The Fund Finance Association 10th Annual Global Symposium

Ashurst continued its long history of sponsoring the Fund Finance Association with partners from our London, New York and Luxembourg offices attending the 10th annual Global Symposium which took place in Miami from February 12th to 14th. With over 800 delegates attending, it was another tremendous milestone for the conference and the industry. The following is our overview of the highlights and key takeaways from this year’s symposium.

• ESG - ESG is very much here and will undoubtedly be a separate topic of conversation by next years’ symposium. (Having acted for ING on the first sustainability linked fund finance financing we very much agree and predict that there will be a significant number of these facilities in the market by this time next year.)
• MARKET UPDATE FROM PREQUIN - Strong fund raising momentum continues with real estate and infrastructure the asset classes with the highest rate of growth. The consolidation trend also continues and while the level of capital raised is increasing, the number of funds closed has decreased significantly illustrating the success of fewer but larger sponsors. Co-investment activity also remains strong with ever more sophistication in products.
• HYBRIDS - As one panellist noted, “We are at an inflection point and hybrids are no longer mythical beasts." That said, the first question to ask is what is meant by a hybrid? There has been a lot of discussion about hybrids in recent years, but NAV (net asset value) facilities (perhaps with hints of hybrid features) continue to outpace true hybrid in the market. A cradle to grave financing solution under one facility agreement is still difficult with the credit decision on uncalled capital substantially different to the credit decision on fund assets (especially when those assets don’t exist yet). Even so, asset backed is clearly needed and while there is now a substantial market for secondaries and debt funds, there is no reason why any asset pool with long dated regular cash flows can’t be financed. Banks are becoming better at joining up their credit decisions and true hybrids from the outset of a fund could yet become mainstream.
• BEYOND BANKS - The demand for financing at fund level and above continues to grow and there is only so much that banks can provide and only so far they can go in considering different structures. In Europe, there is rapid growth of non-bank lenders providing funding for capital call facilities and other fund level liquidity. We expect more and more non-bank lenders will come into the market unrestricted by the same regulation as banks and capital markets won’t be far behind. That there was a session on collateralised fund obligations and principal protected notes says much about how much the market has evolved and continues to grow.
• ILPA - There was, perhaps surprisingly, little discussion of ILPA on any of the panels (except for the panel with an ILPA representative). Particular concerns of investors include (i) not having any further obligations or needing to provide any further information to lenders due to a subscription facility, (ii) transparency around each investor’s share of any borrowings, (iii) a lack of understanding and transparency around NAV lines in particular and (iv) increased risk that a general partner won’t consent to a transfer if it impacts the borrowing base. (Outside of funds with a very small number of investors, the other panel members thought the transfer risk was mostly theoretical given that there is usually headroom in the borrowing base and transfers are often to a similarly credit worthy vehicle.) ILPA’s experience is that when investors are given a choice between investing with a subscription facility and without, 95% would choose to have a subscription line in place.
• FX CONSIDERATIONS - For funds, a hedging strategy is complicated and difficult to get right balancing cost versus risk. It needs to be thought about from the beginning ensuring that fund documents properly reflect the strategy that will eventually be put in place. For banks, it is about liquidity. If a sponsor can’t answer the question about where liquidity will come from if a payment is required then it is not likely to get far in discussions. Being subordinated to the subscription finance providers (and unsecured) is possible and common but expect a breach of any agreed policy to preserve liquidity to be a termination event under your ISDA.
• SECONDARY RESTRUCTURINGS AND GP FACILITIES - GP led restructurings will continue to evolve and with such financings becoming more common, market norms are beginning to develop while at the same time there will be ever more creative structures for providing liquidity. GP Facilities are also becoming more prevalent with a need for liquidity and to monetise cash flows earlier in the life of the fund. If the lenders’ only control or protection is receipt of a pro rata share of cash exiting the structure then it is a difficult lend and expect pricing to reflect the same.
• LIBOR TRANSITION - While LIBOR transition was not a focus point for any panels, there was general recognition of the challenges ahead to meet the upcoming deadlines and that planning for the transition away from LIBOR will require considerable focus. The scale of the impact has meant somewhat of a wait and see approach for a general agreed market solution.