Fund finance is a growing area of focus for us here at OakNorth Bank and over my six years here, I’ve been fortunate to work on some very interesting transactions in the space. Below, I’ve summarised some of the trends that I think will dominate in fund finance over the next 12 months.
I expect funds of all sizes, types, and vintages to seek funding to bolster their liquidity or access to liquidity through a variety of different tools and funding facilities, including: capital calls, subscription lines, hybrid, and NAV. The pandemic has demonstrated to the market that liquidity is key – whether for defensive purposes (i.e. bolstering existing investments), offensive purposes (i.e. to accelerate M&A activity at the investment portfolio company level), or both. One of the key learnings from the COVID disruption is that liquidity is critical, so the funds market has evolved to offer multiple solutions and will continue to do so.
Properly structured fund finance solutions such as those we provide at OakNorth Bank can allow funds to ensure timely redemption of their investors’ commitments without a rushed sell-off of underlying assets (perhaps at a marked discount). Furthermore, a fund with a strong WIP can execute deals in a timely manner by making drawdowns from the facility while raising further capital.
This will be key going forward as funds seek more creative solutions to preserve existing value in the fund and create further value. A wave of NAV fund facilities were expected in 2021 which never materialised. We have already seen a material level of interest in NAV facilities so far this year and expect this to further accelerate over the next 12 months.
As the macro-economic environment tightens with higher interest rates being seen and inflationary pressures continuing, it will be interesting to see how the squeeze on discretionary income affects portfolio investments within funds and how GP’s and LP’s respond. Additionally, with government support for underlying businesses now ended it will be interesting to see whether the financial distress predicted at the start of Covid will come through. The key for funds will be ensuring they have the liquidity or access to it to ensure they can see this through.
Environmental, Social and Governance (ESG) will play an even more critical role going forward – from an LP’s perspective, I expect ESG considerations to impact investment decisions and their choice of funding partner in the future. For example, one of my long-term clients in this space – RM Secured Direct Lending PLC (LON:RMDL) – rebranded last year to RM Social & Environmental Infrastructure Income PLC, to better reflect the positive social impact of its investment activity. As a funding partner, we’re well-aligned given OakNorth Bank has been carbon neutral through offsetting its Scope 1 (direct emissions from sources we own and control) and Scope 2 (indirect emissions from the generation of purchased electricity, heat and cooling) emissions since 2019. We continue working with our clients such as RM Funds and third parties on addressing Scope 3 (all other indirect emissions, including from our lending activity and our supply chain), and our ambition is to be net zero by 2035 for all our emissions.
Fund finance is an area OakNorth Bank is keen to do more in – I’ve personally had the opportunity to work with some fantastic players in this space, such as RM Funds as previously mentioned and Hilltop Credit Partners. I also led the Bank’s £25 million fund finance deal with ICG Longbow (LBOW), the London Stock Exchange-listed fund specialising in first mortgage property investment loans secured against UK commercial real estate; and its first ever subscription facility to Bluegem Capital Partners, a London-based private equity firm focused on European consumer-facing businesses.
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By Mohith Sondhi, Senior Director of Debt Finance at OakNorth Bank