Marcus Emadi | Director at Turning Point Capital
CONTENTS
The Search for Liquidity Fuels Innovation and Collaboration
A central theme at the event was the increasing supply/demand imbalance in the market. This imbalance, driven by growing financing needs amid constrained bank capacity, has led to innovation as stakeholders seek ways to unlock liquidity. General Partners (GPs) are increasingly seeking creative solutions to address liquidity pressures, highlighting the importance of strong relationships with the right counterparties.
Key innovations discussed included:
- Increased use of ratings to ease bank balance sheets and attract institutional capital.
- Securitisation of subscription lines to enhance institutional investment.
- Hybrid facilities and significant risk transfers (SRTs) to facilitate new liquidity pathways.
The market today is evolving rapidly, and the focus is now on growing businesses and working collaboratively with private markets to unlock liquidity. This shift is changing the way businesses operate, aligning the interests of investors and GPs toward long-term growth.
Subscription Facilities Still Hold Strong
Despite speculation that NAV financing would take the lead, subscription facilities remain crucial to the market. Exciting developments are underway to innovate within the subscription facility space. Key trends include:
- Securitisation and term loan tranches.
- Increasing focus on attracting retail investors.
- Increased use of evergreen structures, ETFs, and tokenisation.
Subscription facilities are widely recognized for their low default rates and stability. However, there is still a need to increase awareness beyond industry professionals. Educating the broader market on the benefits of subscription facilities will be key to unlocking further investment potential.
NAVigating the Waters
NAV financing remains a significant area of focus, with growing attention to the challenges surrounding its perception. While the Institutional Limited Partners Association (ILPA) has made strides with guidance on NAV-based facilities, there is still work to be done to drive further transparency and education in this space. The LMA looks forward to continued collaboration with the ILPA in this area to enhance understanding and market confidence.
Regulation – Fit for Purpose?
Regulation continues to impact the fund finance market in various ways. While bank capital rules are pushing innovation, the existing regulations are often mismatched with the realities of the market. Notably:
- Risk weightings do not always align with the true nature of fund finance.
- Pension and insurance regulations often fail to recognize fund finance as a distinct asset class.
In addition to these challenges, broader regulatory considerations, such as the Financial Stability Board’s ongoing consultation on leverage in NBFIs, could further complicate the landscape. The industry must respond collaboratively to ensure that these regulatory challenges do not restrict liquidity in an already narrow market.
Education and Collaboration – Key to Success
The core message from the event was clear: education and collaboration are essential to the success of the fund finance market. As more players enter the space, ensuring that everyone has a deep understanding of the asset class and the structures being employed is vital. Misapplication of these innovations could create problems for the entire market, making collaboration with the right partners critical.
Furthermore, terminology plays a crucial role in ensuring alignment across all parties. The LMA Fund Finance Glossary, released just before the conference, was a step forward in creating common understanding within the industry. Transparency, open dialogue, and addressing misconceptions are key to aligning interests and fostering trust among all participants, including LPs and regulators.
Additionally, aggregated, anonymised market data is vital for supporting discussions around market size and asset performance. The LMA, in partnership with The Drawdown, is conducting ongoing surveys to gather this data, encouraging industry-wide participation to ensure informed decision-making
What’s Next for Fund Finance?
Looking ahead, the future of fund finance is poised for continued growth, with strong demand for innovative solutions. The supply/demand imbalance will likely persist, driving the need for collaboration among market participants to unlock liquidity. To succeed, stakeholders must:
- Focus on building strong relationships.
- Effectively use new tools and structures.
- Adapt to evolving regulatory changes.
The LMA remains committed to supporting the evolution of the fund finance market by promoting efficiency, liquidity, and transparency. As the market continues to grow and transform, we encourage you to stay engaged, participate in shaping its future, and help drive the industry forward.
