The private capital industry has grown to such an extent that there is no longer enough banking capacity to satisfy demand for subscription finance facilities. But institutional investors have been more than happy to step in and fill the gap. This has been facilitated by the introduction of credit ratings. “The debt is low risk and so it attracts positive credit ratings, which means institutions are happy to fund these positions,” explains Investec’s head of relationship management, Jonathan Harvey.

“Capital call facilities have been coming up against a bit of a supply ceiling, but we are seeing a number of institutions come in to fill that need,” adds Tom Smith, partner at Debevoise & Plimpton. “Two or three years ago, there were around 50 lenders in the market. Today, those 50 would not be able to satisfy demand. That is where institutions are coming into supplement banking capacity.”

Institutions are also actively participating in the NAV financing market, which offers a higher rate of return, while private credit funds are proliferating in the space, with several high-profile fund finance bankers moving into the funds ecosystem to help deploy capital in the sector. “If I was a fortune teller, I would look to what happened with leverage finance following the financial crisis, the bulk of which is now done by credit funds,” says Investec’s head of secondaries, Ian Wiese. “We will also continue to see banks partnering with institutional capital as we have done. Institutions rarely have the origination capability to go it alone, but they are certainly interested in the opportunity.”

Khizer Ahmed, founder of Hedgewood Capital Partners, is also unconcerned about supply in the NAV financing market today. “There aren’t many transactions where we struggle to find lenders; it is more about finding the right lender and the right set of terms for a given client or a given transaction,” he says. “For example, we are currently working with a borrower seeking financing against a single fund interest in the venture capital space. That is not the kind of loan a bank would normally consider, but we are working with an insurance company whose mandate does include the provision of such offerings.

“The deal also involves a five-year bullet maturity, with an option to extend for another year, which is another feature that most banks would find difficult to offer, but a non-bank lender has proved more forthcoming. We want to make sure the borrower ends up with a transaction that is accretive to the bottom line and that the lender gets the return and covenant structure they need to compensate for the risk taken.”

Thomas Doyle, head of NAV financing at Pemberton, believes that rather than a supply gap, there is actually an experience gap. “I don’t think there is any real supply/demand imbalance at this point. Instead, I think there is an absence of knowledge. Very few people have the experience to deliver on these NAV transactions, and that could potentially hamper the market.

“However, I do think this market will become too big for banks’ balance sheets,” he says. “That is opening up a tremendous opportunity, either for institutions going direct or direct lenders – and obviously, we believe there’s a particular opportunity for the latter.”

Meanwhile, any shortfall in capital – or experience – is likely to be short-lived, as fund finance establishes itself as a mainstay of the private credit arena.

“The universe of lenders in the fund finance space is one of the biggest developments our industry has seen in the past few years,” says Cadwalader partner Brian Foster.

“The maturity of the market, coupled with the increased training and resources available, are leading to ever more interest in the space as a destination career.”