Aside from what now appears to have been a momentary pause in 2020 while the world adjusted to the "new normal" of the COVID-19 Pandemic, the fund finance industry has seen tremendous and consistent growth since the Great Financial Crisis. Although we have seen a fair amount of innovations in fund finance gain traction during this unprecedented run (such as NAV facilities, hybrids, secondary transactions, continuation vehicles and rated note feeders to name a few), to many members of the industry these more bespoke products have rarely been more than an interesting topic for a discussion panel or law firm article.

While more esoteric fund finance products have definitely increased in prevalence (particularly in Europe and with newer non-bank lenders aiming to carve out a niche for themselves in the industry), many traditional lenders have had little real motivation before now to implement these types of products due to the extraordinary demand for tried-and-true subscription credit facilities. The uncertain times that we once again find ourselves in at the beginning of 2023 appear to have created an environment where many of these lenders are more incentivized than ever to embrace an expanded array of offerings. 

After years of rapid growth, private equity fundraising has finally begun to slow down, which has affected the demand for subscription facilities. This slowdown can't be traced to a single event, as there are many factors at play (including inflation, steep interest hikes aimed at combating inflation, rising uncertainty over whether those interest hikes will slow inflation before putting the economy into a recession, and the war in Ukraine). There is also a "denominator effect" at play, where the portion of an investor's portfolio that is allocated to relatively illiquid private equity assets falls at a much slower pace than the portion of the investor's portfolio that consists of liquid publicly traded assets. This change in relative value causes the investor's portfolio to be above its target allocation for private equity, which in turn leads to a decrease in new private equity commitments.

This economic uncertainty has also caused funds to hold onto assets for longer than originally expected. These increased holding periods create a perfect opportunity for funds to utilize NAV facilities in creative ways, such as funding distributions to investors seeking liquidity, injecting additional capital into investments or moving assets to a new fund via a continuation vehicle. The appetite for innovative fund finance products has never been greater, and has become almost impossible for lenders to ignore. Over the past few months we have seen lenders go from having a mild curiosity in these types of facilities to having concrete plans to expand into these areas.