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The Ropes & Gray team recently attended the 9th Annual European Fund Finance Symposium, hosted by the Fund Finance Association in London on September 18 where market participants gathered to discuss the latest developments in fund finance.
Below are our key takeaways from the conference.
The State of the Market: Continuation Vehicles, Evergreen Funds, Retail Investors
Fundraising remains generally slow with longer than ever fundraising periods affecting the market for subscription facilities and NAV financing differently. Infrastructure and private credit have done better than other classes amidst this difficult fundraising period. Against this backdrop, continuation vehicles have emerged as the primary tool being used to offer liquidity to investors looking to exit older vintage funds while allowing GPs to hold on to valuable assets.
On the subscription financing front, the rise of high net worth (HNW) investors and retail participation in private funds is forcing banks to reconsider their underwriting protocols to provide liquidity solutions to funds with an increasing number of HNW investors in their borrowing base, often using aggregator vehicles.
We are also seeing an increase in evergreen funds backed by retail capital. These structures present their own challenges to finance given the need to manage liquidity mismatches between investor redemptions and return on underlying assets. NAV and hybrid facilities seem to be the answer.
NAV Financing is Here to Stay
Demand from private equity sponsors seeking flexible liquidity solutions continues to increase given the delay in availability of traditional exits via M&A and IPOs. At the same time, there is broader adoption of NAV financing across fund types. In addition to private equity funds, NAV financings have become more commonly used by other asset classes, such as private credit, real estate and infrastructure funds.
Despite a lot of noise in the market about NAV for distributions, the primary use of NAV facilities by GPs continues to be for strategic portfolio management purposes, including bridging secondaries transactions, follow-on investments, financing continuation vehicles, supporting portfolio companies and refinancing portfolio company debt.
Regulatory scrutiny of the use of NAV financing is increasing, with a particular focus around leverage and disclosure. This is resulting in GPs being more transparent with LPs about (and LPs being more aware of) the use of NAV financing. The release of the ILPA guidelines in the summer of 2024 went a long way in educating limited partners on the benefits of NAV facilities and on the appropriate questions to ask general partners about their use.
A growing number of non-bank lenders such as credit funds continue to enter the NAV financing space, offering more flexible and bespoke terms than traditional bank lenders. These entities are often lenders at the portfolio company level and are more comfortable conducting diligence and underwriting at the asset level.
Increase in GP Stake Finance
Many factors have contributed to an increase in GP financing, including continuing consolidation at the GP level, the challenging fundraising market and greater pressure on sponsors to maintain meaningful "skin in the game" with GPs increasingly expected to fund their commitments at first close, and typical GP commitments having generally increased from around 3% to 5%. At the same time, sponsor-level succession planning is becoming more prominent, as younger team members—often without distributions or carry—are being asked to meaningfully commit to the next fund.
GP financing remains relationship-driven, with lenders more likely to back sponsors they know well given the complexity and time demands of these facilities. That said, the lender universe is expanding. While traditional subscription facility lenders have supported long-standing clients, GPs now have additional options in the form of alterative credit providers.
From a credit support perspective, management fees remain the most popular income stream to underwrite. Lending against carry is still difficult, with lenders increasingly taking security over vintages beyond the ones being financed.
Collateralized Fund Obligations
Collateralized fund obligations (CFOs) (together with rated note feeders) were highlighted as an innovative tool used by funds to raise equity, enhance liquidity, and apply leverage. While rated note feeders typically invest in a single fund and are not usually collateralized, CFOs are structured across multiple funds and are collateralized. Additional features include tranched notes and structural protections.
CFOs popularity is driven by their ability to channel insurance and private wealth capital into private markets and provide sponsors with permanent-like, non-recourse leverage. The market expects continued growth in the use of CFOs, with increasing focus on liquidity, documentation standardization, and secondary market liquidity.
Trends in Secondaries
Distributions from private funds have significantly decreased over the last few years, with payouts to limited partners now roughly half of what they were previously. This reduction in distributions has led LPs to scale back their commitments to new funds. In response, LPs are increasingly pressuring their general partners to pursue exits in order to generate liquidity.
While secondaries were often associated with distressed LPs seeking liquidity, the current market reality is different. There are relatively few distressed sellers at the institutional level. Instead, institutional investors tend to take a systematic approach to secondary sales, often prompted by periodic portfolio reviews or changes in leadership.
A notable trend in 2024 was that 40% of LPs participating in the secondary market were first-time sellers, indicating a recent broadening of market participation. On the sponsor side, there has been a shift in how credit secondary transactions are handled. Whereas sponsors previously relied on existing credit or flagship secondary funds, there is now a move toward raising dedicated credit secondaries funds, with more sponsors exploring entry into this space.
The quality of deals on the market remains high, with most transactions involving strong businesses as bringing lower-quality assets to market is seen as increasing the risk of failed execution. In terms of market participants, there are only about 10 to 12 highly credible lead buyers, but the pool of minority buyers is much more diverse.
General partners considering secondary solutions are mindful of maintaining good relationships with their existing LPs and are thoughtful in their approach.
The rapid growth in the size and volume of the secondaries market is making it an increasingly attractive alternative to traditional exit routes such as IPOs, and sponsors are expected to consider secondaries more frequently as a viable option going forward.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
