What are your views on the evolution of subscription finance?
Subscription lines are a critical part of working capital, and they continue to be well priced on a relative basis. There are a deep set of lenders extending rates of 65 to 80 percent. It does feel like there is room to get closer to full lending, but I think that is limited by LPs rather than the lending community.
How would you describe LP attitudes toward subscription finance today?
The market was dominated by ERISA concerns around short-term borrowing a decade ago, but that has continued to ease and maturities are now north of 180 days and even close to 270. That is positive because it is in line with the time it takes to sign and close a deal. In the past, maturities stood at 90 days and that created additional challenges for processes that took longer.
We are seeing more LPs asking to see both levered and unlevered returns, however. I am not a fan because without the credit facility we would have to call capital in advance and there would be a penalty to the LPs. We may also have to return capital if a deal doesn’t close.
In addition, LPs are increasingly asking for more time to settle capital calls. The market standard has been 10 business days, but I think it will move to 15-20 days. LPs also want more visibility on the balance outstanding and the short-term outlook regarding what might be called in the next quarter. There is certainly a greater focus on that kind of transparency.
What are your views on the NAV financing market?
It is an interesting space for funds that are longer in the tooth. The market is still quite expensive and not yet well integrated with subscription line providers. I do think we will see more sub line lenders building NAV features into their packages, but it is still very early days.
I expect LPAs will now also start to incorporate the consideration of NAV lending. Even if you could secure an attractive deal from a NAV lender today, you would typically have to go to your LPs to get it authorized.
Are you seeing non-bank lenders enter the fund finance space?
We are a mid-market firm, even though we have just raised a $1 billion fund. That means, when we are borrowing 20 or 30 percent on a line, we are still of a size where traditional players are most relevant, even if it is a two-bank syndicate. I would add that, as a mid-market firm, we are also looking for holistic banking support, rather than a subscription line in a vacuum. We want a banking partner that can do wires and provide other banking services.
How do you think an economic downturn will impact the fund finance market?
Fund borrowing is still cheap relative to commercial markets, because it is backed by unfunded commitments, and I think that will continue to be the case. If interest rates go up by 3 percent, the whole market will move, and subscription lines will still be cheap on a relative basis. The spread between NAV lines and general commercial lending, meanwhile, is actually shrinking as the market matures.