Three Key Fund Finance Developments

Attorney Zac Barnett’s extensive legal career includes representing borrowers and lenders in the fund finance space. Informed by his work as a lawyer in this sector, Zac Barnett cofounded Fund Finance Partners, LLC, in Chicago in 2019. The COVID-19 pandemic has changed the fund finance market, and financial professionals like Barnett are tracking three key developments that are arising and expected to take place.

One relates to fund finance institutions’ ability to manage deals and loans as their attention becomes more strained. Some debt fund managers and fund finance providers have initiated discussions for creating stop-gap liquidity or finance-based solutions to indefinitely or provisionally refinance credit facilities at risk of being pulled.

Another trend that finance professionals expect involves credit fund balance sheets and the deterioration of borrower earnings. Market conditions as of early April 2020 began testing these balance sheets, and borrower earning decline leads to requests to the funds to provide follow-on investments. Additionally, breached covenants linked to asset value (NAV) will stress fund liquidity due to valuation adjustments at the first and second quarters’ end.

Finally, fund sponsors are extending or drawing down fund-level credit lines, which includes subscription facilities, hybrid lines of credit, and NAV. As of April 2020, the proceeds of these are going towards positioning capital deployment or shoring up investments. Some fund finance professionals also foresee an increase in such requests.