Funds Europe – What are the growing sectors or assets for fund investment, and how are these trends altering the attitude of fund financers?
Lobbardi – If I look at the assets that are using fund finance, we are seeing a lot more real estate and infrastructure than five or ten years ago.
There is also a shift in the type of finance product. Five years ago, the market was dominated by capital call facilities. Since then, NAV financing and other more complex financing have exploded. And we see that across all asset classes. We see that through the secondaries, which are doing NAV while they’re still deploying capital to increase their investment capacity. We’ve seen that a lot in the last 18-24 months, and the volume of this type of financing has increased rapidly.
Likewise for the private equity funds, nearly every private equity manager wants to have that conversation about NAV financing.
There is no exact number because no one really tracks the exact volume, but NAV and similar types of products maybe represented 20% of the market five years ago. Today, 50-60% of the market is NAV or another type of more complex or sophisticated financing.
What does that mean in the next 12-18 months? Well, a technical recession is already here, and the rates are going up. So, there is going to be pressure in terms of capital requirements and liquidity for fund managers. Some are already thinking about how to answer those needs. That means we will see more of these complex products.
Davidson – From an ESG perspective, we’re seeing borrowers expecting innovation and customisation to a greater degree now. Increasingly, they want a financing partner that’s able to create structures that work for them and their own ESG strategies. It’s no longer a case of taking products off the shelf; it’s about taking time to look at how you want to finance your business and how lenders can help accelerate the transition.
There are also emerging sectors. Infrastructure and renewables are clear examples of that. There’s a huge demand for renewables assets, and you’ve also got energy transition assets like large-scale battery storage, which is complex and often requires specialist financing. Lenders will need to adapt with the market to support the technological development we need to achieve a net-zero economy.
Mehmood – The opportunities and challenges presented by the market since the onset of Covid have also changed the shape of the fund finance landscape over the last couple of years, bringing a broader pool of liquidity to certain parts of the market.
The NAV segment has experienced a big influx of interest from debt funds and institutional liquidity. NAV transactions have been particularly attractive for debt funds as they provide an opportunity to deploy over a portfolio of assets rather than a single individual exposure, which is their normal modus operandi, whilst achieving a similar return.
“We’ve seen a real shift in the market over the summer with the reality of the economic outlook now coming home to roost.”
At the same time, we’ve seen an acceleration in institutional capital available in the market. The liquidity coming to the market has proven itself to be increasingly flexible and innovative, something we are now seeing spread to other parts of fund finance.
We’ve seen a real shift in the market over the summer, with the reality of the economic outlook now coming home to roost. My private equity colleagues have seen the liquidity in that market tighten quite significantly, which is also something we’ve seen clear signs of in fund finance around subscription line appetite in particular. There will also be different sectors and opportunities that emerge in the future. For instance, we’re starting to see some Special Situations funds being raised. The broader economic headwinds will mean that the opportunities within fund finance may shift slightly. In turn, that might drive more product evolution.