Q&A: Mayer Brown's Soumitro Mukerji

Q: What is the appeal of fund finance for private equity?

A: Fund finance comes in various forms, the most common product being subscription line financing, or a subline. Efficient liquidity management is a key part of the appeal. As funds become bigger and the pool of LPs increases in size, managers look for ways to mitigate execution risk around drawdowns, especially when they are involved in a competitive process. Having a credit line from a strong financier could put them in a better position to win a bid and close a deal. Other forms of fund financing address various other concerns that managers have – funding portfolio companies, financing a GP stake, making distributions prior to asset liquidation, or just keeping the lights on.

Q: How is the market evolving in Asia?

A: The Asian fund finance market has been growing steadily over the years, particularly in Hong Kong and Singapore. Unsurprisingly, it started out with sublines being arranged by US and European banks for their key relationship clients in Asia. While still small relative to the US and European markets, the market has evolved and become fairly mature, with most banks able to offer these facilities to their clients.

Q: How is this evolution playing out in terms of products?

A: The growth of non-subline products – or fund finance 2.0 – is the most exciting trend in the industry. These include NAV loans, hybrids, GP facilities, management company facilities, and preferred equity structures. As the private capital industry in Asia continues to expand, financiers are having to innovate and offer more complex solutions. That said, currently only a small number of financiers are offering these solutions in Asia and the market is well set for more competition and innovation.

Q: How are lenders getting comfortable?

A: In the subline space, the credit analysis for lenders is relatively easy, especially when you have a top-tier sponsor with a diversified LP base comprising strong institutional investors. If the financing is supported by thorough diligence and a customary collateral package, credit teams can get comfortable with this. Fund finance 2.0 is more challenging due to a range of factors. These products require extensive due diligence – documentary, operational, industry – carry higher risk, command higher pricing, and require lenders and managers to spend a lot more time structuring the deal.

Q: How can that be turned around without changing attitudes about risk?

A: Fund finance 2.0 covers a range of asset classes, managers and geographies, and some financiers will understand some of those better than others. If there are financiers who offer these solutions in the Western markets, they could piggy-back on that expertise. Similarly, there would be asset classes such as real estate and infrastructure where certain financiers are more comfortable, as well as geographies in which they have a natural advantage that could play to their strength. I see the change in attitudes coming through lenders going for low-hanging fruit in the tree of complexity.

Q: Is familiarity with insolvency regimes in Asia an issue?

A: Enforcement analysis is obviously important, but I don’t see that as being the biggest hurdle. These vehicles are often structured in jurisdictions and governed by laws which banks are comfortable with from a legal and enforcement standpoint. The structure and collateral may also be similar to other limited recourse structures that banks may already be familiar with. The bigger challenges are the risk-reward dynamic, the regulatory hurdles at banks, the level of time required to structure these deals, finding the right expertise in the market, and managing pricing expectations with managers.

Q: Are private debt funds moving into the fund finance space?

A: In Asia, they are less interested in sublines because the pricing does not work from a return perspective and the market is well covered by banks. They are interested in the non-subline market, particularly for NAVs and preferred equity. This is a space in which banks are only starting to dip their feet, and it’s not crowded. The economics are also more supportive of what private funds would expect. Some of the deal teams at these funds are ex-bank folks who found it challenging to pursue these opportunities at banks, so I expect to see continued and growing interest.

Q: Could sustainability-linked lending be a major driver of uptake?

A: In the last couple of years, we have seen a major uptick in this area. Fund managers and lenders – under pressure from investors, new ESG [environment, social, and governance] regulations, stakeholder activism and hopefully the genuine desire to benefit society – are looking to do more to reorient capital in a sustainable manner and demonstrate their commitment to meeting ESG goals. Between 20-40% of all fund financings we are working on now have ESG criteria, up from 5-10% a few years ago, although the detail and rigour of these metrics vary substantially. There is still a lot of work to be done to achieve ESG end goals within the financing space – harmonisation of ESG KPIs [key performance indicators], monitoring and auditing ESG metrics, addressing concerns around greenwashing, and genuine stakeholder engagement. I expect ESG-linked lending to only grow; the question is whether it grows gradually or exponentially.

Q: Fund tokenisation promises to eliminate capital call complications. Could that erode the need for fund finance?

A: Tokenisation is certainly making waves in the private markets, with managers tokenising fund interests. It addresses issues of transparency, accessibility, and the ever-growing search for new sources of capital. Whether tokenisation eliminates capital call complications remains to be seen. Fund finance solutions come in various forms and LPs often have bespoke arrangements with fund managers. It will be interesting to see whether all of this can be streamlined to erode the need for fund finance.

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• Topics
• Southeast Asia
• Fundraising
• GPs
• LPs
• Advisory
• Singapore
• subscription credit lines
• ESG