NAV-igating the future: Trends from the 15th FFA Global Symposium

It did not take many conversations at the 15th Fund Finance Association Global Symposium in early February, nor a deep review of the conference agenda, before the key trends in the fund finance market became clear. We set out below our takeaways on what the industry will be focussed on in the next twelve months:
 

Insurance in fund finance

Private capital managers are spending significant time revisiting traditional closed ended fund structures to find ways to expand their investor base to include insurers who, driven significantly by the increased volume of PRT (Pension Risk Transfer) transactions, have huge assets under management that they need to deploy into a diverse portfolio of suitable assets. 

In order to tick the regulatory boxes (primarily in the US), the Rated Note Feeder structure is now prevalent, allowing those insurers to invest into a debt product (the rated notes) rather than a traditional limited partnership interest and benefit from preferable capital treatment. Whilst there is significant appetite for the higher rated tranches of the notes, it is the lower rated/equity tranches that market participants are most focussed on placing. Indeed, we spoke to one advisory firm who have a partner entirely focussed on this.

A related topic is the increased focus on launching collateralised fund obligations (CFOs). Interest in the product is both from insurers looking to diversify their investments or realise liquidity and from managers looking to increase AUM or use CFOs as a funding tool, e.g., for their own co-investment commitments.

NAV

Save where interfacing with new fund products (the Rated Note Feeders mentioned above, evergreen facilities, continuation vehicles), subscription facilities are now omni-present, often repeated on similar terms and documents from fund vintage to fund vintage and increasingly viewed as commoditised.

Fund NAV is, however, experiencing a period of maturation. Deal volumes have risen significantly, investors and managers alike are increasingly familiar and comfortable with the product and lender competition has never been tougher. We have seen ‘fairway’ buy-out funds marketing low-LTV facilities (c. 10%) receiving more than a dozen offers, and here the market seems to be coalescing around the banks, primarily as a result of the cheaper pricing offered. The non-bank lender offer does, however, still hold persuasive power – higher LTV, more accommodating cash flow sweeps, lending against more concentrated portfolios, and greater flexibility on structuring and wider terms. It is the preferred option where any of those features are required. A bifurcated market seems to be emerging. 

We also spent time discussing with certain non-bank lenders how their cost of capital could be reduced via back leverage to make their offering economically more competitive.

Credit fund leverage

The overarching theme on credit fund ABL and back leverage: more. 

More managers looking to raised levered funds or levered sleeves for the first time. Managers who already have fund leverage facilities in place implementing them more widely across their funds and structures: SMAs, evergreen funds and continuation vehicles. And on the creditor side, more banks looking to credit fund leverage as a strategy and offering alternative products (repo, TRS-based leverage, credit fund NAV, hybrid facilities).

Summary

The above picks out key fund finance products that were the cornerstone of the FFA Symposium this year, but the underlying trend is that of maturation, evolution and innovation. As parts of the market mature and do become more commoditised (though rarely without some complexity from a lawyer’s perspective), innovative thinking moves to the next frontier. That is reflected in the continuing theme of the expansion of what is considered fund finance and the ever-increasing crossover with, from a legal perspective, practice areas pointed at private capital management beyond traditional fund finance teams: for example, CFOs and Rated Note Feeders, whilst debt products are inherently part of fund formation and structuring as a means of bringing investors into fund structures (rather than banks and non-bank lenders funding into fund structures), and credit fund back leverage – traditionally securitised in its nature – is heavily structured finance technology.

Fund finance has always been about finding creative solutions to the issues that managers are confronted with and that is certainly continuing apace.