Dechert was proud to serve as a sponsor of the 9th Annual European Fund Finance Symposium at Old Billingsgate, London, on Thursday, September 18. Six partners and three associates from Dechert’s Global Fund Finance practice (coming from our London, New York, Singapore and Luxembourg offices) attended this outstanding conference organized by the Fund Finance Association, which brought together more than 1,000 investors, fund managers, bankers and lawyers from over 500 firms for education and networking across the fund finance market.
Various topics were discussed during the event, among which notably market developments in EMEA, risk management in fund finance, GP financing solutions, securitization and fund finance products, and ratings in fund financing. Below are some key takeaways for our readers, without rehashing all the themes here.
Challenging macro environment with signs of recovery
Despite persistent geopolitical and macroeconomic headwinds, the fund financing market continues to face a challenging fundraising environment but is showing signs of recovery. Alternative AUM may continue to grow (it being noted that infrastructure performs strongest in alternatives for 2024, with secondaries growing as proportion of private equity AUM), albeit at a slow rate, and fundraising in private markets is expected to recover from 2027. Direct lending remains most targeted strategy with private credit becoming more prominent.
Adaptation and innovation by market participants
GPs are exploring new solutions to maintain performance of the investments and support ongoing operations by using continuation vehicles. Financing for these vehicles might come from a combination of new or existing investors, alongside debt provided by lenders in the fund finance market, such as those offering Sub-lines and NAV facilities to facilitate the transaction. For similar reasons, the market witnessed an increase in Evergreen funds, helping maintain investment momentum. SMAs (Separately Managed Account, which may have only a single investor) become popular to adapt to the rise of high-net-worth investors, presenting distinct challenges to lenders due to the concentrated and complex risk profiles.
GP financing solution
Anthony Lombardi, one of our fund finance partners from Dechert’s London office, shared his insight on the “GP Financing Solutions (Trends and Developments)” panel. “GP facility” usually refers to any lending to fund managers/general partners (GPs), providing a liquidity option for fund managers and investing professionals. These facilities are put in place to solve challenges faced by GPs, including providing liquidity for new fund commitments, succession planning for the fund’s management, or raising finance to seed new strategies. These facilities are often secured by management fee streams or similar collateral. Tradionally a specialized product, this product continues to grow and attract increased market interest.
Fund finance and securitization
Questions are increasingly asked in Europe about whether particular fund finance transactions (e.g., NAVs or ABLs) constitute “securitizations” under EU and UK regulatory frameworks. Securitized financings may also offer beneficial regulatory capital treatment to some European lenders, and therefore more competitive pricing. However, funds need to be aware of the risk retention and highly detailed reporting requirements within the framework of EU and UK securitization regulations.
Rated note feeders and Collateralized Fund Obligations (CFOs)
Rated note feeders have now very much “arrived” in Europe from over the Atlantic. They are particularly popular with insurers looking for capital efficient investments in fund exposures. The market is seeing a wide range of innovative structures. CFOs are also making a comeback.
Ratings play an increasingly important role
In fund financing, a rating is a credit assessment provided by a rating agency that evaluates the financial strength and capacity of a fund to service its debt. Banks are more frequently requiring funds to obtain ratings before offering credit facilities, driving by their desire to better manage risk and regulatory capital requirements. While lenders often prefer public ratings for transparency and portability, private ratings remain common due to investor confidentiality concerns and a GP's comfort level with disclosing sensitive information to a certain extent.
Amid a packed program of panels and meetings with clients, prospects, contacts, colleagues, peers and friends, the Dechert team also hosted a busy booth throughout the event. We thank the Fund Finance Association for a superb symposium and look forward to continuing the dialogue with market participants.
