Credit firms want a piece of the fund finance market

Credit shops have traditionally avoided the strategy, but innovative new opportunities are luring them to carve a niche for themselves

There is a growing appetite for fund finance, and credit firms want a seat at the table.

Fund finance solutions for private equity funds have ballooned in recent years, becoming far more than the “vanilla” subscription lines of credit. The strategy is evolving to offer more products, and as banks increasingly enter the space, credit firms are realising the opportunities for them, too.

“Five years ago, we believe roughly 50 percent of funds globally were using fund finance, while today more than 90 percent of funds are using these types of facilities,” says Sarah Lobbardi, a partner and head of fund finance at Validus Risk Management. “In the last five years this took off with new types of lending and more lenders coming into the space.”

These new products offer different solutions for various stages of a fund’s life cycle. They can assist a firm with no access to dry powder resolve an immediate need for equity, or a firm needing a little extra capital to preserve net asset value at the end of a fund’s life.

“Credit funds have been one of the drivers of this growth,” Lobbardi says.

Credit shops have traditionally steered away from fund finance due to the low return profile and the revolving nature of the basic subscription line, according to Matt Hansford, head of UK fund finance at Investec. However, new opportunistic credit solutions and lending opportunities are enticing credit firms to adopt the

Credit offers market expertise

One of these firms is Crestline. The Fort Worth, Texas-based alternative investment firm has been providing fund finance solutions for private equity firms since late 2016. The firm closed on a fund of more than $600 million for the strategy in November.

“We are seeing a fair amount of demand, and growing demand,” says Dave Philipp, managing director and senior portfolio manager of the Fund Liquidity Solutions Group at Crestline Investors. “What we are seeing is a widening on the use of proceeds.”

While a Crestline fund finance solution is more expensive than a similar option from a bank, working with a credit manager offers a flexible model and a lender with more market expertise, Philipp says.

“We sit in between private credit, private equity and secondaries,” he adds. “We tend to be much more flexible, we tend to be faster, we tend to deal with more esoteric assets than most banks would be comfortable with.”

Crestline has found that limited partners are interested in committing to funds focused on fund finance, and private equity firms are interested in working with credit shops. The firm was “pleasantly surprised” that investors understood the strategy and “got behind it relatively quickly”, Philipp says.

Crestline isn’t the only credit player in fund finance, and the small circle is growing. London-based 17Capital, which hired a new head of fund finance in September, has raised more than €2 billion for the strategy across four consecutive funds.

However, even as the space continues to expand, a full finance revolution may be a few years away.

“People are trying to be more innovative with more sophisticated structures,” Lobbardi says. “We can see a higher number of asset-backed lending and hybrid facilities than in the past, but the core product remains subscription lines.”

Philipp doesn’t see any credit firms entering the space with an appetite for subscription lines of credit specifically, due to the saturated market and lower opportunity for growth, but he expects Crestline to remain on the front line of innovation within fund finance.