Off the back of another record breaking year of deals, both in size and volume, the resilience of the fund finance market is likely to continue throughout 2022. With larger funds being raised, there is a corresponding increase in the scale of financing as new entrants to the market, on both the borrower and lender side, are creating competition with traditional lenders. Generally speaking, the market continues to see new lenders and borrowers and products are evolving to meet the increasing variance of investor demands. Umbrella facilities are finding their place across all regions as larger fund managers seek to achieve efficiencies across their portfolios.
Concurrent to the macro trends identified above, Walkers has prepared a jurisdiction-specific commentary of the most salient aspects of the market today. Should you have questions about any of the trends included, please reach out to our industry specialists below or your usual Walkers contact.
Asia-Pacific: Increase in ESG and sustainability-linked facilities
Across the Asia Pacific region we have seen a significant recent increase in the number of Environmental, Social and Governance (“ESG”) and sustainability-linked facilities in the fund finance space. Facilities incorporating ESG features have been an area of focus for sponsors and lenders in the region for some time. Walkers acted as Cayman Islands counsel to the lender in relation to the world’s first capital call facility with an interest rate linked to sustainability criteria.
We have also seen an uptick in activity in recent months, both in terms of performance-based facilities (with pricing pegged to performance against an agreed set of KPIs) and use of proceeds facilities (providing for pricing incentives for loans used for ESG purposes).
We expect that increase in activity to continue throughout 2022 as sponsors continue to look for ways to include ESG concepts in their debt lines and more lenders position themselves to be able to offer and monitor ESG-linked terms.
Aside from ESG related trends, the rapidly growing and maturing Asia private capital market has resulted in increased demand from managers for more bespoke liquidity solutions. Lenders have stepped up to fill this demand with NAV and hybrid facilities becoming more common and we have also seen a noticeable increase in the number of GP and management fee financings.
Bermuda: ILS and Collateralised Reinsurance Managers Look to Debt
Over the course of 2021, in Bermuda we have seen a general upward trend in fund finance activity, with subscription line and hybrid facilities continuing to be popular. Most notably, in (re)insurance, a number of asset managers whose investment focus is in insurance-linked securities or collateralised reinsurance found themselves seeking alternative sources of capital and increasingly took to debt to help fund renewals in this space. With the combination of the global COVID-19 pandemic and a pattern of increased catastrophic activity in recent years, there has been a greater need for capital across the industry and we expect the trend to continue into 2022.
Cayman Islands: US Managers Turn To Asset-Based or SPV Facilities
For the Cayman Islands, where we face primarily the North American fund finance market, we have seen a notable increase in the use of asset-based or SPV facilities by funds in large part due to the cost benefits and enhanced lender protections that such facilities offer. It is anticipated that the continued growth of super funds will lead to an increase in the demand for umbrella facilities, which offer a host of benefits including lower fees and pricing and timing efficiencies.
Another recent development relates to the Padma case which has altered the procedural steps for a creditor to seek the winding up of a Cayman Islands exempted limited partnership (“ELP”).
Prior to Padma, a creditor could present a winding up petition to the Grand Court of the Cayman Islands (the “Grand Court”) seeking the winding-up of an ELP formed under the Exempted Limited Partnership Act (the “ELP Act”) directly. But in Padma, the Grand Court reminded the parties that an ELP has no separate legal personality and it is through the ELP’s general partner/s that debts and obligations of the ELP are enforced. Accordingly, the Grand Court has no jurisdiction to order the winding up of an ELP on the presentation of a creditor’s winding up petition. The Grand Court concluded that an unpaid creditor’s remedy was to present a winding up petition against the general partner of the ELP that would then necessarily result in the affairs of the ELP also being wound up.
Channel Islands: Record Figures for Guernsey & Jersey
2021 was a record breaking year for our fund finance teams across the Channel Islands. In keeping with Walkers’ observations in other jurisdictions, we have seen an increase in the number of transactions, the value of these transactions and the variety of products coming to market. Notably, an increased number of NAV facilities closed throughout the year and particularly in the last quarter. We are generally seeing more bespoke facilities and increasingly complex security packages, as more sophisticated fund finance solutions are required.
In addition, and on the fund formation side, we have seen an uptick in funds interested in investing in digital assets and crypto, as well as cannabis healthcare funds in Guernsey following the launch of the first such fund in 2020. It will be interesting to see if these funds present a challenge to the traditional fund finance market. Otherwise, continuing the themes of 2021, we expect to see even larger funds, larger facilities and more syndication over the course of 2022.
Ireland: Increased Demand from Established Lenders and New Entrants
2021 was a strong year for the Irish funds industry with AUM in reaching an-all time high of approx. €4 trillion across 8,350+ Irish resident funds. Ireland also continues to be a leading hedge fund administration centre with €6+ trillion assets under administration. We continue to see increased activity from established lenders but also new entrants across sub-line, NAV and hybrid facilities which are being utilised by managers more frequently and earlier in their funds’ life cycles. This has been particularly true for the super-funds and large global fund managers where we have seen greater deal sophistication and evolution in borrower-driven bespoke terms.
ESG and social impact investing is on every board’s agenda, particularly as managers come to grips with the additional disclosure and transparency requirements rolling out across the EU under SFDR and the EU Taxonomy Regulation. 2022 promises to be a year of more green finance and sustainability-linked product innovation as market participants continue to embrace ESG factors at the forefront of their decision-making processes.
The recent overhaul of the Investment Limited Partnership (“ILP”) product has created a highly versatile, ‘best in class’ onshore, regulated and tax transparent partnership vehicle for venture capital, private equity/credit and real asset strategies including infrastructure funds. The ILP can avail of the pan-European passport under AIFMD and can be marketed to a wide Non-EU investor base through local registration and private placement rules. The amendments have modernised the existing law by updating LP voting rights, capital repatriation rules and now permits umbrella structures with statutorily segregated sub-funds that can pursue different strategies with no cross-default or cross-contamination. We are already starting to see a steady flow of new ILPs come to market in Q1 2022 as many managers see the clear benefits of the structure. We also expect legislative reform of the 1907 Limited Partnership later this year.