advisors can help managers navigate these unexpected events and volatility by helping them find the right long-term financing partners.” Adam Heaysman agreed, emphasizing the time saving offered by Alpha’s solution: “Borrowers are struggling to keep abreast of changes to lender appetite and CFOs are typically time challenged. Rapid access to cost-effective solutions is key for borrowers.”         

This was a view also supported by Guillaume Leredde, who said “Pressure on fundraising combined with a reduced supply of financing in a high interest rate environment will be key challenges. To date the demand for fund finance products remains high, but we have not seen the full macroeconomic impact yet. Advisory can guide borrowers through the ever-changing lender environment and equip them to face challenges on the horizon.” 

One area of the market that is feeling the impact of pressure on lender balance sheet particularly acutely is smaller managers, as lenders focus on their core established relationships with larger sponsors. “Funds at the top-end of the market continue growing with strong interest from lenders to participate in large club deals; the real challenge will be how our industry gets behind first-time and emerging managers –who are important drivers of diversity and innovation.” stated JP Peters. “This is where Kombit wants to make a difference. We are an intentionally small business with an agile approach, helping clients of all sizes to avoid pitfalls as much as assisting with transaction-based solutions.”   

The past year has seen one of the most challenging environments for borrowers in the relatively short history of fund finance. For advisory, it is becoming increasingly apparent that what was formerly a very niche corner of the market is now becoming critical to how many managers operate their businesses and manage their liquidity needs.   

With thanks to Alpha Group, Avardi Partners, Deloitte, and Kombit Consulting for their valuable contributions.
Edited by Joel Buckett   
Contributing Authors:
Guillaume Leredde
Director Avardi Partners
Georgina McCreadie
Assistant Director Deloitte
Adam Heaysman
Managing Director Alpha Group
JP Peters
Founder & Managing Director Kombit Consulting