By: Allvue Team

December 1, 2020

The role of fund finance has become increasingly important to both lenders and borrowers, partly due to ongoing market conditions that have been exacerbated by the COVID pandemic. With the volatility created by the pandemic, asset managers have needed to increase their lines of credit, or embark upon new financing, as a way to ensure they have liquidity available for their funds in case of a broader downturn in the market.

When the COVID pandemic jumped to the forefront, industry watchers were concerned that GPs might need to fully draw down on their credit facilities. Along with this, there were worries that a deluge of defaults might occur, given the major disruption in the markets. However, neither of those situations came to pass to the extent expected. The use of new facilities has continued to grow, and new borrowers have begun to jump into existing facilities.

Fund finance is the mechanism that provides access to liquidity for GPs, which often take the form of credit facilities secured by collateral pledged to the lender. The type of collateral that is pledged can take many forms, depending on the types of funds lenders capitalize. Asset based credit facilities, subscription lines, NAV, and hybrid facilities provide capital to the growing alternative investments market backed by different forms of collateral the GP has available. Typically, loans of this type are low risk, with about a 0% default rate.

Additional credit facilities have continued entering the market, and increased usage of credit facilities has attracted newer, more nimble lenders into the market. These lenders face challenges with credit facilities, which often have complex structures that are difficult to manage and track through bespoke spreadsheets. This is because each type of collateral is secured differently with varying degrees of complexity in the covenants and testing required by lenders. This results in different types of information in multiple formats that must be reconciled between lenders and borrowers.

Collateral Types Used in Fund Finance

Asset Based Credit Facilities
Secured by a pool of loans and other assets; used by many private debt clients for working capital and leverage.

Subscription Facilities
Secured by the uncalled commitments of the investors/Limited Partners of a fund.

NAV
Secured by the Private Equity fund’s equity interest in each of its portfolio companies.

Hybrid Facilities
These facilities combine the collateral characteristics of Subscription Lines and NAV facilities, and are secured by uncalled capital commitments and the fund’s portfolio.

Traditional Processes are Outdated

Lenders with fund financing business have faced challenges that have smoldered for years from the front to the back office. These embers are now ready to catch fire, given the volume and variety of loan types being added to their portfolios. Among those challenges that lenders are currently facing, these issues rise to the surface:

• Calculations continue to be done manually for each facility – This exposes lenders to manual error and reputational risk, regulatory or compliance risks, and a possible loss of revenue opportunities.
• Borrowers are sending data in multiple formats – Standardizing and aggregating facility information can be difficult at best, and with borrowers sending disparate data in divergent formats, this increases the risk of manual error in data reconciliation. This leaves lenders with no way to view data across deals.
• There’s no accurate way to view data stored in multiple spreadsheets – Tracking exposure and risk across lending facilities is difficult when data is held across single-function systems or in numerous spreadsheets. This necessitates the creation of ad hoc processes to centralize and aggregate data and holds the possibility of errors being introduced into the process.

A Front to Back Solution Can Help Scale Your Business

With funds actively utilizing credit facilities apace, lenders are searching for a way to bring stable and accurate processes to their fund finance activity. To do this, lenders will need a front- to-back solution that can automate workflow, track approval processes across loans, and import and normalize data from various sources so that it can be more easily utilized. Along with the ability to manage, monitor, and maintain their portfolios, an automated solution will make a pronounced difference in a lender’s ability to mitigate error and control risk.

In short, automating data input and management across deals is the only way for lenders to effectively scout for new deals and pivot quickly towards these opportunities in the fund finance space. Lenders will need to leverage a technology solution that provides these capabilities:

• Automatic calculation of borrowing base – Since the value of the borrowing base determines the amount of money the lender is willing to lend to its borrower, adjustments upwards or downwards will have an impact on how collateral amounts are determined. And in times of greater market volatility, borrowing base calculations may be performed with more regularity. With the ability to perform automatic calculations, lenders save time and money and can be alerted more quickly to issues that arise from a devalued borrowing base.
• Automation of data transfer between borrowers and lenders – With a fully-automated, error-proof method of exchanging data between lenders and borrowers, the process of onboarding information becomes more efficient and less time-consuming. Mapping tools and Excel plugins can further help lenders more easily interact with various forms of data. Finally, if both borrowers and lenders are on the same platform, there may be synergies for standardizing data transfers and workflow activities between the parties.
• Ability to quickly track and audit status of business processes and approvals related to facilities – With automated workflows that can be configured to connect different areas within the lender’s organization together through a shared workflow and business intelligence platform, they can more efficiently manage risk and compliance and more easily scale their business.

Allvue’s Solution

As a provider of technology to both lenders and borrowers in fund finance transactions, Allvue brings automation, standardization, and interconnectivity to both. Allvue’s Fund Finance solution set automates and standardizes data so lenders can manage approvals as well as track exposure and risk across the lending facilities process. Our solution allows them to organize and standardize disparate underlying data such as loan assets and LP commitments, view LP and asset exposure collateral across multiple facilities, and approve and manage facilities, helping them mitigate compliance errors and portfolio risk. We provide lenders with a way to work efficiently and accurately, so they can concentrate on winning deals and maximizing revenue.