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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.
Secured by the uncalled commitments of the investors/Limited Partners of a fund.
Secured by the Private Equity fund’s equity interest in each of its portfolio companies.
These facilities combine the collateral characteristics of Subscription Lines and NAV facilities, and are secured by uncalled capital commitments and the fund’s portfolio.
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:
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:
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.