Fund finance
How to Unlock Scalability with Growth

Fund finance is witnessing exponential growth, but this comes with escalating operational requirements for sponsors and lenders as they scale these facilities. Sumit Gupta, Co-Founder and Managing Director of Oxane Partners – named New Solution of the Year at the Private Equity Wire European Credit Awards for its leverage facility management solution – shares how sponsors and lenders can unlock scalability as they grow.

Keeping pace with growth
The use of fund finance has grown exponentially in recent years, as demand for both subscription lines and NAV lending has ballooned. The subscription finance market is estimated to have reached $900bn in size globally and continues to expand as a result of manager appetite for short-term liquidity management tools to help them move quickly on opportunities.

There is an even faster-growing appetite from GPs for NAV financing, a market currently worth over $100bn and predicted to grow sevenfold by 2030. Demand is fuelled by the need for funds to manage liquidity and distributions, optimise returns and unlock capital for follow-on investments near to end-of-life.

With more fund finance comes heightened operational requirements. Borrowers must provide ongoing data and reporting on the underlying collateral, whether LP capital commitments or fund assets, while lenders seek to assess risks and validate data and reporting coming from managers. The need to not only monitor covenants and KPIs at fund level but also within underlying collateral only intensifies the issue.

Bringing automation and scalability
As sponsors and lenders embrace this developing financial toolkit, the escalating operational requirements require automation and scalability.

As fund finance use scales, tech can automate borrowing base reporting, data preparation and other compliance for borrowers in a way that is tailored to individual lender requirements. For managers dealing with multiple facilities from multiple lenders, a technology solution can bring scalability to processes, while also ensuring more accuracy, expediency and reliability in data and reporting.

For lenders, technology can support the ongoing assessment and monitoring of risk, helping track timely reporting and validate data. This can counter delays in the processing of drawdown requests and help build an aggregate view to manage facilities centrally.

Streamlining and strengthening the borrower-lender relationship
While there is currently no standard technology for managing fund finance, adoption is growing. There is merit in lenders and borrowers working together on the same platforms, to remove friction and streamline processes.

When we started working in this space, we initially supported lenders managing their facilities on our technology platform, with a number of large institutions witnessing significant and immediate benefits.

Since then, many have encouraged their borrowers to adopt the same tools, with strong results. Coming together on a single platform can eliminate unnecessary delays, cut out duplication or redundant work and greatly enhance the granularity and availability of data to facilitate more purposeful engagement.

Uncovering hidden risks
Identifying unseen risks is critical and technology makes it possible to monitor covenants and risk parameters at both facility level and in the underlying granular assets of the fund. For lenders, bringing multiple facilities into an aggregate view and understanding risk concentration in terms of LP exposure, underlying obligors, industries and geographies can be invaluable. There is also growing regulatory attention on banks’ leverage exposure to private equity especially through the non-traditional fund financing route.

By embracing technology, funds can ensure they future-proof their operations to meet the growing demands of investors and lenders alike.