Saturday, December 17, 2022 It’s that time of year again when conversations are dominated by reflections on our market’s performance over the last 12 months and expectations as to what 2023 will hold for our industry. After a record-breaking 2021, 2022 started with similar levels of activity but was quickly impacted by macro-economic and political turmoil, interest rate hikes and lenders feeling the squeeze after years of deploying huge amounts of capital to find finance. Couple that with a slowdown in fund-raising, a fall in M&A and declines in valuations, and we had a number of factors at play which should have resulted in a significant slow-down in activity in 2022. 

It’s a testament to the diversity of our industry – both from a product and provider perspective – that most players in our industry on the legal and business side will likely finish the year up on 2021. However, the mood is understandably cautious for next year.  As interest rates reach the market implied terminal rates and inflation starts to show signs of tapering, the focus for 2023 will very much be on the extent to which these monetary policies have impacted the global economies, as a recession in multiple regions loom. Given the above, “liquidity” is likely to continue to be at the forefront of conversations, whether it be for Managers as beneficiaries requiring cash for struggling portfolios and/or for their LP’s with cash tied up for longer in a benign divestment environment, or for the benefactors, with lenders, many of whom are scaling back balance sheets and becoming more selective with capital deployment as provisions start to ramp up and sector limits are hit. 

One thing is for certain, the Fund Finance industry has seen and will continue to see more growth and innovation than any other asset class. On that note we again reached out to the industry for their reflections on 2022 and what lies in store for us in 2023. A huge thank you to all of those across the European markets who contributed their thoughts to this issue and to all of our clients for their continued support this year.[1] We hope you enjoy the responses below and manage to have a very well deserved rest over the holidays! Stephen Quinn, 17Capital: 2023 will see another challenging year in terms of liquidity for the private equity industry – the macro events of 2022 will not dissipate quickly.  

This ‘liquidity crunch’ is quite circular in practice – a tougher exit environment for portfolio companies means lower distributions for LPs and GPs who are both looking carefully at managing their future commitments to new funds and strategies.  We have seen areas of the debt markets contract significantly in 2022 which may offer opportunity for the fund finance industry if the right sources of capital and risk appetite are in place. Shelley Morrison, Aberdeen: Building on a major trend from 2022 we predict that alternative, non- bank lenders will accelerate growth of their market share.  Institutional capital will continue to partner with banks to support them in managing counterparty limits and balance sheet constraints whilst forward-looking sponsors will seek to establish long term relationships with non-bank lenders to ensure access to liquidity. 

Challenging macro-economic conditions have already had an impact on fundraising timetables. As new lenders enter this market and established lenders become increasingly selective about the deployment of their capital, we forecast an increase in the issuance of bespoke and innovative facility structures across both sub-lines and asset- backed fund finance.  In 2023 we anticipate funds will take longer to close and expect this to drive increased demand for flexibility - smaller ‘first close’ facilities, accordions and margin/covenant ratchets. Ahlem Ben Gueblia, ANZ: Despite the uncertainty, volatility and slowdown in fundraising, we believe 2023 will be a strong year. Our clients are rapidly adapting to the current environment and fund financing remains a key tool to their liquidity management. Lenders’ product offerings are under continuous review to tailor to the needs of the sponsors and next year should accelerate the development of new products even further, with the rise of NAV facilities at the forefront.  

Lastly, 2023 will reinforce sustainability as a key priority in our activity. Sustainability Linked loans will increasingly constitute the vast majority of financings in Europe, seeing lenders working closely with sponsors to support their sustainability agenda and help them transition to a net zero carbon future. Guillaume Leredde, Avardi Partners: 2023 will be an interesting year for the fund finance market. With the increasing rate environment, changes in balance sheet capital treatment for banks and the rise of non-bank lenders, the purpose and type of fund finance facilities used by fund managers are evolving. We are working on creative ways to optimise financing for our clients and the demand for bespoke solutions is increasing. The main challenge for 2023 will be the lenders’ capacity to satisfy the market demand. Olawale Ajayi, Bank of China London branch: We expect NAV financing to remain a hot topic in fund finance in 2023 as more banks are beginning to have appetite for the product. Due to the uncertain economic environment, some banks may delay their entry into this space and will prefer to experiment with hybrids. 

Deal activity across the traditional sublines to remain robust in 2023 despite increasing interest rates. Wikash Bhagwanbali, Bank of Ireland: Despite the wider market volatility, 2022 was a busy year. For 2023, we expect demand for subscription lines to continue, although banks’ increased capital requirements will put upward pressure on pricing. Coupled with rising interest rates, it will be interesting to see if there will be any behavioural changes in the usage of subscription lines. Some managers are likely to opt holding assets for longer, or selling to their next generation funds or continuation vehicles, as they see value upside not currently recognised in the market. This in turn should support further demand for hybrid and NAV solutions as a means to free up liquidity. On the LP side, higher interest rates and pressure on public market valuations will impact portfolio allocations. As a result, we expect to see an increase in secondary sales, benefiting secondaries funds who will look to take advantage of likely discounted sales opportunities. Sabih Hussain, Barings: The European fund finance market will continue to see a strong demand from GPs into 2023 for capital calls and fund leverage. 

Like the US, European private investment markets are becoming reliant on the use of leverage to fuel the growth of direct lending. With some lenders at capacity, the supply will have to be met by new entrants and non-bank institutions. Non-bank lenders are not just replacing bank capital, they are more flexible in their terms as well. The European markets lack some of the products that the US markets benefit from, such as public perpetual vehicles and mid-market CLOs.    Tom Glover, BC Partners: We expect that 2023 will bring an increasingly challenging macroeconomic and geo-political environment and are well prepared for that.  Further liquidity pressures across the private equity sector will likely manifest themselves in various ways such as even fewer investment exits, more challenging asset-level financings and extended fundraising cycles.  

Within these challenges, there are always opportunities.  Partnering with nimble and capable GPs, we expect to creatively deploy larger amounts of capital in 2023, enabling our clients to capture the compelling strategic and asset level opportunities that present themselves at this stage of the cycle.    Guillaume Hartog, BNP Paribas: It’s fair to say that the fund finance market didn’t suffer very much from the COVID crisis with retrospect, and when affected, recovered quickly. Fund raising, fund size on various strategies as well as facility terms and pricing quickly went back to pre-crisis level or almost. This was a testimony to the robustness of this market and its players. I hope I can say the same in a couple of years after the current slowdown following the war in Ukraine which sparked global market turmoil comprised of inflation issues, asset value rebasing and possible – whether long or deep or technical – recession-like situations both in the U.S. and EMEA, with the consequential massive rate increase. But this time it could well be different - we don’t know how long the challenging global macro environment may last. 2022 has been a transition year, and the global macro and geopolitical situation will continue to impact the fund finance market in 2023.

Fund raising processes have and will continue to slow down. LPs will be more selective. Facility terms will tighten after years and years of relaxing. Pricing will continue to increase on the back of the surge of liquidity costs for banks. Additionally, many banks are suffering from capital constraints or are more proactive in capital management (in anticipation of Basel IV for instance, when applicable) leading to less liquidity available from the bank market. But as an essential part of the business model for financial sponsors and the fact that fund financing technologies have proved to be a powerful and flexible tool, there will still be a volume of financings. For the main banks in this space, because of the amount of balance sheet at stake, this should shift toward a more relationship driven business. So for deals well structured and well priced, and with the appropriate syndicate of banks which can play the relationship and through the cycle, there will still be a market and a great deal of financing. If the fundamentals of the fund finance market are maintained (credit worthiness of LPs, decent overcollateralization, cross solidarity amongst LPs, comprehensive security package, recourse to LPs or assets) the risk profile should remain strong. We could see perhaps shorter tenor to manage cost of funding (compensated with extension options). On a more positive note, we see the secondary NAV facility market growing materially as LPs seek liquidity options…………..

Source : [European Fund Finance Market Predictions for 2023](news.google.com/__i/rss/rd/articles/CBMiUmh0dHBzOi8vd3d3Lm5hdGxhd3Jldmlldy5jb20vYXJ0aWNsZS8yMDIzLWV1cm9wZWFuLWZ1bmQtZmluYW5jZS1tYXJrZXQtcHJlZGljdGlvbnPSAVZodHRwczovL3d3dy5uYXRsYXdyZXZpZXcuY29tL2FydGljbGUvMjAyMy1ldXJvcGVhbi1mdW5kLWZpbmFuY2UtbWFya2V0LXByZWRpY3Rpb25zP2FtcA?oc=5) undefined - December 17, 2022