Fund Finance: 2024 Reflections and Looking Ahead to 2025

USA

Pat Hurley, Kris Ring, Matt Stayman, Chris Steinroeder 

Subscription Financing
In the US subscription-secured credit facility space, while many 2023 trends (including limited availability from many traditional lenders) continued into 2024, fund sponsors over the past year have benefited from the stabilization of — and in many cases a reduction in — fees and interest rate spreads compared to the prior year.

In what remained a slower fundraising environment for fund sponsors in 2024, we also continued to see a reduction in both maximum facility amounts relative to fund size and initial tenor for many funds (with the exception of certain large, established sponsors with successful track records), with many sponsors often leaning on temporary accordion increase features to upsized facility availability as fundraising efforts progress.

We anticipate that the recent trend toward more normalized pricing will continue into 2025 and that the subscription facility market will see an increase in activity as dealmaking picks up across the private funds industry. While some of the largest lenders who have historically provided an outsize role in subscription financing may not be back to pre-2023 participation in this market, the market has adapted well since the post-SVB and regional banking crisis, with new lenders and capital sources continuing to enter the space. We anticipate an increase in demand from borrowers in the coming months and that the lender community should be well-placed to meet it.

Management company lines and GP borrowing
Over the past year, we have seen a growing trend of sponsors and non-bank lenders active in the NAV financing space exploring more financings backed by management fees and GP stakes. These products provide liquidity to managers often in connection with, or as an alternative to, a minority sale of interests in the management company or GP entities. This is a trend we expect to continue in 2025.

NAV Financing
Notwithstanding robust scrutiny of NAV financing in the private equity ecosystem, we have observed general partners becoming more eager to use NAV facilities. The Institutional Limited Partners Association (ILPA) reports that NAV facilities are currently estimated to be a $100 billion market, with the potential to grow to $600 billion by 2030. We have advised general partners who are incurring NAV facilities borrowed against specific fund assets or cross-collateralized against multiple portfolio assets (with such cross-collateralized facilities generally having a lower all-in cost profile than debt at a single portfolio company). In addition, we have seen general partners drawing NAV concepts into subscription line facilities, creating a new wave of hybrid facilities, particularly in the continuation vehicle space. We expect 2025 to show that the use of NAV financing in the US market is here to stay.

London

Ed Saunders, Simon Fulbrook 

Subscription Facilities
The year 2024 was a busy one for the European market. Liquidity eased from where we stood this time last year, not least as lenders have turned to SRT and capital relief trades to alleviate regulatory pressures. The rating of subscription facilities and deployment of various structured finance arrangements in the market have all contributed to a surge of released liquidity that in turn has led in recent months to a notable downtick in pricing for subscription facilities (albeit yet to return to the lows we saw several years ago).

Some of the habits of a liquidity-constrained environment have stuck. As noted for the US market, we have seen fund managers continue to carefully consider right-sizing the quantum and term of subscription facilities. Structures allowing access to novel capital pools (notably insurance capital) have been a consistent feature of the year, most evident by a number of facilities we have worked on, including a term loan component.

Innovation in fundraising has also presented challenges to which lenders have had to adapt. Rated note feeders, open-ended and semiliquid funds, as well as an uptick in private wealth capital, all require considered analysis by lenders, many of whom we have seen provide flexible accommodation for such structures.

Through membership of its working groups, we are pleased to partner with the Loan Market Association (LMA) as it turns its attention to the “biggest asset class you’ve never heard of” in fund finance. We welcome the continued efforts of the LMA to showcase and educate participants on the growing importance of fund finance in the wider financing community.

NAV Financing
As the European NAV finance market matures, we have continued to advise our clients on a number of such financings across asset classes. Increased market confidence was particularly evident in certain asset classes, and we saw a notable increase in execution on real estate NAV financings, as well as advising on complex transactions in the private equity, private credit, secondaries, and growth markets, among others. We look forward to continuing that trend into the coming year.

Other Products
We advised our clients over the past year on a number of “green loan” and ESG-linked financings, including for a variety of products within the fund finance tool kit. We expect this trend to continue, particularly as funds look to deploy capital marketed to investors on the basis of sustainable investment.

Within the market, the pressures of larger fundraises, succession planning, and providing access for junior executives has continued to drive a growing interest in GP co-investment financing, partner loan programs, and management lines. We have advised on a number of these complex structures, often requiring sensitive tax structuring, and look forward to continuing to do so into 2025.

Paris

Adrien Paturaud 

In 2024, France's fund financing market continued to experience notable growth, in particular with respect to NAV financings and hybrid structures. We have observed these alternative financings, almost unseen in the mainstream of the French fund finance market several years ago, be implemented on several transactions over the past year as fund managers seek flexible liquidity solutions (particularly for follow-on investments and/or to shore up value in existing portfolio investments). This has been something of a contrast to the equity bridge financing (subscription facility) market, which has advanced at a steadier pace, not least given the increased length of many fundraisings.

Looking to 2025, we expect the French fund financing market to continue its robust expansion. The market is observably more mature, offering a wider array of alternative fund financing solutions, and French lenders have grown much more comfortable playing in this space.

In addition, the enactment of Ordinance No. 2024-662 in July 2024, which aims to modernize the framework for alternative investment funds (with the creation of the société de libre partenariat spéciale (French special limited partnership) and the introduction of the possibility for the fonds professionnels spécialisés (French specialized professional funds), including the sociétés de libre partenariat (French limited partnerships) to issue debt securities), has enhanced France's attractiveness as a financial hub.

In summary, 2024 was a year of significant advancement in France’s fund financing landscape, characterized by increased adoption of NAV and hybrid financing structures, more competitive pricing, and evolving regulatory frameworks. These trends should continue as France remains positioned to be a central player in the European fund finance market in 2025.

Asia

Steve Howard 

Subscription credit facilities remained the mainstay of the Asia fund finance market in 2024, with many of the same effects of a subdued fundraising market as noted for other jurisdictions also evident here.

The combination of regional banks and institutional global lenders meant that pricing, however, remained relatively consistent, and this is a trend many expect to see continue into the coming year.

While the NAV financing market for private funds in Asia is not yet as mature as in other regions, and some of the complex structures we have represented clients on in Europe and the US are yet to develop in Asia, we have noted interest in the product from fund managers. We expect Asian fund managers to start exploring NAV financings as a liquidity tool with more intent over the coming years.

Hybrid facilities in particular offer a gateway to NAV structures for market participants more familiar with subscription credit structures but willing to adopt NAV-based credit enhancements. At the same time, lenders build familiarity with the fund manager and the underlying collateral. With lenders actively looking to solve operational challenges in the Asia market (e.g., currencies, jurisdictions, collateral structures, concentrations, and asset valuations), the market as a whole is primed for NAV financings to provide a flexible liquidity-management solution.

We expect the market to grow in the coming year, particularly alongside a promising uptick in fundraising for certain asset classes, such as real estate, infrastructure, and private credit, and for country-specific funds.

Spotlight: Preferred Equity

Ravi Chopra, Rob Emerson 

For the second year running, our experts in this field were pleased to have contributed a chapter to the recently published edition of the fund finance market’s leading textbook: Global Legal Insights’ “Fund Finance Laws and Regulations.”

With a reduction in M&A exits, lower-than-average distributions from private equity funds across 2023-24 have focused sponsors on seeking alternative financing sources for investments and/or liquidity. While it can sometimes have a headline rate higher than traditional lending, preferred equity has played a strong role in satisfying such needs.

Market conditions over that same period have been conducive to financing solutions, given average private equity company EBITDA growth and sustained valuation multiples, as well as greater expectations of medium-term exit deal flow. Preferred equity has, however, distinguished itself in providing a softer-edged solution in instances for which pinning down an exact valuation and exit timeline has proven challenging — for example, allowing for an indefinite maturity and applying cash sweep and other economic adjustments to address departures from a business plan instead of triggering covenant breaches and security enforcement.

That said, it’s not always a straight decision between preferred equity and NAV financing, and we have seen clients pivot between the two on the same transaction or land on a blended version that helps to balance the right amount of certainty for the financing provider with the right amount of flexibility for the borrower, particularly to overcome certain structuring challenges.

In addition, institutional investors have increased their use of preferred equity solutions in right-sizing and balancing their own portfolio construction during a period of lower distributions emanating from existing investments, and sponsors continue to use preferred equity structures in strategic situations to aid in fundraising, platform expansion, and cash management. We expect both will continue, and likely increase, during the year ahead.

Spotlight: Private Credit Funds

John Anderson, Simon Prosser 

For private credit funds, thoughtful use of fund financing tools to optimize returns and operations, and to enhance investor access, was a theme in 2024 that we expect to continue in 2025.

In particular, we observed private credit funds accessing a more customized range of fund finance products from a broader set of providers as new entrants emerge (not least financing by private credit funds with a fund finance strategy).

Asset-based lending as a private credit fund strategy is firmly on the rise, which is contributing to the demand for a broader fund finance tool kit, as is the rise of various flavors of evergreen and semiliquid private funds. We expect these to be recurring themes in 2025.

Structured access to private credit funds for insurance investors (in particular through rated note feeders and including non-US regulated insurers) increased in 2024 and was an important focus for many of our clients. We expect this to continue in 2025 as a response to what continues to be a slower fundraising environment for certain parts of the credit fund industry.

Spotlight: Secondaries (Continuation Vehicles)

Jacqui Eaves, Krishna Skandakumar, Thiha Tun 

The use of fund financing in the context of continuation fund transactions increased significantly in 2024 for a number of reasons:

• Continued innovation among lenders for products suitable for GP-led transactions
• Maturity of the GP-led market in terms of a focus on high-quality assets and the need for innovative liquidity solutions
• The presence of sophisticated secondaries investors backing continuation fund transactions

These factors created an environment in which lenders have increased confidence to back deals while giving sponsors access to liquidity solutions to effect a successful continuation fund transaction.

Interesting examples Goodwin saw in the past year include:

• Bridge financing to acquire an add-on pending the rollover of the existing asset to the continuation fund, with a view toward combining both assets within the continuation fund
• Multiasset GP-leds for which the portfolio companies have different borrowing facilities, with a view toward refinancing them once they are transferred to the continuation fund 
• Dividend re-caps of one or more portfolio companies once they are rolled into a continuation fund 
• Secondaries buyers who are part of asset management groups with significant lending and restructuring affiliates backing GP-led deals involving assets that are highly levered, with a view toward right-sizing the capital structure of the asset once it is in the continuation fund and thereby improving the condition of the asset and extracting value from it

We look forward to an interesting year for the rapidly growing secondaries market and to helping our clients drive innovation within the industry.

Spotlight: LPs and Concentrated Portfolio NAV Financing

Reid Bagwell, Niall Dickson, Lynette Elam, Ed Saunders 

ILPA guidelines
On July 25, 2024, ILPA published its long-awaited guidelines on the usage of NAV-based financing facilities in private equity funds. ILPA had previously indicated its skepticism of recent trends in NAV facility usage; in speeches and interviews, senior ILPA representatives have discussed NAV facilities and limited-partner concerns regarding them, especially related to transparency and use of proceeds.

In line with those prior comments, the ILPA guidelines (which, it is worth noting, were expressed to relate to private equity only and not other asset classes) included recommendations designed to promote visibility for investors on the use of NAV financing, as well as transparency on structuring and an ongoing dialogue between GPs and LPs, including to allow allow institutional LPs to answer questions from their own stakeholders. However, ILPA focused on the “borrow to distribute” model (particularly where such distributions then comprise recallable commitments), which has been the focus of much press attention. Although such financing purposes do have a place within the array of NAV financings we see (in some cases at the request of investors), we have observed that the vast majority of NAV financings for private equity funds are used to protect existing portfolio value or to provide funds with accretive financing, often at a conservative LTV, well-priced, and with a valuable degree of flexibility as to its deployment.

The fundraising view
Many sponsors see NAV facilities and hybrid products (subject to LPA constraints) as powerful capital structuring tools, efficient means of increasing portfolio-wide leverage and, in certain circumstances, flexible liquidity options. While the market standard in respect to fund governance for such products continues to develop, we increasingly see LPs focus (particularly in the midmarket) on the parameters for NAV financing set out in LPAs. Where the principle of such facilities being used is accepted by LPs, they may push for timing and quantum restrictions and in many instances still require a certain degree of LPAC or LP oversight or consent.

A positive trajectory
We expect dialogue between fund sponsors and LPs to continue through 2025 but are hopeful that as familiarity with NAV facilities and hybrid products increases, so too does acceptance by sophisticated investors of sponsors’ ability to use them at their discretion.

Conclusion

Goodwin continues to be a long-standing and proud member of the fund finance community. Members of our team serve on the US and European committees of the Fund Finance Association, and we are pleased to be a platinum sponsor of the 2025 Global Fund Finance Symposium this month, which seems poised once again to be the biggest and most impactful event of its kind in the market.

Reflecting on the year just passed, we are grateful for the partnership that our clients and other market participants have extended and for the opportunity to be at the front of a colorful and innovative market. We look forward to meeting with you soon (whether at the symposium or otherwise) and continuing this conversation.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.