New research highlights the role of fund finance by GPs will combat impact of COVID-19

During a recent webinar addressing the impact of COVID-19 on the fund finance sector, nearly half (48%) 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%) believe it will be for GPs to increase investment capacity and 18% cited its role in creating a “war chest” to capitalize on M&A and debt buybacks.

When asked to predict the most likely reaction of the fund finance market to the crisis, 41% of private equity professionals believe lenders are likely to reduce hold levels and increase pricing.  Nearly a third (31%) anticipated new subscription lines will be impacted by a slowdown in fundraising, while 18% expects to see significant additional borrowing by managers.  A further 10% 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%) believe they would create additional financing at the fund level and 11% would either seek a secondaries process or form a continuation fund.  However, the majority (63%) 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%) 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 said: “Fund finance is set to play crucial role to mitigate the effects of COVID-19 and capitalize 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.”

Mike Mascia, Partner at Cadwalader, and guest panellist on the webinar, said: “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.”

Stephen Quinn, Managing Director at 17 Capital, and guest panellist on the webinar, added: “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, said: “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.”

In 2019 Intertrust launched an independent advisory service designed to help alternative investors establish fund finance facilities. The team helps funds to navigate through the process of establishing fund finance facilities or debt lines. Their expertise can add significant value through a fund’s life cycle, having a full overview and understanding of the lender market as well as the wide range of lending structures available across the fund finance spectrum.

¹Survey conducted among over 190 private equity professionals during the Intertrust webinar on 23 April 2020

² Research conducted for Intertrust by PollRight among a panel of 34 alternative investors encompassing private equity hedge funds and real estate between 22^nd February and 7^th March 2019