Navigating the Evolving Landscape of Fund Finance: Unlocking Growth and Optimizing Balance Sheets

The world of fund finance is undergoing a remarkable transformation, with the emergence of innovative financing solutions that are reshaping the way private equity firms and their partners manage their capital and operations. From the growing prevalence of credit lines extended to general partnerships and management companies to the rise of continuation vehicles and NAV financing, the industry is witnessing a surge in strategic financing options that are enabling firms to drive growth, facilitate succession planning, and optimize their balance sheets.

Unlocking Liquidity and Accelerating Progress in Challenging Times

GP Financing: Bridging the Gap in Uncertain Markets

In addition to fund finance being applied at the portfolio level, the industry is witnessing the evolution of credit lines extended to both the general partnership and the management company. GP lines are being used to help fund principals meet their GP commitment, supported either by personal guarantees or guarantees provided by the management company, as well as the distributions flowing back from capital contributions. Industry experts estimate that over half of GPs now employ this form of borrowing.The current macroeconomic backdrop is only increasing the appeal of these financing solutions. "Organizations, and the individuals that lead those organizations, want to put more money behind their strategies but there is less liquidity available today given a lack of distributions," explains Dane Graham, partner at 17Capital. This slowdown in monetization is impacting GPs as well as LPs, leading more GPs to seek to borrow against stakes in earlier vintages to commit, or over commit, to new vintages in order to accelerate progress and provide differentiation in fundraising.

Management Company Financing: Fueling Growth and Succession Planning

When it comes to the financing extended to management companies, there are myriad use cases, and according to industry experts, most sponsors with over billion in AUM now either have a management company line or are seriously considering it. These financing solutions can be employed to facilitate succession planning, enabling the rotation of equity from founders to the next generation of leaders who will be driving value going forward.However, the overwhelming theme is one of growth and balance sheet optimization, with GPs looking to extend their franchises, launch new products, and expand into new geographies, including through the acquisition of other GPs. "There is less liquidity available today given a lack of distributions," Graham notes, underscoring the appeal of these financing options in the current environment.

NAV Financing: Empowering LPs and Enabling Continuation Vehicles

The evolution of fund finance extends beyond the general partnership and management company, with NAV financing emerging as a valuable tool for limited partners as well. 17Capital, for instance, is providing NAV finance lines to investors facing overallocation issues but retaining high conviction in their managers, allowing them to meet their objectives without being forced to sell at a discount in the secondaries market.Continuation vehicles represent yet another extension of the NAV financing product line, with NAV facilities often used to bridge to these structures. Typically, the new continuation vehicle will then be raised and will take out the NAV loan. However, once the continuation vehicle has been raised, there is often limited appetite to leverage the vehicle through a fund-level facility, with the exception of cases where all stakeholders, including selling LPs, rolling LPs, and a new continuation vehicle anchor, agree on the terms.

Navigating the Complexities of Continuation Vehicle Financing

The use of NAV facilities in the context of continuation vehicles is not without its challenges. "Our strategy is one of diversification, so single-asset continuation vehicles can be challenging from a NAV financing perspective," explains Graham. "A hybrid solution may be more appropriate if there is uncalled capital remaining, but generally speaking we would be looking for multi-asset continuation funds."Gavin Anderson, partner at Debevoise & Plimpton, agrees that it is rare for continuation vehicles to use a lot of leverage. "The main structural difference with continuation vehicles is there is a lot less dry powder for a subscription line to draw on and a more concentrated pool of assets that may not provide the appropriate security for a NAV lender," he notes. However, interest for NAV facilities among older continuation vehicles, raised between 2019 and 2021, is growing, as GPs managing these funds seek financing to continue investing in their add-on pipeline in advance of an ultimate exit.