Panel Recap: ‘Hot Topics In Fund Finance’ – Finance and Banking

The Thursday afternoon panel on “Hot Topics in Fund
Finance” was chock full of interesting insight on the latest
trends in our industry. Subjects included ESG, rated note feeders,
continued LIBOR transition and the competition for talent in the


The last couple of years have seen an explosion of
Environmental, Social and Governance (ESG) subscription lines, but
early predictions of meteoric growth have recently been tempered to
some extent.

LPs are putting pressure on sponsors to implement meaningful ESG
in their fund investments. Banks are interested in participating in
ESG deals to make sure that the obligations of the bank to make a
profit and to do good in the world align with what’s happening
in the global landscape.

The U.S. market is starting to evolve over time but hasn’t
had the same kind of regulatory pressures as in Europe that have
significantly moved the needle there. The European market has felt
a huge rush of ESG regulations that, rather than serving as a
deterrent, have been having a positive impact on increasing ESG
activity. The legislation has included the taxonomy and low-carbon
benchmark regulations, as well as sustainable finance disclosure
statutes that have had a broad effect on ESG being factored into
investment decision-making.

One key for ESG in fund finance is making sure that the credit
facility tracks the risk that a bank is trying to address. To date,
ESG credit facilities have typically been structured either using
key performance indicators (KPIs) of the fund or using a use of
proceeds approach (UoPs). But on the legal side, there is still no
set market determination for how to govern this or standardization
on what metrics will end up in the loan agreements. One observation
from the panel was that it will be important to keep an eye on how
our industry develops consistency of documentation.

The audience was polled by the panel on several ESG-related
questions. In 2021, nearly 35% of audience members had firms with
at least one ESG transaction, while just under 20% of audience
participants were at firms with three or more ESG deals. For
percentage of overall book of business, half of the audience
responded that its fund finance portfolio comprised 5% ESG, while
less than one-tenth of firms had portfolios of 10% or greater ESG.
An overwhelming majority expected those percentages to be from
5-25% three years from now, with just under a quarter of audience
members predicting that amount to be over 25%.

Rated Note Feeders

The use of rated note feeders has grown significantly in our
market over the last few years. They are a tool to more easily
permit insurance company LPs to participate in funds. Rather than
providing an equity commitment like a traditional LP, the insurance
company will be issued debt by purchasing notes from a feeder

Insurance companies can use this structure to mitigate
regulatory pressures that would otherwise diminish their
opportunities for investing in private funds. Their regulators rate
the risk of the investments held by insurance companies. Insurance
companies have more favorable risk treatment for debt investments,
especially debt investments that are rated by a ratings agency,
than they do for equity commitments.

Insurance companies are starting to take notice of this
technology, and GPs have begun to provide this approach as a
solution for insurance companies to be LPs. The goal is to get the
overall construct to function in a similar way to an LP that was
committing in the more traditional approach via equity. The use of
a rated note feeder tends to be more prevalent when there is a more
concentrated borrowing base.

The panelists discussed issues of enforcement with requiring an
LP to purchase notes in the event of a bankruptcy by the feeder.
While European practitioners generally are less concerned that such
enforcement may be estopped by a court, fund finance professionals
on the U.S. side of the pond typically take the view that a lender
would have diminished ability to enforce. To mitigate that risk,
credit agreements will generally require the debt held by an LP to
be converted to equity if there is any bankruptcy or insolvency of
the fund.

LIBOR Transition

While we’ve all experienced the ocean of LIBOR transition
amendments, panel members observed the interesting dynamic in the
current state of play. The U.S. market still has a long lead time
to when LIBOR truly falls away in mid-2023, yet banks are being
required to shift to SOFR now to avoid risk of regulator-imposed
penalties. Banks are assessing how to appropriately determine what
is “new money” for purposes of when SOFR needs to be
implemented. Funds sponsors want to ensure that their assets and
liabilities match. If their underlying portfolio assets use a
certain flavor of SOFR, GPs (especially for credit funds) desire
that their credit facility liabilities match that same type of

There is a sense that all parties may be waiting to see what the
market evolves to on spread adjustments. Some market participants
on both the lender and borrower side prefer new deals to have a
flat margin, while other players would rather the loan documents
separately list a spread adjustment for SOFR. When a credit
adjustment spread is used, lenders and borrowers alike are
negotiating over what those numbers should be.

On the Europe side, there was a much swifter move to the
fallback rates. Given the end of 2021 deadline for non-USD LIBOR
imposed by the UK benchmark regulatory supervisor, European credit
facilities were forced to flip to the new benchmarks by December
31. Thus, LIBOR transition activity there has now largely been

Competition for Talent

Panelists noted that the fund finance space hasn’t been
immune to the Great Resignation. Competition for talent has
therefore become rampant. Organizations are considering how
flexibility and mobility add to recruitment and retention. At the
same time, the pool of potential recruits may have widened because
of the ability to have remote teams. Because there has been less
emphasis on face time, firms are concerned that there is less
relationship-building and mentorship. This can be especially
challenging when bringing people in at the more junior levels. Our
industry thrives on training new recruits, and many of the
panelists expect their companies to focus on the education and
coaching of their new professionals to fund finance.

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