Fund Finance Market Observations for May | Cadwalader, Wickersham & Taft LLP
Fund financing markets remained active and dynamic in May, building on a strong first quarter. Much of what the market was presumably predicting at the start of the year has actually happened. While the markets are stable and there isn’t much breaking news, here are some of our recent observations.
Transaction volume and pipeline. Trading volume and transfer indicators continue to hum. The number of our new transactions has a slightly higher trend than the comparable period in 2020, and our accumulated hours in March and April 2021 actually exceeded 2020, which surprised positively because last year there had been such avalanche of contracts when the pandemic first set in. in our market. Potential transaction hours and LPA exams remain high, and when combined with very robust Q1 PE fundraising numbers PEI and PitchBook report, our forecasts remain very optimistic.
Use of the bank. While our January forecast for spread compression and shim size increases have moved as expected, my forecast for usage down a few points did not materialize. My guess was that valuations being frothy and PSPCs stealing opportunities would slow the flow of PE transactions and hence negatively impact usage. But anecdotal comments suggest usage is at the high end of historical levels. And several press reports suggest that the sponsors do not see a significant competitive impact on the transaction flow on the PSPC side.
Transaction issues. Several hot topics on the side of agreements:
– The Revlon language is an increasingly frequent point of negotiation. More soon.
– Rated feeders that issue note-like structures to investors, especially insurance companies, are increasingly on our plate. Lenders often face the risk of debt commitment, so it is important to work with fund advisors early on to get the proper wording in LPAs / Foster Note Agreements so that investors under -jacent get all of the basic loan credit.
– ADMs and tailor-made structures with equity commitments and backstop guarantees are banked. What a difference a year makes.
– The ESG link is materially increasing.
Europe. The London market remains very active. Our team closed a € 6 billion underwriting facility last week that included both an ESG component and 27 participating banks. Quite the deal: perhaps the biggest consumed in Europe to date. In addition to a number of very large subscription contracts, we also continue to be very busy with NAV oriented transactions in the European market. Several of the current ones are innovative and first impression, and we look forward to discussing the structures if after the closure customers allow it.
Family offices. We continue to see robust business activity with family offices. In recent years, family offices have increasingly hired internal portfolio managers, invested in compliance and risk management, and have become more sophisticated users of funding. Many have large, diverse pools of investments in hedge funds, private equity funds, and public and private companies. All of this makes them attractive borrowers. We are seeing a steady increase in the size and sophistication of family office financing.
Mom. I think about my mother a lot today. Happy Mother’s Day Sunday to all moms.