GPs focus on breadth, flexibility, and good value
GPs focus on breadth, flexibility, and good value
Fund finance has become a key tool for private capital fund managers, including subscription credit lines, NAV-based facilities, and longer-term leverage. But rapidly changing macro conditions and a tougher fundraising environment means GPs will look even harder for flexible terms and competitive pricing.
James Nash, Head of European Fund Finance and Global Product Head of Subscription Finance, and Joel Buckett, Vice President, Private Equity Fund Finance, at Deutsche Bank, spoke with Shaun Beaney, Editor of Preqin First Close, about being selective, ensuring good value, and how the failures of Silicon Valley Bank (SVB) and Signature Bank have reshaped the market.
How would you explain fund finance to a non-specialist?
James Nash: It can be so many different things to so many different people. At its core, it’s a way of providing capital to funds throughout their lifecycles. So that would be subscription finance in the early stages, through to NAV lending in the later stages, and then at the back end, you can move into continuation funds. The basic products, subscription finance and NAV lending, make up the vast majority of the market. Subscription finance has probably been around for 25 years. The original basis was to provide working capital as bridge-style financing for funds to reduce the operational burden. Having a facility enabled GPs to manage that process and only go out to investors on a quarterly basis, to make a call to clean up the debt line. That’s how it all started out.
Who utilizes fund finance?
James Nash: It can fundamentally be made available to just about any asset class in any region. We’re a bit more selective with what we do. We lend to private equity funds, private credit funds, infrastructure, real estate, and secondaries. What we won’t do as an institution is venture capital or hedge funds. Anything with slightly more aggressive underlying investments, like crypto or emerging markets, are not spaces we play in. The global subscription finance book at Deutsche Bank is about €20bn. Half sits in the US, a fraction over a quarter in Europe, and a fraction under in APAC. That’s across 140 different facilities and 60 managers.
How have the unfortunate collapses of Silicon Valley Bank and Signature Bank affected the market?
James Nash: After some initial concerns, the market’s settled down very quickly. It’s obviously contributed to a reduction in available bank capital. The nature of those banks meant it’s more at the venture capital level. They were certainly active in the larger buyout funds as well, but the core of what they did was venture capital. The US is such a big market that there are still plenty of lenders there to take up the slack. In Europe, we’re still seeing SVB active in the market now that the local entity’s been bought by HSBC.
How is fund finance changing?
James Nash: With interest rates pushing up, it’s driving a much higher all-in cost for managers now. We think there’ll be a lot more focus on the value that these facilities provide.
Joel Buckett: Devaluation of asset prices means it’s much harder for funds to realize targeted returns. There are a lot more GPs trying to hang onto assets for longer, either by extending the fund’s life at maturity or through GP-led secondaries. There’s been a big rise and proliferation of NAV financing, and continuation vehicles. Simultaneously, a liquidity shortage for some partners at fund managers, who need it for succeeding funds, has increased demand for GP co-investment financing.
What's your view on leveraging funds to boost returns?
James Nash: The fact that they can be used to provide some leverage on internal rate of returns (IRR) is now well known and understood by LPs, so we think it’s becoming a more accepted and more discussed topic across the market. The fact that everyone’s aware and there’s more transparency around it can only be a good thing.
What would your advice be to young professionals considering a move to fund finance?
Joel Buckett: It’s a great industry to be part of, given the scale of growth, the utility of the products, and the strength of the network you can build through involvement with industry bodies and events. Generally, it’s an industry that favors extroverts who want to work as part of a team. It’s quite a syndication market where different banks work with each other, so I’ve always found people in fund finance tend to be very helpful.
Tell us about your work with the Fund Finance Association?
Joel Buckett: I’m a member of the EMEA committee of the NextGen Network at the Fund Finance Association (FFA). NextGen aims to promote learning, development, and networking for professionals up to director level. We’re currently working on a global mentorship program. I’ll also be hosting a breakout session at the FFA’s European symposium on June 19. We’re always keen to have more fund finance professionals involved who want to help shape and benefit the future industry.
Shaun Beaney is Editor of Preqin First Close, the essential newsletter for the global alternatives market. It’s quick, easy, and free to subscribe here.
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