No one knows what even the medium term looks like in this unprecedented crisis, but SCF performance so far is not the source of any lender heartburn. In May, the Fund Finance Association noted that, among its members, there had been only one institutional investor default on a capital call so far.

“That investor is a corporate entity in a completely disrupted industry,” wrote Cadwalader’s Michael Mascia, who is also a Fund Finance Association board member. He added that “high-net-worth investor funding continues to have 99 percent-plus funding performance.”

Nonetheless, greater scrutiny of exposures began in earnest in March and April. “In our discussions with banks, there’s a sense that the product is viewed as a little more risky than it used to be,” says Pierre Maugüé, partner at Debevoise & Plimpton in London.

“I’m not sure every bank really understands the risk they have on their books,” says a second banker who didn’t have permission to speak to the press (Banker 2). “There’s really no uniform underwriting methodology across all the banks.”

Johnston says: “There are funds that we’re lending to in the market that have 30 percent or 50 percent write-downs in NAV in their investments.Of course, there’s increased risk throughout credit markets, and that is surely influencing some lenders’ more conservative approaches.

“Clearly some of your borrowers aren’t in as strong a financial position as they were earlier in the year, and that ripples through to the underlying investors, and it ripples through to the financial stability of the fund managers – in every aspect there’s additional risk today than there was previously. That’s something we’re certainly focused on.”

For some ‘newer entrants’, Johnston thinks “there are real credit concerns that are slowing down their deployment of capital” in this market. For most SCFs the collateral is the uncalled capital of investors, which are contractually obligated to fund capital calls by their GPs. However, lenders are increasingly aware that prolonged damage to the economy and certain industries could affect LPs’ willingness to fund, as they too become selective over where to put their money.

Source: Preqin Special Report: Subscription Credit Facilities, June 2019