The focus on liquidity is only likely to increase in 2020 given the Covid-19 pandemic and macroeconomic concerns

2019 saw the continued strengthening of the Funds Finance market, with an increasing number of banks arranging facilities to UK and European private equity funds and the syndication market for these facilities developing as more banks, insurance companies and other alternative investors participating in them.

The large majority of lending in this market in 2019 remained capital call facilities (also known as subscription or bridge facilities) lent to funds against undrawn commitments of limited partners, with significant (though much lower) amounts of lending into managers for working capital purposes or helping support executives finance their “skin in the game” coinvesting in funds alongside investors. Capital call facilities remained a critical tool for PE managers needing to demonstrate that they can complete transactions quickly, particularly in auction processes. They also enabled managers to manage liquidity at a fund level and to provide greater certainty to LPs on the timing of drawdowns and distributions (the focus on liquidity is only likely to increase in 2020 given the Covid-19 pandemic and macro-economic concerns).

The continued strengthening of the market for Funds Finance in 2019 (right through the market from large cap to small) was able to respond to GPs’ requirements – both in terms of volume but also dealing with the increasing complexity of fund structures. This led to more flexibility on terms, continued downwards pressure on pricing (which has reversed given Covid-19 and other market concerns), and more innovation and variation in the products available.

One of the hot topics in 2019 focused on when the first large cap PE fund would put a leveraged NAV facility in place in the main fund (as is common for credit, infrastructure and other funds). Despite a number of potential deals being discussed, no mainstream deals were concluded during the year and so this remained an area to watch going into 2020. Some experienced Funds Finance market participants were able to continue providing flexibility through capital call or hybrid facilities, and more bespoke debt and preferred equity solutions became more prevalent. An area which did see increased activity in 2019 was liquidity and leveraged facilities to fund investors’ portfolios of LP investments (supplementing the established market for facilities to secondaries funds), with more innovation in the products available.

The increasing range of solutions provided by the Funds Finance market are also now being used by GPs for additional liquidity or firepower to fund expansion, providing more options (with greater flexibility than traditional debt facilities) as founders look to exit and handover to the next generation. Succession planning for PE fund managers was a key focus in 2019 and will remain a hot topic going forwards.

The increased strength and depth of the Funds Finance market is good news for PE fund managers (and their LPs), provided it is used properly. In 2020, we expect the market will continue to develop and the pendulum will continue to swing in favour of NAV facilities and other bespoke solutions as these move alongside capital call facilities to become a staple of the Funds Finance market, and lenders work with GPs and LPs to tackle the challenges – and the opportunities – which arise out of Covid-19 and macro-economic concerns.

The increasing range of solutions provided by the Funds Finance market are also now being used by GPs for additional liquidity or firepower to take advantage of opportunities, and can also provide extra options (with greater flexibility than traditional debt facilities) as founders look to exit.

If you would like to know more or would like to discuss anything further, please get in contact.