Reflections from EUROPE
Change of Players and market resilience
One of the key themes emerging was the expanding lender market and the steps that are being taken, both at a governmental level and at the market level, to secure the future of the industry.
The covid-19 pandemic has brought with it uncertainty: a term seen as less than preferable to the risk appetites and credit considerations of more traditional lenders. As the historical players pause for thought, the subscription, hybrid and NAV lending field has opened up to a raft of new alternative players, including non-bank lenders and credit funds, taking this as an opportunity to move in and join the fund finance market.
Additionally, there has been a slew of regulatory activity to ensure liquidity within the market, including ESMA’s new guidelines on liquidity stress testing in UCITs and AIFs and the FCA’s new rules for certain open ended funds investing in inherently illiquid assets.
As with the Global day, ESG was a recurring theme from the European sessions. ESG policies are still in the spotlight notwithstanding the covid-19 pandemic, with fund managers still keen to highlight their ESG credentials to limited partners, and lenders still keen to be seen at the forefront of ESG change. For the more serious ESG-focused lenders, there was suggestion of adjusted margins on the basis of meeting certain key performance indicators and the rise of a new ‘impact-focused’ facility in the fund finance space as a result.
The headline takeaway seemed to be that whilst deal flow had slowed slightly in Europe during the covid-19 pandemic due to the market uncertainty, fund sizes have continued to grow throughout, with the amount of ‘dry powder’ rising steadily.
The result: it is likely to be a busy 2021 for the fund finance industry when fund managers deem the market stable enough to go on a shopping spree…
Reflections from Asia
The Fund Finance market in Asia continues to see Cayman exempted limited partnerships (ELPs) dominate, however there are several new vehicles joining the market to challenge Cayman’s prominence in the funds space. Will these new vehicles pose a legitimate alternative to Cayman’s relative monopoly and how has this year’s pandemic impacted the fund finance market in Asia?
Fund financing in Asia – who are the key players?
In Asia the most popular private fund vehicle tends to be close-ended fund established as a Cayman ELP. There are, of course, funds domiciled in other jurisdictions, but they are usually utilised for specific reasons, for example Singapore and Mauritius are often used where there is tax benefit from double taxation agreements with related countries; Japan and Korea tend to have their own markets and would utilise a mixture of domestic and offshore vehicles for different fund structures.
The rise of BVI, Singapore and Hong Kong
Whilst we continue to see Cayman ELPs dominate the fund financing market in Asia, there have been certain developments in other countries in the past year. We have seen an uptake of BVI partnerships being deployed for co-investment and single asset funds, particularly among Chinese clients who have long been familiar with BVI vehicles. Singapore has been promoting Variable Capital Companies, a hybrid structure which draws in features of various fund structures in other jurisdictions. Hong Kong, likewise, seems to have increased its attractiveness to managers with new partnership law and tax concessions for carried interests, etc. Nonetheless, there is no indication that industry players would shift away from Cayman fund structures given the advantages of a flexible, matured, well-recognised and transparent jurisdiction with robust legal and regulatory regimes which offer legal certainty and creditor-friendly terms.
The fund market in a Covid-19 world
Whilst we see a more cautious approach to new originations and the tightening of credit standards throughout the year, average deal flows have been relatively stable. This is primarily due to the fact that there are different types of funds in the market, some of which are investing in industries which are less affected by, or indeed have profited from, the pandemic such as digital related sectors, healthcare and pharmaceutical.
The past year also saw an increase of facilities other than pure subscription line facilities. Although the use of NAV or hybrid facilities in Asia remain relatively uncommon compared with the US or European market, certain established fund managers have turned to look for support at the General Partner(s) (GP) level, especially during 2020 when Covid is putting pressure on liquidity and leverage on funds. A broad and stable Limited Partner(s) (LP) base in the Asian market also helps sustain activities in the market throughout the year. As the market continues to explore and utilise different structures and facilities, the Asian market can diversify and bring the market to the next level.
The Global day panels covered a variety of topics from the European Private Real Estate market to ESG and diversity in fund finance. Each panel provided an interesting take on the world of fund finance and how these areas will play a role in shaping the future of the industry.
European Private Real Estate Market Update
The European Private Real Estate Market has unsurprisingly, seen fundraising fall in 2020 and deal activity slow, though not uniformly across the private markets. The good news is that even at a reduced rate, deals are still being done and fund managers expect to complete current fundraising cycles with little to no delay. Smaller newer managers may struggle to increase their Limited Partner(s) base in the next year and therefore the full picture insofar as fundraising is concerned has probably not yet emerged. It is expected that the big will continue to get bigger, however! Healthcare, logistics, infrastructure (renewables, digital) and distressed assets are the investor sweet spots.
Interestingly, one of the key outcomes from the Global day was that the pandemic does not appear to have sidelined ESG policies, with fund managers still keen to highlight their ESG credentials and LP’s not necessarily willing to relax ESG indicators. Insofar as a move to greater diversity is concerned, sustainability was recognized as a key issue.
Diversity in the industry
Diversity continues to be a hot topic in the industry. Although broadly speaking the private equity and venture capital industries have limited data on diversity and inclusion, it is recognized that this is a data gap that needs to be filled. Having said that, there was a recognition that private equity firms are increasingly focused on diversity from a portfolio investment perspective, while some law firms have evolved beyond the marketing aspects of diversity and inclusion to take concrete steps to create and sustain more inclusive environments. The need for banks to potentially be incentivized to participate in deals involving diverse and emerging managers was raised as was the observation that a possible key to sustainability might be to see diversity and inclusion as a consideration that actually drives commercial returns.
Women in Fund Finance
This year has been a challenging year for maintaining connections across the industry. However despite the challenges, the co-Chairs of the US, Europe and Asia Committee Co-Heads of Women in Fund Finance (WFF) have had an impressive three years of growing the network which is now 2,500 women strong. In a year when in-person events were suddenly no longer possible, WFF still managed to put together 19 events (three in-person before switching to virtual). The WFF’s objective is to maintain connections amongst women in the network by providing highly relevant content for women of all stages in their career cycle, and in 2020 maintaining this connection has been more vital than ever before. Moving forward into 2021 we all have an opportunity to determine how to shape the future of working post pandemic and WFF is keen to continue this conversation.
The team are globally recognised as leaders in the fund finance sector and have advised on a variety of different financing structures involving funds that have ranged from a hundred million to billions of dollars in subscribed investor commitments.