Over on sister title Private Funds CFO, editor Graham Bippart has been looking deep (perhaps deeper than anyone ever has) into the state of the provision of fund finance. This market is both opaque and increasingly important to secondaries investors, as noted in our series on leverage. Against the backdrop of the pandemic, it is undergoing a number of changes. Here are five of them:
One: Amid the crisis, banks in this space have focused on existing clients at the expense of new ones, with even blue-chip managers being rebuffed. Sources noted “banks traditionally seen as smaller players, passive participants, or servicing specific market segments, as showing up on deals they might not have been able to compete for previously”, writes Bippart. He singled out Silicon Valley Bank (especially in Europe, according to one source), First Republic and Signature – which last year hired two managing directors from Wells Fargo’s sub line business. Signature managing director Charlie Owens noted in in June that dealflow for the bank has “at least doubled” in recent months.
Two: The result of constrained supply? More lender-friendly terms. Says Bippart: “Pricing for syndicated subscription facilities, in which one or a few banks take the lead on a loan and others participate passively, for top sponsors rose from pre-pandemic levels of around LIBOR plus 150-180 basis points to as much as 225bps. By July, one US lender says levels could go to 250bps for top sponsors, depending on the size of the deal and other considerations. In bilateral deals, which tend to get tighter pricing, since banks don’t have to shop them to other lenders that may have higher rate thresholds, some say top sponsors can achieve as low as LIBOR plus 185bps.” Initial tenors have become as short as one year and significant LIBOR floors are being used.
Three: Credit concerns are creeping in for lenders, but there is no wave of defaults yet. “Clearly some of your borrowers aren’t in as strong a financial position as they were earlier in the year, and that ripples through to the underlying investors,” says Wells Fargo’s Jeff Johnston, a lender. Members of the Fund Finance Association in May noted only one institutional investor default on a capital call up to that point. Nonetheless, lenders are increasingly inserting NAV covenants and minimum called capital requirements into credit agreements, and even looking beyond uncalled LP capital for potential sources of repayment.
Four: It’s become harder to find a syndicate for new, large transactions. And some banks are trying to sell down existing pre-covid exposures, in some cases to make room for new loans at new, higher prices. It isn’t clear how smoothly these sales are running.
Five: The market for fund finance – at an estimated $500 billion – may not be big enough to account for increasing demand. The future may well see more participation by insurance companies, as well as other non-bank lenders, and a greater role for syndication.
Subscribers to Private Funds CFO can read the investigation in full here.