Fund finance facilities aren’t new, but their use and popularity are growing as GPs consider expanding in an environment of low liquidity and heightened investor caution
Private capital managers remain intent on expansion and diversification despite challenging economic headwinds, according to CSC research.
Our Future Private Capital CFO survey reveals that 90% of general partners (GPs) plan to expand geographical coverage in the next 24 months. Meanwhile, nearly 97% of respondents say they’ll diversify into new asset classes.
To achieve these ambitions in a muted market, managers need accessible credit lines, and a large majority—87%—intend to expand their use of fund credit facilities.
So, where can GPs access the loans they need? What will they use the cash for? And how do they balance risk and reward?
Here are five things you should know about the growing use of fund credit.
- Managers need credit to enable greater deal-making agility
In a sluggish market, how do fund managers continue to make the deals that drive their firms forward when exit activity has decreased, investor liquidity is low, and surplus cash is in short supply.
The answer? They turn to credit lines. There are great deals to be made, if managers can act quickly and decisively. Accessible credit lines give them the agility to grasp good opportunities whenever they present themselves. - Credit pays for new operational capacity
At the same time, diversifying into new asset classes and geographies requires an expansion of operational capacity. That can mean investment in technology, talent, or outsourced services. If you move from private equity into private debt, you might need six new employees (or outsourced equivalents) with specialist knowledge of the asset.
Investors generally don’t want to pay for expansion in an investment management company. They want their cash to go directly into assets. Credit facilities are used to provide working capital and fund overheads, including salaries, investment in technology, legal fees, and other costs of expansion. - Fortunately, lots of people are looking to lend to private markets
The good news for ambitious private capital fund managers is that there’s plenty of choice in the market, albeit not from banks.
In the current economy—and with the failure of Silicon Valley Bank and others fresh in memory—banks are issuing fewer loans and offering smaller amounts.
But other lenders are rushing in to fill the gap. Private market direct lenders, hedge funds, and others want to put their own capital to work, just as private equity funds want to deploy cash as quickly as possible. A great way to do it is to lend to private markets. - NAV financing is becoming commonplace
Net asset value (NAV) financing is one credit choice that has grown rapidly in popularity in the last few years. According to the Fund Finance Association, the global NAV financing market stands at about $100 billion and is expected to grow to $600 billion by 2030.
In a NAV finance deal, the loan is secured against the value of the assets in a portfolio. This can be a quick route to new injections of capital. It’s also popular because it stops managers from having to sell assets at suboptimal prices on secondary markets.
What are the risks of this type of fund credit? Only that rates can be high (though generally not as high as the potential losses associated with selling assets prematurely) and any debt carries risk. Managers should run downside risk scenarios on any potential loan as part of normal risk management activities. - Fund credit is helping drive the transition to outsourcing
There are many reasons for investment firms turning to outsourcing partners, and managing credit lines is one. Loans are governed by complex legal documents that need to be properly administered, and many firms will have as many credit lines as they have funds. That can be difficult to do in-house when experience and expertise in this space are in short supply.
The expansion of fund credit is also fueling the role of the fund finance advisor. These third-party specialists help funds get the best loans for their requirements, and manage the loan process through to completion.
CSC offers treasury management and fund finance advisory alongside a full suite of loan administration and agency services.
What part does fund credit play in GPs’ expansion plans? Find out more in our Future Private Capital CFO report.
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