Delivering long-term client value


Read time: 6 mins        Added date: 07/11/2024


The fund finance market is evolving. While this presents new opportunities for many private market sponsors, it also adds further complexity when managing growing, often multi-asset-class platforms. Jill Wilson, Edward Fry and Varun Sarda of Lloyds tell Private Equity International how lenders need to adapt to financial sponsors’ needs.

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Q How would you describe the fund finance landscape today?

Jill Wilson: At the end of 2023, the estimated global value of private markets assets under management was just over $13 trillion. The compound annual growth rate has been around 19 percent for the last four years, and the market is expected to reach over $19 trillion by 2029. 

As a result of this market growth, GPs’ demands for financing solutions has also increased materially. We are seeing increasing consolidation in the market, as well as a number of our clients becoming publicly listed, which means financing needs are also evolving. These now include more traditional ‘corporate’ solutions to support firms’ growth in addition to fund-level financing. 

Despite a rising interest rate environment, it’s clear from our experience that fund finance solutions are still delivering a multitude of benefits for our clients and LPs alike, including liquidity management and alternative, efficient forms of capital to support investment. 

Of course, fund finance is much broader than just subscription facilities. While NAV loans and other forms of leverage have been around for some time, demand for these asset-recourse products has increased significantly in the last few years as GPs have sought additional ways to access liquidity. This increasing demand across the collective product spectrum has grown the total value of the fund finance market to well in excess of $1 trillion globally. 

Over the last decade, we have also witnessed fund finance needs evolve from bilateral deals to much larger syndicated solutions. Many of our clients now have complex multibillion-dollar portfolios, which can be highly intensive to manage. 

Our focus is therefore very much on how we can make the management of financing as frictionless as possible. Across our global team, we have been mandated to co-ordinate close to $20 billion of new financing during 2024 alone, being able to bring an in-depth but real-time view of the global market, as well as providing full support to clients across underwriting, syndication, liquidity sourcing, development of sustainability-linked loans (SLL), forex strategies and cash management.

Q Where are the expanded liquidity requirements coming from, and how can clients find solutions?

Edward Fry: Large syndicates are becoming difficult to manage. While we are seeing some increased use of debt advisers on transactions, we believe longstanding and active lead banks are best placed to have an informed view across global markets trends, current liquidity pools and the key needs of lenders.

When building large syndicates, sponsors need to think about the financing objectives of the lenders selected. For some new market entrants, participating in the financing alone is sufficient. For longer-standing fund finance lenders, balance sheets have grown to an inflection point; those lenders are moving from balance sheet growth mode to balance sheet management. 

Accordingly, these lenders are becoming more strategic with the sponsors they are supporting, typically seeking deals where there is ancillary opportunity or broader relationship opportunity across asset classes. Keeping a large group of lenders on side for the long term is challenging for sponsors, so it helps to have a lead bank that can guide them through individual lender requirements.

Complexity can arise as a result of the approach that some lenders take to external credit ratings. We have worked closely with ratings agencies, clients and banks/non-banks both on the approach to ratings and on the real-world application for live transactions across subscription facilities and NAV financing, all with a view to achieving a successful syndication.

JW: Another well-discussed challenge of syndication is that subscription facilities don’t lend themselves particularly well to institutional liquidity due to the revolving nature of the product. Conversely, NAV loans offer more certainty over drawn profiles and associated cashflows, which has supported the growth of institutional capital in syndication.

That said, across the industry, there continues to be a focus on bringing institutional capital into the subscription facility market, largely a result of the scale of liquidity required to support the ongoing growth of private markets. Across the market, there are a number of examples of investors actively investing in subscription facilities, many of whom Lloyds has worked in partnership with. 

“For longer-standing fund finance lenders, balance sheets have grown to an inflection point”

Edward Fry

Q How can lenders support clients with a smooth and efficient process?

JW: The first thing is engaging early with partners to think about a financing strategy. Sponsors that spend time working with us and considering different solutions tend to find we can add more value and help navigate challenges that others can’t. These discussions can come as early as prior to finalising the LPA, ensuring investors are bought in and aware of the GP’s approach to financing. 

EF: Many sponsors now have dedicated in-house financing teams that bring a lot of value, though we generally find these teams like to work alongside a lead bank. Having a credible lead bank as a partner really helps with running these complex processes efficiently, bringing transparency to timelines and driving more effective communication.

Earlier this year, Lloyds acted as lead arranger, agent and joint ESG co-ordinator for our longstanding client CVC Capital Partners on their landmark AA+ rated €7 billion SLL facility for their latest Europe/Americas private equity buyout fund. CVC Capital Partners Fund IX was the largest private equity fund ever raised globally. This was yet another major achievement for our franchise – not just in terms of arranging €7 billion of liquidity, but also in terms of working with Fitch to achieve an AA+ rating on the facility across a highly diverse syndicate.

“Over the last decade, we have seen fund finance needs evolve from bilateral deals to much larger syndicated solutions”

Jill Wilson

Q Apart from liquidity, what other factors are key to successful financing?

JW: We aim to build long-term, broad-based relationships with our sponsor clients, supporting their entire ecosystem from the management company through to the fund management platform and the portfolio companies. This means we have an inherent understanding of our clients’ businesses, which allows us to bring in the right teams from across the bank to support them.

Fund finance is strategically important for many of our relationships, but is in no way viewed as an isolated product: our complementary services extend to FX, capital markets, cash management and retail data analytics, and through our wider group brands we also support clients with workplace pensions, via Scottish Widows, and corporate salary exchange schemes, via Tusker.

Supporting portfolio company-level financing across real estate, infrastructure and leverage finance is also important – and, again, somewhere we can add value, with our long-term expertise in these areas.

With regards to our leverage finance activities in particular, we have recently increased our ability to support mid-market clients’ debt financing needs by entering into a partnership with Oaktree Capital Management. The partnership can provide up to £175 million ($228 million; €210 million) per transaction and there is no cap to the total amount we can deploy.

Varun Sarda: With a growing focus on net zero and better-quality ESG data becoming available, GPs are making more ambitious ESG commitments, and we are seeing more innovation in fund financing. Fund finance lenders are keen to participate in this trend, with an increasing number of SLLs being issued in recent years.

We are seeing a maturing market around the types of KPIs that are being introduced in SLLs and the scrutiny being applied by financial institutions; the important thing is to make sure structures meet robust market standards, are appropriate for each specific asset class and incentivise good ESG progress.

JW: Additionally, FX hedging and risk management solutions have had to keep up with the growth and innovation seen within the private markets space – whether this has been expanding credit appetite for uncollateralised hedging (in order to minimise the cash drag from a hedging programme), developing the credit terms that ensure derivative documentation work for the duration of the fund’s life, or looking at new asset classes and fund structures.

Generally speaking, demand for hedging has risen steadily over the last 10 years as managers have generated value through their asset selection and management – as such, they need to minimise risks in other areas of their portfolio, such as FX. Private debt funds have always been the biggest users of FX hedging; today, more secondaries, infrastructure and even a number of buyout managers are implementing FX risk solutions.

Q Looking forward, what are the priorities for clients in 2025 and beyond?

JW: Although we are in a period where fundraising and M&A have slowed, we expect private markets, and therefore financing needs, to continue to scale. Additionally, we will see ongoing innovation in many different forms to fulfil evolving demand.

Clients want to see consistency, stability and longevity, with support through the cycle both in periods of tighter liquidity and in more buoyant markets. Due to the attractive growth and strong credit fundamentals, we continue to see increasing demand from both bank and non-bank lenders. However, there will likely continue to be only a small number of banks that are able to work with clients from the early stages of a fund, to design, lead and co-ordinate solutions across increasingly large syndicates.

Jill Wilson is managing director and global head of financial sponsors, Edward Fry is a director of loan syndicates, and Varun Sarda is a managing director of sustainability and ESG finance at Lloyds Bank.

Article first published in Private Equity International, November 2024.