Collateralized Fund Obligations (CFOs) are securities that create leveraged exposure to portfolios of fund investments through the issuance of an equity tranche and one or more debt tranches. Although CFOs have been around since the early 2000s, the product has recently received renewed interest from private equity sponsors and investors as a potential fund financing solution. The Financial Times, in a recent article, discussed CFOs, noting certain sponsors that have recently issued CFOs and mentioning interest in the product from insurance companies and public pension plans.
A recent article in Private Funds CFO, titled “Lenders get cautious on ESG-linked lines, but issuance remains resilient,” addressed some market developments involving ESG-linked subscription credit lines, including comments from Cadwalader’s Wes Misson. The subscription-required article is here.
Walkers’ Julia Keppe and Alice Wight interview Luxembourg-based fund finance expert Michael Mbayi on the latest episode of “We Talk Banking & Finance” podcast. During this episode, Michael highlights fund finance activity over the last 12 months and the emerging trends in the practice. He also provides insight into the current capital market environment and how it converges with fund finance. To hear more on this topic, click here.
The holiday season is near, and in NYC, networking is the gift that keeps on giving! Join FFA’s NextGen committee for an engaging discussion with private fund CFOs followed by a networking reception from 5:30-8:00 p.m. next Wednesday, December 7. Register here for more details. We look forward to seeing you!
As we head into the Thanksgiving Holiday in the U.S. next week and try to take a breather from the breakneck pace of the market over the last 18 months, it is a good time to reflect on where we have been, where activity levels stand and the trends we expect to continue into 2023.
Results from Intralink’s survey of 200 global investors provided interesting and timely insight into LP allocation plans. According to the survey, 70% of LPs plan to increase allocations to private funds over the next 12 months. On the one hand, the survey results make sense in the context of a year in which intermediate liquidity products, such as high yield credit, disappointed while a liquidity barbell portfolio likely fared better. On the other hand, survey respondents were heavily weighted toward wealth management and family office investors, limiting its direct relevance to the institutionally driven fund finance market. While the positive sentiment indicator is certainly welcome, our base case continues to be for a year-over-year decline in fundraising next year as the rate of capital recycling in private markets slow.
The size of the NAV loan market currently measures around $100 billion and is poised to grow to $700 billion by 2030, according to an estimate from 17Capital cited in a Bloomberg article this week. NAV loan origination volume is accelerating as other sources of funding prove more challenging and deal exits are put on hold. 17Capital reports originating $5 billion in NAV loans and pref equity over the past 12 months. The article, “Private Equity Funds Tap Exotic Loans for Liquidity as Deals Ebb,” is available to Bloomberg subscribers here.
Mark your calendars for the FFA’s 12th annual Global Fund Finance Symposium, scheduled for February 8-10, 2023 in Miami Beach, Florida. Visit the FFA site for more info.
As the traditional subscription facility market has matured, new liquidity and funding innovations have arisen. Enter the rated note feeder. This structural tool in the back pocket of GPs may ease the accessibility of private equity to investors that need to commit capital via a debt commitment and enhance investor returns through collateralized fund obligations. While the use of rated note feeders has gained significant traction over the last couple of years, implementing this structure in connection with a credit facility is fraught with questions. This article provides a background on rated note feeders against the backdrop of fund finance, discusses issues of enforceability in the event of a fund bankruptcy, and dissects the nuances of protective provisions you can use for a rated note feeder in your next fund finance deal.
Cadwalader Fund Finance attorney James Hoggett has been promoted to Special Counsel, effective January 1, 2023.
James, who is based in London, focuses on fund finance, advising both lenders and GPs on a wide range of products, including subscription lines, asset-backed and hybrid facilities, as well as GP support and co-invest structures. His experience covers all asset classes and includes acting on several multibillion dollar facilities to leading primary and secondary funds. Congrats, James!