11 Jan 2022
2022 Fund Finance trends
What might lie ahead in the world of fund finance in 2022? Three RBS International experts give their views.
Environmental, social and governance (ESG) matters have taken centre stage in fund finance. The last 12 months have seen exponential growth in global sustainable debt issues: where it took 12 years from 2007 to 2019 to reach US$1trn (€0.9trn) of combined sustainable debt issuances worldwide, analysts expect that same amount of US$1trn will have been raised in new sustainable debt issuance in 2021.
As 2022 kicks off, many RBS International fund clients have already been asking about green financing and a number have either incorporated key performance indicators (KPIs) into their financing or want to incorporate these into the next tranche of their loans.
This is driving a move to a more quantitative set of metrics says Susan Fouquier, Head of Institutional Banking in Guernsey, Isle of Man and Gibraltar. “Due to COP26, the main focus was on the climate last year but we expect to see further social metrics this year, particularly around diversity and inclusion,” she says.
RBS International continues to evaluate the integrity of customers’ ESG policies and this remains a pivotal assessment during the on-boarding and financing process, Fouquier says.
“The majority of funds have an ESG policy but the vast majority remain qualitative statements rather than quantitative measures. More advanced customers are able to clearly articulate how the result of ESG analysis impacts decision-making and can point to the structure within the business.
“Both investors and financial institutions are critiquing ESG strategies and the governance that supports the strategy to a greater degree than ever before. Those customers unable to point to robust structures will soon fall behind the pack,” she says.
“Before, it was an onshore domicile for European funds or for US funds wishing to attract European investors into US funds through feeder structures. Now, Luxembourg’s influence and reach is growing”
Ian Harcourt, Head of Institutional Banking, Luxembourg
Data collection remains a challenge, as does the integration of ESG metrics with general financial information. Resources can be an issue for mid-market funds, Fouquier says. “Technology and innovation will be key to the transition to a more quantitative focus; new technologies will help reduce carbon footprints while improving the efficiency, accuracy and transparency of the reporting.”
Evolution in financing requirements
Infrastructure and renewable asset funds are raising more money than ever before. What’s more, they are venturing into newer sub-sectors, such as battery storage, which would have been considered niche areas in the past. All this is leading to fast growth in borrowing requirements, says Neil Walker, Head of Institutional Banking in London.
He sees a continuation in 2022 of a couple of trends that have already started. One is a stepped profile to fundraising. “A number of limited partners may have money held up in previous funds pre-exit, so they can’t come in at first close but come in at second or final close instead. This means fund managers are having to be more flexible, and so are financing packages.”
Subscription facilities are being put in place earlier and against a more concentrated pool of investors – another trend that Walker expects to continue into 2022. “These are being stretched over the fund life: they are coming into existence earlier and lasting longer into the exit phase, in part to help bridge sales and facilitate earlier distributions to limited partners in some instances.”
Lenders are being more creative as well as more flexible, with the rise of hybrid and NAV-based financing. Most of the market is still traditional, says Walker, “but there is a trend for more creative approaches which will open up exciting opportunities”.
A buoyant mergers and acquisitions market continuing into 2022 is driving attractive valuations and faster-than-usual exits. Managers moving between fund ventures relatively quickly creates a knock-on effect around financing requirements. “The success of the last fund means the next fund is even bigger. As this continues, general partners will continue to look for creative financing support to help them continue that success story.”
Geographic spread and innovation
Luxembourg has long been a major player in the mutual fund business as the second largest fund domicile location in the world. During 2021 the country’s market grew by 19.3% to reach a combined assets under management of traditional and alternative funds of over €5.6trn.
The country is fast gaining prominence as a domicile for global funds, explains Ian Harcourt, Head of Institutional Banking in Luxembourg. “Before, it was an onshore domicile for European funds or for US funds wishing to attract European investors into US funds through feeder structures. Now, Luxembourg’s influence and reach is growing.”
This evolution in the market coincides with a growth in funds available for private equity in Asia. Asian dry powder is estimated to represent about 25% of the world’s private equity capital waiting to be invested, compared with just 19% in Europe.
Not all of that money will be invested in Asia, says Harcourt. “That money will be attracted to the US and Europe. We expect that there will be a preference for Luxembourg as it can be used to access American funds through European feeder structures. Luxembourg has a very stable and well-defined regulatory regime and a strong framework in relation to fund structures and the tax of corporate entities. The European requirement for a depositary to oversee and protect investors’ money gives investors an extra layer of comfort, as this is not a requirement in the US.”
The US lags Europe slightly in terms of ESG funds and sustainability products and Harcourt thinks this will add to Luxembourg-based business. “A micro-trend will be for the US not just to have feeder funds in Luxembourg but to establish their own fund structures and piggy-back on the ESG angle and Luxembourg’s global profile.”
Most observers think the Luxembourg alternative funds sector will see double-digit growth in 2022, with many saying more than 20%. “We are seeing established upper-end, large global and mid-market funds raising far larger amounts than in the past. Mega funds of €1bn or more are becoming increasingly common and financing for them is being raised more often by large global private equity sponsors,” says Harcourt.
The UK Budget due out on 17 November is expected to bring significant fiscal tightening in a bid to restore the government’s financial credibility
As consolidation in the alternative fund market continues, general partners are looking for other means to fund their commitments.
In this edition the FCA’s new Consumer Duty, an update on LTAF, ESG investing, ‘side pocket’ proposals and regulatory horizon scanning.