Challenges and opportunities for fund finance in 2023

Cautious optimism

Lenders and borrowers have both entered 2023 during a time of uncertainty in the market, and this year’s outlook is more difficult to predict as a result. Despite this, it is likely that fundraising processes will take longer, with funds expected to request smaller subscription facilities from their lenders. Lenders also have their own challenges this year, including increased capital requirements. They are also contending with restricted lending appetites, which are being driven partly by the volatile market conditions and increased regulation.

However, challenges for some bring opportunities for others. The growth of non-bank lenders is likely to continue throughout 2023, with institutional lenders increasing their market share and being able to fill the gaps that traditional lenders may struggle to. Connected to this, the development of a more active funds finance syndication market is expected, with bank and non-bank lenders working together to support the needs of those sponsors requiring larger facilities.

The situation suggests that the financing market will become increasingly relationship-led, with the quality of client relationships playing a bigger part in a lender’s decision as to whether to deploy its capital. Certain lenders will be looking to develop their strongest client relationships and move towards offering those clients several fund finance products, rather than providing only the subscription line.

Despite all the uncertainty, subscription lines will likely remain a very effective tool for funds. While rising interest rates may slightly affect the popularity of these facilities, 2023 is still likely to be an active funds finance year for strong managers and for those lenders who remain open for business.

Innovation

The discussion around innovative fund financing solutions will continue apace, particularly regarding net asset value (NAV) financings. During the latter half of 2022, interest in NAV financing began to increase significantly, and we expect this to continue throughout 2023. With lower portfolio valuations, funds are more likely to hold their investments for longer, with managers then looking to NAV-type products to access liquidity.

Likewise, lenders should expect more conversations around hybrid facilities. It will be interesting to see whether lenders who have traditionally focused solely on subscription lines will look to explore a more hybrid offering in future. It is also likely that there will be an increasing number of fund financing solutions for securitisation vehicles in 2023. The debt capital market space can also provide fund finance solutions, for example in the form of bonds.

ESG fund finance

The emergence of environmental, social and governance (ESG) linked subscription facility agreements is likely to continue in 2023. Lenders and managers will need to work together to find suitable KPIs and an appropriate level of ongoing monitoring. The development of the sustainability element of funds finance will be especially interesting to observe in coming months.

Resilience of the fund finance market

Regardless of any macro-economic challenges that may lie ahead in 2023, the industry is well placed to deal with these. The fund finance industry has been resilient before and there is no reason why it cannot be again. The next 12 months will likely be a busy year of transactions with funds finance activity expected to continue to grow.