Emerging Trends in APAC Fund Finance: Key Insights from the 6th Annual Symposium
Singapore hosted the 6th Annual Asia-Pacific Fund Finance Symposium on 14 November 2024, organised by the Fund Finance Association. The event saw strong participation from key industry players, including leading financial institutions, fund managers, legal advisors and rating agencies. Notably, 20% of attendees were from the GP Community. DLA Piper was proud to be a gold sponsor, represented by Singapore partners Joe Bauerschmidt (Corporate), Barbara Voskamp (Tax) and me, Soumitro Mukerji (Finance). I also had the pleasure of speaking on a panel titled "Guardians of the (APAC) Legacy - Japan, SE Asia, India or Australia; and Fund Domiciles".
Below is a summary of key findings and observations from the conference:
APAC Fund Raising
Despite the current macroeconomic challenges, the fund-raising outlook appears positive, especially for certain asset classes such as private equity. Over the last two years, APAC fund-raising has been impacted by the decline in China-focused funds, which are at a decade low. Based on market data, there were 1174 and 588 China-focussed funds raised in 2021 and 2022 respectively. In 2023 and 2024 YTD, this has reduced to 146 and 31, demonstrating the size of the fund-raising decline. In terms of growth markets, Japan and India are attractive to investors. Given the increased interest rate environment, private credit remains a favoured asset class. On the theme of APAC fund-raising, Darren Choy, Head of Fund Finance Asia at SMBC observes that "despite fund raising activity still being slow, we have seen sponsors looking at their existing fund finance facilities to determine how they can get the best use out of it. Whether it be relooking at the borrowing base, changing of booking jurisdiction/regions for APAC focused funds with a view to tapping into the Asia bank liquidity pool, upsizing/downsizing facilities, or evolving them into hybrid/NAV facilities. These discussions will continue in 2025 with more bespoke facilities coming to the market given macroeconomic challenges ahead with the possibility of a continued high-interest rate environment."
Hybrids and NAVs – any takers?
Despite the slowdown in 2023, demand for sublines (new, extensions and refinancings) continued. However, structural innovations such as uncommitted lines (with features to reset from committed to uncommitted, and vice versa) and more progressive borrowing base determination were built into deal terms. Thus, further cementing the role of subscription line facilities as an operational simplification tool. Concurrently, the market saw some fund managers requesting alternative solutions including conversion of sublines into hybrids or NAV facilities. Historically less favoured by banks in Asia, hybrids and NAVs appear to be getting incremental traction given the challenging exit environment. However, compared to the European and US NAV market, the APAC NAV market is still nascent. Lucas Huang, Head of NBFIs at OCBC Bank notes that "Asian lenders and sponsors are approaching NAV financing cautiously, debating the benefits versus the necessary efforts to negotiate, execute and monitor such a facility". Developments such as the guidance note issued by the Institutional Limited Partners Association (ILPA) on NAV facilities have also helped conversations between fund managers and lenders. DLA Piper has produced a summary of the ILPA guidance note for LPs, GPs and lenders.
Subline Securitizations: A Brave New World
There was a lot of buzz around the recently completed USD500 million securitization deal by Goldman Sachs, being the first broadly syndicated, publicly rated securitization of subscription credit facilities. APAC is yet to see a transaction of this nature. US banks have been capacity constrained due to the growth of the subscription line market in the US thus necessitating products which allow them to offload loans and free up lending capacity. Challenges to the growth of the securitization market in APAC include the lack of diversity in loan portfolios, confidentiality issues for borrowers who prefer private as opposed to public ratings, currency variations across the APAC region and the challenges in rating HNIs and family offices which often comprise a significant part of the LP pool.
Subline Themes
The pricing delta between the US and Asian markets has not gone unnoticed by funds' treasury teams. Asian banks are seeing a trend of subscription line financings for US managers being raised or refinanced from US to Asia. There are clear benefits to this strategy, particularly for US managers with Asia-focussed funds where treasury teams are based in Asia. Other noticeable trends in the subscription line space include requests by borrowers to include HNIs and family offices within the borrowing base, push back (particularly from strong sponsors) on the level of investor diligence and demand for uncommitted facilities to minimise costs. LPs continue to push for ESG resulting in more ESG-linked sublines coming to the APAC market although volumes remain low compared to the European and US markets. The lack of capital relief remains a hindrance to the growth of ESG facilities within APAC. On other key themes, Frank Wu, Head of Private Markets Funds at DBS Bank is of the view that "the introduction of subline credit ratings by agencies like S&P, Moody's, and Fitch is paving the way for greater standardization in the fund finance market which is a much-welcomed development. This will help foster a robust syndication and distribution ecosystem. While more prominent in Europe and global markets, APAC is beginning to see increased interest, particularly from non-bank lenders in the sub line space."
Onshoring and regionalization
The trend of fund onshoring continues with the growth of regional fund structures like Variable Capital Companies (VCCs) in Singapore and GIFT City in India, although most market participants see Cayman Islands as being the preferred choice of fund domicile within APAC, especially for larger fund managers and international LPs. The focus of fund-raising is shifting from China (declining from 60% of APAC-specific funds to 12%) to markets such as Japan, Korea and India. DLA Piper notes that this trend is unlikely to be a zero-sum game with VCC and GIFT City structures being included as part of the overall fund structure. Common examples would be a Luxembourg domiciled fund investing through a VCC structure or a VCC fund investing via a GIFT City structure. DLA Piper has worked with financiers on assessing the bankability of these structures and are seeing lenders becoming familiar with VCCs and GIFT City structures as more of these come to market.
Over to the GPs
The ever-popular GP panel included panellists from Blackstone, Carlyle, Hopu and Crestline. Unsurprisingly, the challenging fund-raising environment, particularly with respect to China, was a common theme exacerbated by the lack of exits. Top-tier managers, including Blackstone and Carlyle remain bullish on India. There is a strong focus on the Distributed-to-Paid-In ratio. Given the significant drop in IRRs over the last few years and distribution timelines being extended, better-performing managers are likely to be prioritized by investors. On the fund finance front, the need for liquidity remains strong and while pricing remains a key element, GPs are keen to develop a broader relationship and explore the entire suite of financing options from sublines to NAVs as well as hedging, cash management, buyout debt and margin financing.
Looking Ahead
With a growing universe of financiers, each with their own unique capabilities and risk appetites, the fund finance market is expected to play a strong role in 2025 and beyond in providing liquidity for the APAC private capital industry. When asked to vote in a polling question on the outlook for the year ahead, 90 per cent. of the audience said it is time to explore alternative fund financing options beyond traditional sublines.
With its market-leading investment funds and finance practice, DLA Piper remains at the forefront of innovations within the fund finance market. Reach out to me or your local DLA Piper contact to discuss any of the themes raised and how we can help.
