Over the past five years, we have consistently seen more than a trillion dollars raised for closed-end private markets funds on an annual basis. With demand for subscription lines at around 20 percent to 30 percent of capital raised, the fund finance industry has clearly experienced exponential growth.
At the same time, the NAV finance market has risen from relative obscurity to become one of the most talked-about areas of the asset class in a matter of months, while GP financing solutions have become ever more sophisticated and nuanced.
Meanwhile, the make-up of the lending community has also changed dramatically, with a proliferation of private debt players alongside the traditional banks, as well as growing appetite from institutional investors. The speed of this evolution and the liquidity options it presents is exciting, certainly. But it also raises a number of questions that borrowers need to address.
How are LPs viewing these changes? Leverage at a fund level has historically courted controversy, given the implications for IRRs. Investors were initially concerned that managers were simply looking to artificially inflate performance. Those fears have now largely been allayed, as LPs have experienced the cashflow management benefits of subscription finance. But a rapid increase in the uptake of NAV lines, particularly in the face of a possible impending recession, could once again be giving investors the jitters.
Meanwhile, CFOs must also navigate an increasingly complex lender ecosystem. What are the pros and cons of working with a bank, as opposed to a specialist lending fund or even an insurance company? And ESG-linked facilities are also increasingly garnering attention. Is this something that a CFO should be pursuing? And, of course, the big question is how an industry that has grown up in a benign environment will fare when the economy sours.
Ultimately, however, it is clear that fund finance is in the ascendancy. The breadth and depth of both supply and demand are increasingly rapidly. So, perhaps the final question that we should all be asking ourselves, in the face of a potentially multi-trillion dollar industry, is: just how big could this fund finance market really become?