A new survey by Intertrust, a global leader in providing tech-enabled fund and corporate solutions, has revealed how fund finance will play a primarily defensive role in helping GPs to combat the impact of Covid-19 while also supporting their investment programmes. During a recent webinar addressing the impact of Covid-19 on the fund finance sector, nearly half (48 per cent) of industry professionals said the main benefits of using a NAV or asset-backed facility would be to fund distressed portfolio companies. However, one in four (25 per cent) believe it will be for GPs to increase investment capacity and 18 per cent cited its role in creating a “war chest” to capitalise on M&A and debt buybacks.
When asked to predict the most likely reaction of the fund finance market to the crisis, 41 per cent of private equity professionals believe lenders are likely to reduce hold levels and increase pricing. Nearly a third (31 per cent) anticipated new subscription lines will be impacted by a slowdown in fundraising, while 18 per cent expects to see significant additional borrowing by managers. A further 10 per cent expect to see an increase in capital calls as a likely market reaction.
For those GPs requiring more time to create value in their fund in light of the impact of the pandemic, a quarter (23 per cent) believe they would create additional financing at the fund level and 11 per cent would either seek a secondaries process or form a continuation fund. However, the majority (63 per cent) of respondents believe they would seek an extension to their fund commitment period.
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 research2, over two-thirds (68 per cent) of investors predict that demand for fund finance will continue to rise over the next five years.
Cliff Pearce, Global Head of Capital Markets at Intertrust, says: “Fund finance is set to play crucial role to mitigate the effects of Covid-19 and capitalise on the investment opportunities it brings. While there has been some entrenchment by the banks, there’s liquidity available held in the market through a variety of different products. Although the denominator effect for LPs may certainly have an impact on fundraising, the rise in equity prices can also soften that effect, and all things considered the market is in as good a shape as it can be.”
Stephen Quinn, Managing Director at 17 Capital, and guest panellist on the webinar, says: “What we’re seeing is consistent with the audience poll. Fund level finance is being used by private equity managers and investors to address challenges within their portfolios and also in anticipation of opportunities that will arise as the current crisis abates.”
Samantha Hutchinson, Partner at Cadwalader, and guest panellist on the webinar, says: “GPs have a plethora of liquidity options and tools available, which have been more fully developed and used across the fund finance markets since the previous crisis – from “stretched” subscription lines, to NAV-financing, to preferred equity, to hybrid financing. The current market conditions we’re experiencing underscore how useful these products have become both for GPs and LPs. With exits pushed out by 12-24 months, GPs need additional time and capital to realise the full value of their portfolios, defend their existing portfolios and at the same time investors also need liquidity and these products can help to plug that gap.
“Equally, when deal activity does resurge, we now have an unprecedented amount of dry powder, a secondaries market which has evolved into a sophisticated and efficient market place for generating liquidity via a number of different technologies and in many cases, more flexible allocation targets. All of this better positions GPs and LPs to manage their assets and position through this crisis and the key for GPs will not only be surviving it but sourcing opportunities to thrive during it. The fund finance products and market technologies now available to GPs will be a key part of this recovery and success.”
Mike Mascia, Partner at Cadwalader, and guest panellist on the webinar, adds: “It’s great to see fund finance being recognised by the greater alternatives community as a helpful contributor to liquidity management for both funds and the investor community.”
