Fund finance helps alternative asset investors, including private equity, private credit, real estate and infrastructure managers meet operational needs. But a reduction in providers and – lately – higher interest rates mean managers are finding finance is getting harder and harder to come by, Ben Griffiths, global head of fund financing at MUFG Investor Services tells Funds Europe.

Higher demand for private equity and similar illiquid assets is driven by the return and diversification needs of institutional investors. Likely in the near future, another driver will be the expansion of private capital funds to the retail market.

However, other changing market dynamics within illiquid assets have taken place in recent years. Not only have specialist fund administration firms risen to support fund managers and asset owners who broaden their portfolios to encompass private assets, but some of these same administration firms are also developing fund finance services – also known as “subscription lines” – for closed-ended and hybrid alternative asset funds.

These private-markets administrators include MUFG Investor Services, a global industry leader in asset servicing, administration, banking and fund financing with $785 billion of assets under administration. MUFG Investor Services clients include some of the largest public and private funds in the world.

Providing fund finance services through loans to private equity managers has grown in line with the wider growth of private markets.

“In terms of our book of business clients using subscription lines has increased substantially over the past six years since we set up this business and now almost all managers look to put one in place in the early stages of the fundraising and beyond,” says Ben Griffiths, global head of fund financing at MUFG Investor Services.

Large banks traditionally provided subscription lines to alternative asset managers. Prior to COVID, competition between the banks’ forced down prices. But since the inception of the pandemic, many banks have retreated partially or fully from offering this type of credit facility due to greater capital requirements placed on them by regulators, says Griffiths.

This – along with rising interest rates in the past two years – has made it more difficult for fund managers to access funding for their operational needs.

“Some of the biggest players went by the wayside in the last 12 months and subscription lines became less important to other banks versus other products as their capital requirements increased,” Griffiths says.

Subscription finance: what is it?

Subscription finance is historically a facility used to provide operational efficiency whereby, for example, during a ‘capital call’ (where the fund manager calls on investors to release funds for investment) the manager may need a loan in order to place the investment should an underlying investor not have their funds immediately on hand, or more frequently these days, to minimise the amount of times a manager calls capital from its investors.  

The management of capital calls can be complex and time-consuming and investors with fewer resources to manage their capital calls (and who do not outsource the process to their fund administrator) may sometimes struggle to meet commitments in a timely way.

“Funds need the surety of getting the money from the capital calls at the right time to be certain they can make timely investments,” says Griffiths.

How difficult is it to access funding and what sums of money are involved?

Large, syndicated deals - although there have been fewer of these in the past 12 months due to the current fundraising environment – involve multiple lenders and are “still raising facilities”, says Griffiths. But smaller, first- and second-time fund launches are finding it more difficult to raise financing.

“It’s at the smaller and newer end where it’s painful.”

And with central bank interest rates now around 5-5.5%, pricing is a major challenge.

“Once a firm adds in the spread required by lenders above the interest rate, the effective rate can be considerable. This can put the private equity firm close to its hurdle rate – the minimum return it must meet for the managers to be compensated.”

These tighter borrowing conditions, says Griffiths, are forcing private capital firms to think hard about why they want to access fund finance and then to manage the process more robustly.

For example, paying higher rates of interest means a firm would not want drawings on a subscription line open for any longer than necessary. In the past, says Griffiths, some firms would draw on subscription lines for as long as possible, using them as a form of leverage, particularly in the early stages of a fund, or keeping lines open for operational needs.  This, of course, still happens but managers need to think more deeply about the length drawings are made for and the tenor of deals.

“A subscription line is typically two or three years, but this now has to be considered against the effect of increased costs.”

Typically, loan facilities will be no more than 30-40% of the fund size governed by their constitutional documentation, says Griffiths. He adds that it is comparatively rare to see facilities of below $50 million, where “facility fees and legal costs may no longer make it worthwhile for the manager.”

Where does MUFG Investor Services stand in this business?

MUFG Investor Services entered the alternatives asset management business in 2013 and is a division of Japan’s Mitsubishi UFJ Financial Group. Our parent company has a focus on long-term partnerships, a principle that flows through to MUFG Investor Services, says Griffiths.

Beyond subscription lines, the firm also provides NAV financing to funds of hedge funds and to funds of private equity funds.

“We are owned by one of the largest financial institutions by assets in the world giving our asset servicing business the backing of a huge balance sheet.  We are global in nature and cover all strategies in the time zones the managers are located in.  We have a large presence in North America, Europe and Asia. We are also a full-scale European credit institution and a depositary in Luxembourg and Ireland. Larger banks that provide fund finance will do it mainly to earn fees from other investment banking products like FX execution or from providing leverage.”

Griffiths says MUFG Investor Services, on the other hand, wants to work with clients who understand they can benefit from partnerships across a full range of services, for example, fund administration, depositary, and from the firm’s FX overlay business, called Passive Currency Overlay, which manages operational and executional risk for clients investing internationally.

“We are a one-stop service provider, not a monoline administrator. We get to know the funds we work with intimately and provide operational solutions for the long term.”

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