Shifting market brings 2,000 to FFA Miami confab

The Fund Finance Association’s annual conference in Miami has brought in just shy of 2,000 registrants – another record for the event – even as dealflow slows by some measures, in step with relatively anemic fundraising.

Borrowers and institutional investors make up part of the increase. Both are coveted segments of the market for conferences like those held by FFA, since lenders can spend more time meeting with clients and pitching deals and services to prospective ones.

(Quick side note: There was a rumor going around the reception drinks on Monday, quickly: the Symposium will be held in Miami next year, not Las Vegas, I’ve confirmed.)

Among them is Teacher Retirement System of Texas, which we reported last year was looking to possibly be the first US pension system to issue a collateralized fund obligation, although the deal has been said to be not yet completed.

The increased buzz takes place amid a more difficult environment for fund finance more broadly. Where, in past years, market participants regularly said the subscription credit line and NAV facility market could hit $1 trillion and $750 million, respectively, those speaking with Private Funds CFO now often decline to predict market sizes, rather saying future growth will depend on fundraising, which could be secularly reduced amid normalized interest rates.

According to Haynes and Boone’s recent survey, most lenders only expect a slight increase in sub line lending this year. And a Proskauer survey released Monday notes that NAV facilities last year were smaller, and there were fewer of them, with fundraising slowing and many of the loans going to borrowers’ continuation funds, which typically have only one or two assets.

That doesn’t mean there isn’t business to go around: increased base rates and spreads have made sub lines a more attractive business for banks, even amid more intense regulatory capital constraints, for example.

JPMorgan, which dropped smaller borrowers more than a decade ago due to Dodd-Frank capital regulations, and was even reportedly turning away some large sponsors to focus on its most important relationships after its acquisition of First Republic, has been said to have changed its mind about the business overall, and is now serving a broader contingent of borrowers.

The bank could not comment in time for this blog.

Those higher overall yields may be what inspired Goldman Sachs to jump into the committed line market with the acquisition of part of Signature’s loan book (though the bank told me they’ve always offered committed lines, the purchase at least represented an expansion of it’s business there).

The addition of players with lower funding costs – insurance firms and banks like EverBank, which is backed by a consortium of private equity firms – also means increased competition.

Both borrowers and lenders are becoming more focused on the discreet services and products that fit with their strategies, rather than trying to be everything at once.

“Not every lender works for every borrower. And not every borrower works for every lender, anymore, either,” one CFO of a private equity firm told me at the welcome reception on Monday night at the Fontainebleau Miami.

That means getting a transaction done is more work for both parties. But with differentiation often comes innovation.

Capital markets solutions for fund finance are sure to be among the hot topics at this year’s confab. And, perhaps surprisingly, it is not being driven by lenders’ needs to open up balance sheets and diversify their loan books so much as by borrowers’ needs. The exception for now being credit risk transfers and guarantees, which are increasingly popular among bank lenders – check out Tom Auchterlonie’s report we put out this morning.

As an example, law firm Fried Frank has been involved in arranging total return swaps and reverse repos as alternatives to NAV loans, for which borrowers can find more attractive pricing (after more initial work) since banks get better capital treatment on such instruments. Other privately-placed securitization style products have also been used to obtain longer-term financing for GPs (more on this at a later date).

Despite pensions funds still being on the sidelines, financial services company Thrivent has issued a publicly-rated collateralized fund obligation (which I have previously begged you to call fund interest ABS, not CFOs, for the sanity of the Private Funds CFO team), backed by 70 interests in funds managed by 58 general partners, with about $800 million in net asset value and $127 million in unfunded commitments. The del, called White Rose CFO 2023 Holdings l was rated by KBRA and Fitch Ratings. (Yes, I should have reported it, but I’ve been out of commission with a series of winter illnesses and a small motorcycle accident. All is well, now, and I apologize for leaving you hanging 😊).

And I think that the holy grail of subscription credit line securitization exit for banks are more likely to become a reality in a market where competition is this hot, even if deal documents need to become less standardized as borrower and lender needs become more idiosyncratic. Perhaps the term loans on offer from insurance companies can help to solve the conundrum of the non-amortizing nature of sub lines, and CLO-inspired structural elements, like additional buckets for different products, could add a static pool element to balance out the short-term, blind pool nature almost certainly to be an aspect of any securitization of the instruments.

The problem of utilization rates could potentially be mitigated in the documents for underlying deals, maybe by including higher non-utilization fees or adding a floor to utilization. Or the securitization docs themselves could provide the solution, perhaps by forcing the equity holder or junior classes to bear all, or a portion of, lower proceeds due to lower utilization rates, making the AAA-rated portions more attractive to institutional investors.

I’m spitballing here, and I’ve only had one coffee, but who knows? In a market like this, more seems possible than even when the money “flowed like wine, and the borrowers flocked like the salmon of Capistrano,” to borrow from the wisdom of Lloyd Christmas.

Stay tuned for more of our conference coverage throughout the rest of the time here in Miami!