Sub-line pros consider which borrowers could suffer in the ‘new normal’

The new, uncertain landscape for subscription credit facilities has prompted market participants to wonder: when fund raising and deal-making levels return to normal, will there be enough supply to sate demand? And if not, which borrowers will suffer?

Fundraising activity and private equity deal-making, while by no means dead, have naturally slowed since before the pandemic struck. But market players are asking, should demand for subscription credit continue to exceed supply, who’s demand will be satisfied, should fundraising activity make a comeback in the near-to-medium term?

Some think that fundraising will remain subdued throughout 2020, and that top sponsors will continue to be able to raise quickly and in size, borrowing sub lines commensurately, with ease.

“The proportion and number of managers that successfully raise funds in 2020 is going to tilt to more stable, long-term, larger managers in a pretty meaningful way,” says Wells Fargo’s head of asset management, Jeff Johnston. He adds that work-from-home conditions and general concerns about the pandemic haven’t seemed to be a barrier to fundraising for high quality managers with the right fund strategies.

But some top sponsors have already faced challenges getting the sub lines they want. Few doubt that there will be a reversal of the trend of public markets shrinking and private markets shrinking. And funds sizes keep growing.

“If I were Blackstone, I would just tell everyone, ‘I’ll pay 25 basis points more than everyone else to make sure I get the maximum amount of capacity’” Anonymous lender

“Funds are just getting bigger and there’s more and more funds being raised and hedge funds are now looking for drawdown capital,” says one banker. “Some of the larger GPs are the ones that are ultimately going to have an issue.”

Others suggest that top-tier sponsors will easily obtain credit lines, but that those lines may indeed be smaller, should the current supply/demand dynamic continue and fundraising activity begin to make a moderate recuperation. Rather, it will be first time funds, and perhaps even many midsize sponsors, that either won’t be able to get lines or will get them at less attractive terms.

Lenders have suggested that large, syndicated deals, often done with a small handful of banks before the crisis, will have to put together much larger syndicates – an idea some have been skeptical is sustainably achievable. Raising less than the full intended amount and then incrementally raising further amounts as needed via accordion provisions with other banks may be one solution, the banker suggests. Or: simply strategically paying more than competitor sponsors.

“If I were Blackstone, I would just tell everyone, ‘I’ll pay 25 basis points more than everyone else to make sure I get the maximum amount of capacity,’” the banker said.

Part of the problem, that banker thinks, lies in large sponsors taking on the arrangement process themselves, reducing the fees banks get upfront. “Why would I want to put together a $2 billion deal, and take all the operational risk and servicing that goes along with that, for some $25,000 a year? Banks used to get paid five to 10 basis points on these facilities to arrange them.”

“The proportion and number of managers that successfully raise funds in 2020 is going to tilt to more stable, long-term, larger managers” Jeff Johnston, Wells Fargo

“Some of the larger GPs… are the ones that are ultimately going to have an issue,” the banker added, saying that was especially true for big lenders with concentrated investor pools or non-standard fund structures, like those including separately managed accounts.

While some banks do syndicate to institutional investors directly, that banker and one other suggested that large-scale participation of non-bank participants might be one way to increase the supply available in the market – insurance companies, in particular.

“That’s been a big question mark,” says the second banker. “How do we get the insurance companies to participate in this business? Because in many ways, this [market] is attractive to insurance companies.”

Aberdeen Standard Investments is one non-bank participant that hopes that the need to syndicate deals to more players will result in increased standardization of subscription lines, creating a virtuous circle, as previously reported.

But all lenders speaking with Private Funds CFO have expressed doubt in the future of a significantly broader syndication market, giving varying reasons for that outlook. Standardization is more or less off the table by the very nature of the asset class, say some, while others cite confidentiality issues.