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The LP View: Asia’s Fund-Financing Market Getting More Crowded

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Fi Dinh, Managing Director and Head of Fund Finance APAC

MUFG Investor Services, the asset servicing arm of Japan’s Mitsubishi UFJ Financial Group, sees the Asian fund-financing market getting busier, having closed about a dozen transactions in the region in the past year.

As one of the largest fund administrators in the world with $1-trillion assets under administration, MUFG Investor Services provides services ranging from fund financing to banking and securities lending, custody, and business consulting, among others. In terms of fund financing, it includes credit lines such as subscription finance, NAV [net asset value] financing, and a hybrid model which combines the two.

The firm’s clients span investment managers to institutional investors, pensions and endowments, and sovereign wealth funds.

Fund financing not only helps in operational efficiency but can also unlock liquidity for investors and support underlying performance, hence improving DPI [distributed to paid-in capital] and allowing investors to continue to back a general partner, according to Fi Dinh, Managing Director and Head of Fund Finance APAC at MUFG Investor Services.

“Fund financing is not just to fix a short-term problem. It has become a very important intrinsic tool throughout the fund’s life,” she told DealStreetAsia in a recent interaction.

When it comes to Asia, she said the growing middle-market funds and larger regional funds were her company’s sweet spot. “In the US and Europe, people have talked about bank liquidity drying up, but we feel the opposite in Asia,” she said.

Dinh also shared with DealStreetAsia her outlook for investments in 2024.

Please take us through the different types of fund-financing products for private funds.

There is the subscription finance facility, also known as the capital call facility, typically put at the fund level. It will be secured against the uncalled capital commitment, and the credit underwriting is based predominantly on the creditworthiness of the underlying investor base and the track record of the fund manager.

Meanwhile, NAV financing is put in place towards the later part of the fund’s life when it has already acquired a number of assets. You also have the hybrid structure which is a combination of the two mentioned. As the market develops, especially as liquidity becomes scarce and DPI is low, activities such as financing continuation funds, LPs looking at financing their LP interest in underlying funds, or collateralised fund obligations, also broadly fall into the umbrella of fund financing.

With the slower fundraising and tense geopolitical landscape, US and European investors have become more cautious when they come into the Asian market. So there is a significant increase in separate managed accounts (SMAs), and we see those investors more involved in negotiating subscription credit facilities for their SMAs.

What are the key considerations when we think about repayment?

Our primary source of repayment under the subscription credit facility is the uncalled capital commitment from the investors. Therefore, legal due diligence is extremely important. For NAV financing, repayment is based on either the cash flow or the disposal of the underlying assets. The uncalled capital commitment, with typically 10-15 days to fulfil from the LPs, would be the most liquid for most private asset classes. The LPs’ creditworthiness is a key factor. It is very methodical when we analyse each LP within a fund, and typically highly rated, institutional, or blue-chip investors will attract the highest advance rate.

At the same time, the understanding of GPs and deep relationships with LPs is really helpful. When there are challenges in the market, it’s not just about the obligation to pay but motivation. That is the relationship with the GPs, their track record, and how the fund is performing. Many people think that a subscription credit facility is simple, as you only need to look at blue-chip investors. But that’s not the case, especially when we are operating in a highly uncertain time.

What is driving both GPs and LPs to look at fund financing?

The primary purpose has been for operational efficiency. Rather than issuing multiple capital calls a year, GPs can just issue a couple of calls a year, and that’s appreciated by LPs too. Secondly, for real asset funds in particular, the use of a capital call facility is extremely useful, with the use of letters of credit and fund guarantees to support underlying projects. This type of facility is also helpful with currency equalisation, particularly in Asia Pacific where you have multiple currencies. Those benefits are not cycle-related.

People will use different products under fund financing or the products might evolve with the market landscape to unlock liquidity and support underlying performance, improve DPI, and allow investors to commit to future vintages. But fund financing is not just to fix a short-term problem. It has become a very important intrinsic tool throughout the fund’s life.

For example, the ability to demonstrate the fund’s seriousness in sustainability by committing to a set of KPIs and performance targets linked to ESG has become increasingly popular. With fund financing, particularly sustainability-linked facilities, the funds have to show continuous improvement, regardless of where they start. This goes beyond just financing for liquidity; it is also a behavioural shift and a demonstration of intention.
That’s why fund financing has grown to a global market worth more than $700 billion during the last decade.

How do you assess emerging GPs and established, big managers as a fund administrator?

We do look at the track record of all GPs. A few years ago, a number of big rainmakers from established GPs set up their own funds, and we were able to attract billions of dollars of LP commitments. As the market turned, LPs looked to consolidate their GP relationships and we had the ‘flight to quality’ where capital was diverted back into established names.

First-time GPs typically find it difficult to get access to this type of financing. Even if you spin out from more established managers, when it comes to the fund setup, there’s a lot more than just being good at making investments — areas such as governance, operations, management team, and compliance are all part of our credit considerations.

That’s why it is more difficult to assess a brand new GP on the lending side without some track record. In many ways, the way we assess a GP is similar to how the traditional equity LPs look at it but with different weightage across the various factors, given we are at a different part of the capital stack.

What does the Asian market look like regarding these two types of GPs?

Asia has a very vibrant VC community. Investors in early-stage VC funds are often HNWIs and family offices. That investor base is not the traditional investors whom banks can underwrite for a subscription credit facility, which is typically institutional. Emerging GPs, with a second or third fund and an established track record supported by institutional investors, can start to tap this additional source of liquidity and operational enhancement tool.

As an asset servicing firm, we look at providing liquidity to funds, alongside helping them to enhance operational efficiency and meet regulatory requirements through outsourcing. So the growing middle-market funds as well as the larger regional funds are our sweet spot. As a global business with over $1 trillion of assets under administration, we also have a very strong relationship with top-tier global fund managers and investors.

What’s your stand on 2024 trends?

The drive to liquidity will continue to be the theme in 2024.

While the market is excited about interest rate reduction in the US, and Asia is still largely a US dollar-denominated market in many aspects, the pace that it’s filtered through and the pace of reduction is very debatable between what the regulator indicated and what the market expected.

From a liquidity perspective, secondaries, whether it is LP-led or GP-led, will continue to drive markets, but valuations will continue to be uncertain. M&A and IPOs are coming back to the market for exits, but I think they will be slow in the first half of 2024 as investors are still cautious.

What I’m more worried about is the state of the world these days, where separation, fear, control, and political agenda brought an era of deglobalisation, non-cooperation, and chaos. We are also at a very critical point in the history of our beautiful planet, as this decade is our only chance to make a difference and slow down the impact of climate change. Our future generations depend on it. Yet, we continue to be distracted. May 2024 be the year that we stand together again for the benefit of all.

On the fund-financing side, more and more players are crowding the Asian market. In the US and Europe, people have talked about bank liquidity being dried up, but we feel the opposite in Asia. Also in the US and European markets, when new lenders come into the market, they will look at the more vanilla end of the market. In Asia, they are trying to find their niche in more esoteric structured finance solutions. There’s also a group of non- bank lenders coming into Asia, like family offices that have been lending to funds they invest in, and the democratisation of capital for retail investors. That dynamic makes fund financing in Asia a very interesting place to be.

This article was originally published in Deal Street Asia.