Alternative investment fund finance moving from niche to mainstream

Two-thirds (66 per cent) of alternative investment professionals have a good understanding of the benefits of fund finance but cite negative perceptions among LPs as the biggest challenge to its wider adoption, according to a new survey commissioned by Intertrust, a specialist in providing tech-enabled fund and corporate solutions.

Of those who are familiar with fund finance, almost half (44 per cent) say they had a good understanding of specific areas, while a further 24 per cent are aware of the fund finance product suite and levels of lender appetite. In contrast, one-in-three (33 per cent) respondents admit to having little or no knowledge of fund finance.

 
The research underlines the growing popularity of fund finance market in recent years with increasing numbers of funds seeking subscription line or capital call facilities from lenders. According to Intertrust’s research, over two-thirds (68 per cent) of investors predict that demand for fund finance will continue to rise over the next five years.   
 
More recently, there has been a significant growth in the use of NAV or asset-backed facilities with over half (56 per cent) of those surveyed citing the main benefit as increasing investment capacity in the portfolio. A further 38 per cent said its key advantage was to accelerate distributions and return capital to investors.  
 
Respondents see the biggest challenges to fund finance as being the negative perceptions it has among certain investors (35 per cent) and that the terms and pricing are seen by some as prohibitive to its use (27 per cent). A quarter (24 per cent) believe the biggest challenge is a continued lack of awareness of the options available.
 
In response to growing demand, in 2019 Intertrust launched an independent advisory service designed to help alternative investors establish fund finance facilities. The team helps funds to navigate through the process of establishing fund finance facilities or debt lines. Their expertise can add significant value through a fund’s lifecycle, having a full overview and understanding of the lender market as well as the wide range of lending structures available across the fund finance spectrum.

Cliff Pearce, Global Head of Capital Markets at Intertrust, says: “The fund finance market continues to mature and is moving from niche to mainstream in the alternatives sector. This trend is fuelled by increased borrower awareness, larger allocations from established lenders and new players in the space. On the one hand this is driving more flexible and borrower-friendly business terms but on the other we’re seeing tighter legal structures as lenders prepare for the possibility of a recession and better understand the risks associated with these products. We’re delighted by the success of our recently launched fund finance advisory service and look forward to its continued growth over 2020 and beyond.”
 
Stephen Quinn, Managing Director, 17Capital, a guest panellist at the seminar, says: “Large banks will continue to dominate the subscription finance market given its high volume, low risk nature. Specialist lenders and funds will lead NAV recourse facilities – particularly for more concentrated portfolios that require greater structuring flexibility. Advisory firms, such as Intertrust, can add a lot of value to clients in those circumstances. When market conditions become less favourable than they have been over recent years, sponsors and investors will be more innovative in generating liquidity from their existing asset values through financing, rather than selling in a downturn.”

Matthew Hansford, Head of the UK Fund Finance team at Investec, adds: “The fund finance market has grown exponentially in the last decade, with most of the growth occurring in the subscription line space. More structured fund and GP lending has unfortunately not been a beneficiary with concentrated PE NAV and GP financing remaining vastly underserved.

“The introduction of debt advisors into the fund financing market should speed up the education of the sector. This is important as many GPs are still unaware of the options available to finance themselves, not least because of the scarcity of providers at the structured end of the market.”