• New entrants – Private credit funds and insurers have brought about a significant liquidity boost in the sector. Some funds were still less open to accepting private credit funds in their syndicate due to concerns around conflicts and competition. However, the panelists predicted that competitor funds will gradually get comfortable with one another as the market grows, with private credit funds likely to represent about a third of the market in the future. However, despite the new entrants in the market, subscription lines remain a relationship product likely to be arranged by a traditional institutional bank, which would usually provide ancillary services such as deposit accounts, hedging and custody services to the fund as well.
• Market developments – Developments in the subscription line space, such as the increase in popularity of term loans and ratings, have opened large pools of capital from insurers, private credit funds and banks that were not active in this space previously. Unsurprisingly, ratings are seen as crucial to the continued growth in the subscription line market.
• Product safety – Banks and alternative funding sources are continuing to become even more comfortable with subscription lines and generally view these as a safe product. The market is operating on the assumption that the investors are going to fund calls, and various protections that were commonly inserted in documents in the mid-2010s (requirements for "welcome calls" prior to entry into the financing and annual clean-down calls) are now rarely requested for well-established funds.
• Opening of capital markets – The securitization of subscription lines is transforming them into a true capital markets product, making them more attractive to lenders who are now able to offload positions in the capital markets to free up their balance sheets.
• Slowdown in fundraising – 2024 was the slowest year for fundraising since 2020, and fundraising was down by 18% since 2023, resulting in shrinking demand for subscription line facilities from sponsors.

In light of the above, subscription line facilities for well-established sponsors are now frequently over-subscribed, and sponsors are working closely with the arrangers to carefully curate the syndicate on their deals. In that process of curation, sponsors try to ensure that the syndicate is not too large but still manages to accommodate all their desired relationship banks. However, despite the imbalance in supply and demand, we are not operating in a space where there is a "race to the bottom,” but a space where sponsors are trying to curate a product most suitable to their needs and relationships.

The panelists also noted that, despite the growing availability of capital from a larger number of providers, some products such as SMAs are likely to continue to be provided on a bilateral basis given size.

2. Syndication of NAV facilities

As to be expected, the syndication process in the NAV space still depends heavily on the asset class and the capital providers familiar with, and looking to invest in, that asset class. In the context of closed-ended funds, the purpose for which the NAV facility is provided is becoming an increasingly important consideration for market participants too.

Panelists noted that more banks are entering the sector, as bank education and comfort with NAVs grows. However, within the NAV space some sponsors still prefer capital from private credit funds who may be able to provide this on more flexible terms. Larger bank syndicates are more common in the secondaries space, as banks often view secondaries NAVs as a safer product.

Private credit: Navigating the Golden Age

By Cheryl Lagay

Participants on this panel, which included executives from major investment firms, discussed whether private credit has hit its Golden Age, some of the indicia that it has, and some opportunities and challenges that lie ahead.

They advised that there are indications that the private credit market has reached its Golden Age. There is an ongoing demand for private credit and the growth of private credit is here to stay. One factor driving this is that insurance companies are investing and want higher quality lending products. In addition, for decades banks saw private credit providers, such as direct lenders, as competition that they wanted to squash. However, today banks are seeking ways to collaborate with private credit providers (for example, the collaboration between Centerbridge Partners and Wells Fargo) to provide better funding solutions for their clients. Private credit offers an alternative for various parts of the investor base and there is a lot more to come for direct lenders and on the fund finance side.

The outlook for continued growth of private credit is positive on the macro level, with some expecting interest rates to continue their decline in 2025. Also, individual investors are expected to play a bigger role and the consolidations of bigger players with smaller players in the market are expected to continue. Some lenders are strategically bringing together various platforms under the same management within their lending institution to provide financial solutions across the entire life of a fund.

Lenders must also develop strategies to monitor the quality of the assets. As a general matter, the general partners have the inside track on valuations of assets. Lenders can rely on the general partner to share their work product/valuations and use that as the basis for their own evaluations.

Insurance companies want more exposure to private credit, and to get the favorable regulatory capital treatment, the debt must be rated. As the rated note feeder structures became more popular, the National Association of Insurance Commissioners (acting in its regulatory support role) evaluated this product. The guidance requires alignment with the bond definition for capital. With the additional scrutiny, investors are taking extra care to ensure that the products are properly structured.

The private banking trend is continuing as banks are able to offer broader solutions for their clients. Private credit has made progress but is in its early stages with a lot of potential for growth.

Opportunities

1. Optimizing financial markets make for innovation and better solutions for investors and lenders.
2. Fund finance products used in securitization transactions provide an opportunity for growth.
3. There are opportunities to expand the use of private credit with non-sponsor lenders – many who do not sit on Wall Street and need capital and can access the private credit markets – growth expected in next two to five years.

Challenges

1. Time is needed to educate the market so that more lenders understand the mechanics.
2. As the market grows, regulations will come – some may be positive to bring guardrails to this space.

Atypical collateral underwriting considerations

By Jim Lawlor

In a program focused on underwriting (and legal) considerations for transactions with atypical collateral, the panel reviewed four structures that diverge from the typical subscription line financing for a widely held single fund. The structures discussed were:

1. A separately managed account or “fund of one.”
2. A fund of more than one but with a just few investors holding a large concentration of interest.
3. Umbrella facilities, comprising a single master agreement with multiple loans issues in tranches to different borrowers (usually in a common fund group).
4. High-net-worth facilities.

A common theme for all four discussions was that departures from typical structures are most likely to succeed when based on strong relationships, when there is a high degree of transparency paired with frequent communication, and where GPs and lenders can bring flexibility and adaptability to the transaction.

For SMAs, legal and underwriting risks, most notably investor funding risk, that are typically spread across multiple investors must be viewed differently where there is but one investor. The best way to address those risks is through an investor letter, in which the investor makes certain representations and commitments to the lender directly. These would include a confirmation of the commitment, a direct undertaking to fund capital calls, including with specific wire instructions, a prohibition of transfers and restrictions on LPA amendments without lender consent. But the investor letters for SMA are also bespoke and highly collaborative. No one formula fits all. Returning to the theme, factors such as a positive history between and among the investor, GP and bank can lead to greater flexibility in the investor letters. Also it was cautioned that both lenders and counsel should be doing diligence on whether the sole investor is a funded entity, or a shell that calls upon its own funding source when called upon to fund the SMA. In the latter case, the investor undertaking in the letter should be received from the ultimate funding source. This can lead to discussions and concerns that the undertaking letter constitutes a guaranty by parent entity or funding source. Again, the parties may need to rely on the strength of their relationships to achieve some flexibility in structuring the investor letter to the satisfaction of all concerned. As was noted, SMAs are still evolving and there is no single “SMA box” into which they all neatly fit.

If SMAs require a bespoke approach, then highly concentrated investor bases require a semi-bespoke approach. LPAs and loan agreements may not be revised as substantially as they would be in the case of an SMA, but if the facts and circumstances (again viewed through the prism of a strong existing relationship) justify it, then lenders can and do provide “concentration holidays” in their borrowing bases. Very often this is done temporarily in the case of anchor investors who commit in the earliest stages of fund raising. Early communication of fund-raising strategy from the sponsor to the lender is important. Where a sponsor has already demonstrated to an established lender its fund raising acumen or articulated a clear and defensible long-term fund-raising strategy, the concentration holiday may not be a heavy lift for the lender. Newer funds or funds seeking new lending relationships may be required to advocate more for concentration relief. But if lenders can get comfortable with the anchor investors, and the LPA and side letter are sufficient, concentration relief is definitely possible on a case-by-case basis. In any case, in these highly concentrated deals, side letter review is critical, and investor letters are generally required of the high percentage holders.

Umbrella facilities are “atypical” in a different way. Rather than have fewer investors than the typical fund, these credit facilities have more borrowers than is usual. The product can be a meaningful and efficient solution to credit agreement proliferation based on the one fund/one loan prototype, but it is a solution that fits only limited circumstances. Umbrella facilities are best suited for multiple fund entities with a common sponsor all in the same strategy. So for example, a master agreement may establish a umbrella facility for infrastructure funds. Each fund would be severally, not jointly, liable for loans under its own tranche or subfacility, but that the subfacility would be issued through the platform of the master facility agreement, with only limited terms customized for each tranche. Panelist noted, however, that the tradeoff for efficiency (i.e., not needing multiple credit facilities) can be complexity, with added features for issuance and separation of each subfacility making the initial mater agreement often more time consuming (read: expensive) than a typical credit facility. Moreover, if subfacilties are negotiated at length, with exceptions sough to master agreement provisions, then the efficiency sought to be achieved through the umbrella is not attained. That said, for the right sponsor and lender tandems, the umbrella facility if structured and used appropriately can be effective tool to reduce costs and increase speed of execution on new credit facilities.

Finally, it was noted briefly that there is market trend to higher allowed concentrations of high-net-worth investors. An audience survey indicated that roughly half the lenders have HNW concentration limits of 20% or lower, while a few go to 50% and others set limits on a case-by-case basis. Returning to the theme of relationships, the view was expressed that as private wealth continues to be concentrated in fewer hands, investors will have to track records and lenders will get more comfortable with increased HNW participation.

NAV lending to buyout funds

By Linn Mayhew

The panel discussion focused on NAV lending in the primary buyout market (as opposed to the secondary market and alternative fund structures). Key takeaways are set out below.

Increase in NAV lending in recent years

COVID-19 accelerated demand for alternative and flexible financing structures and encouraged new entrants to the NAV market.

Over the last two to three years, NAV financings have become more popular and have become a core strategy for many private equity funds.

KBRA reported a 30% annual increase in NAV lending to buyout funds with an expectation that it will expand sixfold by 2030.

Common legal barriers and considerations

Influenced by ILPA’s August 2024 guidance, the market has seen limited partners push back on NAV-based financings for returning capital to investors. It has also resulted in LP consent requirements differing across regions, with Europe more likely to require approvals, and fund formation discussions increasingly addressing these concerns at term sheet stage.

Other key challenges include restrictions in fund documents, leverage limits at the holding company level and enforcement challenges, as banks typically avoid taking direct ownership of assets. Other barriers include negative press and restricted access to certain managers or funds.

Single asset and concentration considerations

Single-asset NAV financings present higher concentration risks, particularly in later-stage funds, making loan-to-value reduction and structural safeguards essential.

Managing concentration risk effectively and ensuring a balanced approach between flexibility and security will be key to sustaining growth in this space.

Ancillary fund finance products

By Diana Whitmore

As the fund finance sector has evolved, there has been a corresponding increase in the demand for innovative financial solutions to address a range of liquidity challenges throughout the term of a fund. These issues include succession planning as executives approach retirement, the expanding strategic investments of General Partners and equity takeout of other investors. Various ancillary fund finance products are being used to provide the financial support needed to address these issues.

The panelists discussed three types of ancillary products:

1. GP facilities/employee loan programs.
2. Management company lines.
3. Treasury management.

1. GP facilities and employee loan programs

General Partners use GP facilities to finance their own capital contributions to their funds. Within the middle market, GP facilities can require significantly more structuring to match the cost of capital with appropriate leverage. As GP facilities are not prescriptive, the final loan documentation may differ from the initial deal terms.

The panelists noted, however, that while GP facilities are growing in popularity, most lenders are still primarily interested in providing these facilities as a “side product” in addition to a subscription credit facility (especially given the low quantum of fees which lenders can charge for these facilities). Lenders see these facilities as an opportunity to expand and strengthen their relationship with a sponsor.

Employee loan programs or co-invest programs enable key executives to finance their investment into their own funds. These programs foster executive alignment to a sponsor’s strategic vision and long-term commitment to a firm. Moreover, LPs appreciate that the executive employees have real “skin” in the game. Given the increasingly global nature of the workforce, the panelists emphasized regulatory compliance for any employees residing in non-US jurisdictions.

2. Management company facilities

Management company facilities are a widely utilized and effective means of providing liquidity for management fee-related expenses. These credit facilities are typically modest in size, fully committed and secured by management fees, which serve as a dependable source of repayment for lenders.

Sponsors leverage management company lines to minimize the impact of operating expenses on management fees, ensuring smoother financial operations. These facilities are particularly beneficial for covering year-end expenses, such as executive bonuses, and preventing potential cash flow constraints.

Similar to GP facilities and employee loan programs, lenders view management company facilities as a strategic tool for building long-term relationships with sponsors, offering a relatively low-risk financial product.

3. Treasury management

Firms use treasury reporting and dashboards to gain deeper insights into their liquidity and risk exposures. These tools have driven firms to diversify their banking relationships, enhancing risk management strategies. As treasury solutions continue to evolve, lenders may encounter an increasingly competitive landscape.

The future of securitization in fund finance

By Cheryl Lagay

The panelists on the “Securitization in Fund Finance” panel discussed the definition of securitization, favorable structuring and why securitization and fund finance are intersecting – among other things.

What is securitization?

A process by which assets are pooled and repackaged to create equity and tranches of debt that is collateralized by those assets. The intersection of fund finance with structured finance securitizations is developing and will involve:

1. Collateralized fund obligations which are a form of securitization involving private equity funds; and
2. Collateralized fund obligations which are a form of securitization involving private equity funds; and

An example of a structure for securitizations using subscription line facilities is by using a Master Fund Structure where:

• Issuer is bankruptcy remote special purpose entity structured as a “master trust.”
• Subscription Credit Facility Lender will transfer its interest in advances and related rights to issuer in a transaction intended to transfer the receivable and related rights. The sale of the receivable will include the right to repayment of principal and interest and will not include any obligations of Lender or the related Subscription Credit Facility Borrower.
• Issuer will issue variable funding notes that investors purchase and proceeds will be used to fund the purchase of the receivables.
• Issuer may issue more series of notes, each series may consist of one or more classes of assets and grant a security interest to trustee/collateral agent for the benefit of the noteholders, including the variable funding notes).

Why are fund finance and securitizations intersecting?

1. Rated note feeder – The key reason for the innovation with rated note feeders is that insurance company investors have significant funds to invest but the debt must be highly rated and regulatory capital efficient. The securitization structure can be rated.
2. Collateralized fund obligations – A key reason for the growth of CFOs is the product fits well within the mandate of most investors – as these provide for long-term fixed rate and the spreads are generally favorable.
3. Certain benefits for bank – Banks have capital requirements for credit risk (to be distinguished from the regulatory capital requirements of insurance companies), and securitizations allow for diversified funding solutions for GPs and managers who are the bank’s clients. The master trust structure provides liquidity, and lenders transfer risk of repayment to the Master Trust.

There is no one size fits all for banks. Banks look to accomplish the goals that investors are looking for. It is likely that the banks will get some relief on the capital requirement regulations under the new administration. However, many banks are keeping their own guardrails in place for their own protection.

The CFO market is also large and is continuing to grow. There is a tremendous amount of demand and insurance companies are looking to invest. The expectation is that providers will increase from 2-3 deals per year to approximately 12 per year. The headwinds are the capital markets risk as is the case with any security and, again, the scrutiny of the insurance regulators, which may be best for the markets in the long run.

The scrutiny of the NAIC arose out of its concern to ensure that the increasingly popular rated note feeder was properly structured to achieve favorable regulatory capital treatment. The consequence of the review was to dampen the market for rated note feeders. However, the NAIC has recently published guidelines for favorable regulatory treatment in the rated note feeder structure that remove the uncertainty. In addition, lenders are also learning what the rating agencies require to get the debt rated. The “building box” of criteria of what provisions should be included in the documentation required by rating agencies can be identified in advance and incorporated into the loan documentation during the drafting phase rather than waiting until some point after.

Some identified impediments to growth of securitizations in the market include:

1. Investor base – It may be challenging to find enough investors who want to buy – may require educating the market.
2. Lenders – Finding bank lenders who appreciate the benefits enough to invest the time and effort to set up the necessary structure upfront. Once a few banks engage in setting up the structure and forms become standardized then many lenders will want in.

Another Sputnik moment: The integral role of our capital markets in our national and economic security

By Jim Lawlor

In this program – which invoked the Cold War era call to action in its title and quoted the Dallas speech that JFK never gave in its conclusion – a panel of two from the Department of Defense (after the requisite governmental speaker disclaimers) basically invited the investment community in the US to ask both what they can do for their country and what their country can do for them. The duo came together at the intersection of national defense and capital markets from opposite directions. One was a career professional in law and capital markets who recently moved to the Pentagon as the director of capital markets for the Office of Strategic Capital at Department of Defense (“an investment bank sitting within the Pentagon”). The other is a military academy grad, accomplished military pilot and instructor turned tech entrepreneur and prominent technology security expert who now also serves as a senior advisor at the Defense Advanced Research Projects Agency. The two are implementing parts of the Pentagon’s “third offset” national defense strategy, focused on maintaining military superiority over potential adversaries by developing leading edge technologies that “offset” technology advances by those adversaries, as well as preventing theft of the intellectual property central those developments.

Their appearance at FFA was a “fireside chat” with the investor community about the role of the “not so invisible hand” of the economy in national defense and included a discussion of investment programs now or soon to be available to US investors through the Department of Defense. They also sought to enlist the investment community in the Pentagon’s ongoing efforts to safeguard data and technology from ever more aggressive and creative efforts by “our enemies” to acquire such information. The two Defense Department professionals may have used the terms "enemies" and "threat assessment" more in one program than those terms were ever uttered previously in the entire history FFA symposia. While long on acronyms (some even explained) and short on specifics, the two headline messages were clear: First, economic prosperity ties to economic security which in turn ties to national security and national security in the United States ties increasingly to international security. Second, if loose lips once sank ships, in modern warfare, lax security around technology sinks investments and with it risks destabilizing the global economic and security balance.

The Office of Strategic Capital is an initiative of the Department of Defense within the third offset strategy whose mission is to bolster both national security and the economy by developing, integrating and implementing public/private partnership capital strategies to shape and scale investment in US-based companies focused on a dozen or so critical technologies including microelectronics, advanced computing, AI, biotech, and advanced telecommunication, as well as supply chain security and manufacturing competitiveness. Current programs are administered though the Small Business Investment Company Critical Technologies Initiative, but new and expanded programs with multiple billions of dollars of available capital are also expected to be imminently available (at no taxpayer cost) for investment in critical technologies. The Office also offers free threat assessments to funds to determine if they have been subject to, or are at risk of, technology theft. Prior such assessments have identified limited partners feeding information to our adversaries and even one party’s own bank owned by a foreign adversary having access to sensitive information through normal credit reporting.

In closing, the presenters sought to underscore to the investment community that threats to national security take different forms at different times, but that threats are nonetheless always present. They quoted from the speech that President Kennedy was to have given in Dallas in November 1963: “Our adversaries have not abandoned their ambitions, our dangers have not diminished, our vigilance cannot be relaxed. But now we have the military, the scientific and the economic strength to do whatever must be done for the preservation and promotion of freedom.” That invisible hand of commerce, being exercised in networking spaces and coffee breaks in real time at FFA for completely different reasons, turns out to be a significant tool in our national defense as well. As the speakers noted, all are called to serve in their own ways.

A discussion on bank balance sheet management tools – SRT’s, ratings and more

By Chris Davis

Capital management has always been a critical concern for banks, but recent developments, particularly the ongoing implementation of Basel III rules, have brought it to the forefront. Banks are now more focused on how credit facilities in the growing fund lending market impact their balance sheets. The panel highlighted various tools available to banks to optimize the capital treatment of these loans, thereby increasing the amount of capital banks can deploy.

Regulatory capital requirements require banks to reserve a certain amount of cash in order to offset the risk that loans on their balance sheet default. The riskier a loan is deemed by regulators, the more cash a bank is required to hold to offset that risk.

While the most straightforward method of freeing up capital is to transfer a credit facility to another institution, this is not the most desirable approach as it involves moving a lending relationship to another competing bank.

Panelists expect the fund finance market to see more securitization structures, where a bank would pool and securitize a portfolio of loans into a vehicle, transferring the risk to investors and providing more favorable regulatory capital treatment.

Significant risk transfer (SRT) transactions were also discussed. These transactions can take a variety of flavors, with some involving a guaranty or risk participation structure, banks issuing credit-linked notes, or transferring the loans to an SPV that will issue credit-linked notes, but as the name suggests they all involve transferring risk from loans on a bank’s balance sheet, thus reducing the amount of cash that banks are required to hold against those loans.

Having a credit facility rated reduces the capital reserve requirements for banks. Panelists noted that Fitch has rated approximately 200 subscription facilities and is beginning to rate NAV loans. Ratings can be based on internal models developed by banks; however, this approach needs to be approved and needs to be based on empirical date, which is not readily available as there are few examples of defaults in the fund finance world. The other method is a standardized approach.

Banks can use either internal or standardized ratings approaches for SRTs. Internal ratings rely on empirical data, which can be challenging due to the limited examples of defaults. The standardized approach offers an alternative, where predefined regulatory guidelines are followed that apply fixed risk eights to exposures. The panel also discussed the use of term tranches in subscription facilities, which can be rated and placed with institutional investors.

The panel noted that banks are increasingly collaborating with non-bank lenders, such as Ares working with Investec to securitize Investec’s subscription book. While the regional bank SRT market has not yet opened up, panelists expect growth in this area.

The panelists made several predictions for the future:

1. Despite regulatory uncertainties, more SRT transactions are expected by 2025.
2. The synthetic market has doubled year over year since 2019, and further growth is anticipated.
3. There will be more term tranches allowing institutional investors to participate in subscription facilities.
4. More collaboration between banks and non-bank lenders will transpire.
5. While the regional bank SRT market has not yet opened up, panelists expect growth in this area

Trends and innovations in secondaries NAV lending

By Mac Campbell and Leon Stephenson

Secondaries NAV lending is not a new product – secondary funds have been benefiting from NAV facilities for over 15 years, especially within secondary funds focused on investing in primary buy-out funds. They have historically used and continue to use NAV facilities for a variety of reasons, the two general uses being as a form of acquisition finance and for recapitalization processes.

These facilities also provide significant strategic support to secondary funds. One key area in which they provide such vital support is by helping secondary funds manage their commitment balances. The facilities provide financial controllers and treasurers of the funds an insurance policy and hedge to ensure that they are not caught with overcommitment issues (it being noted that secondary funds are seen as excellent managers of their unfunded obligations).

While the use of NAV facilities for recapitalization purposes has caused some stir over the past few years, this has generally been focused on primary funds (largely buy-out funds, but also other primary fund strategies like direct lending) as those funds have less certainty about the timing for exits of the underlying Investments. Although secondary funds do not have full control over the timing for exiting their investments, the large diversification of the investments and the minority positions held typically ensure that a lot more regular cashflow comes off the investments than the more concentrated PE investments.

Nonetheless, it is agreed that communication and transparency between secondary funds and their investors remain as vital as ever, and there is consensus that over time partnership agreements for secondary funds will regularly include parameters around NAV lending, in the same way that they now address subscription facilities.

There are a few recent trends and innovations:

• Some of the NAV facilities provided to secondaries may be delayed draw term loans, sometimes with a revolving sleeve. The term component (and delayed draw) being used for the primary purposes (for example, acquisition financings and then accrued interest costs), with the revolving sleeve being there on a contingent basis (including for use in the management of unfunded obligations).
• Terms have generally gotten longer due to a couple of key factors, including (1) lenders becoming more comfortable with the product and the sector maturing and (2) extensions being required as distributions from primary funds to secondary funds are being delayed (driven by exits / realization events in that primary fund).
• Given the longer duration of the holds and the term nature of the financings, rated insurance capital is now invested into NAV facilities, providing increased liquidity and lower margins.
• Secondary funds are now setting up designated infrastructure and real estate-focused funds and looking at the use of NAV facilities.
• There has been an increased focus on investing into private credit and we are seeing secondary funds focusing on investing into credit assets. Asset based lending facilities, where a lender lends against a portfolio of loan assets, have been around for a long time, but there is increasing innovation in this space as insurance companies partner with credit funds and banks lending to credit funds. Insurance companies can now get direct exposure to funds by investing into them through rated note feeders, they can participate in NAV facilities with banks, they can invest through “arranger” vehicles who structure the deal for the insurance company lender and in some instances the insurance company may be the source of funding for a bank.
• Back leverage facilities to private credit funds are also becoming more frequent. These facilities would include facilities made available by a bank to a private credit fund who itself provides NAV facilities. It is somewhat ironic that the bank may not be able to provide any of the underlying NAV loans but is able to provide back leverage secured against a diversified pool of those same NAV loans.
• There is a convergence of fund finance and private credit as private credit funds play an increasingly important role in the industry.
• In conclusion, secondary PE, secondary credit, secondary real estate and secondary Infrastructure are on the rise, which in turn will mean more NAV facilities provided to funds holding these assets.

Non-bank lender perspectives in fund finance

By Linn Mayhew

The panel discussion focused on opportunities for non-bank lenders across the spectrum of fund finance products as summarized below.

Review of market dynamics allowing non-bank lender entrants into fund finance space

The fund finance market has evolved significantly, providing opportunities for non-bank lenders to enter, in part due to increased demand by asset managers requiring more flexible financing solutions, particularly in NAV and GP financings.

Non-bank lenders usually have more risk appetite and the ability to offer complex solutions that bank lenders may seek avoid. This has helped to position non-bank lenders as complementary rather than direct competitors to banks.

Review of any meaningful developments facilitating non-bank lender activity

Greater acceptance of non-bank lenders by asset managers and banks has helped drive market expansion. The shift towards GP financings, hybrid NAV financings and increased need for structuring flexibility has facilitated their growth. Banks and alternative lenders now collaborate more frequently, recognizing their respective strengths.

Anticipated issues/constraints

The outlook for 2025 is positive, with fundraising and M&A activity expected to improve. However, there will be challenges; notably, these include limited borrower awareness of non-bank solutions as well as uncertainties in the market. Competition between non-bank lenders offering fund financing solutions is likely to increase and differentiation will depend on creative structuring and strong relationships with asset managers as well as banks (who are a referral source) rather than pricing alone.

Hedging and fund risk management

By Jim Lawlor and Diana Whitmore

Funds use a variety of hedging strategies to mitigate risk, manage liquidity and enhance portfolio stability. These strategies may include derivatives, ISDAs, foreign currency exchange hedging or interest rate hedging. By strategically implementing these risk management approaches, funds aim to optimize returns while minimizing downside risks and exposure to market volatility.

ISDAs and NAV triggers

NAV tests or triggers in ISDA agreements serve as early warning indicators for counterparties, signaling potential deterioration in a fund’s financial health. These tests should be linked to the fund’s performance, allowing the counterparty to take appropriate protective measures if the NAV falls below a predetermined threshold.

However, such NAV tests should be drafted carefully to avoid inadvertently penalizing funds. For example, investor redemptions should be carved out from a NAV test, as investors may have a variety of reasons for redeeming their interests that are unrelated to the health of a fund. Additionally, as a fund ages and begins to wind down its investments, a NAV test should not overly penalize such fund.

LP interest in risk management

Communication of risk management strategies to LPs should cover:

• Hedging policy of the fund – Include a discussion of what you are hedging against, why you are taking such hedging strategies, etc.
• Cost of the hedging strategies – Investors want to understand the economic impact they’ll experience as a result of the hedging policy.
• Risk – Explain any liquidity risk associated with the hedging strategy.

Open-ended multi-currency sleeve hedging fund

Open-ended evergreen funds continue to raise capital indefinitely and do not have a fixed term. In contrast to closed-end funds which seeking to provide certainty, open-ended funds may be more flexible and have greater liquidity.

A multi-currency sleeve strategy manages foreign currency exchange risk by employing hedging strategies across different currency "sleeves" within the portfolio to minimize the impact of currency fluctuation on an investment. A multi-currency sleeve hedging fund is particularly useful for global investment strategies.

Selecting the right hedge entity

Determining the right hedge entity involves careful consideration of various factors, including:

• Determination of what products are being cleared and margined.
• Confirmation of the dealer-counterparty.
• Constraints within the fund documentation.
• Parent of a hedge entity as certain entities are more heavily regulated (for example, business development companies).
• Structure of any guarantees or a guaranty-lite structure in connection with any jurisdictional arbitrage.

By strategically hedging risks, funds are able to navigate unexpected market shifts. Mitigating risks is key to maintaining investor confidence in a sponsor’s strategy – particularly in an uncertain market.