Finance
Haynes Boone on the future of fund finance
This article is sponsored by Haynes Boone
As an asset class, private capital has experienced exponential growth in the past few decades, more than doubling its assets under management from less than $10 trillion globally in 2012 to more than $24 trillion in 2022. The fund finance industry has grown alongside it, starting from a nascent product in the late 1980s to an almost universal part in every fund’s capital structure today.
Fund sponsors now routinely include ‘bankable provisions’ for subscription line facility lenders in fund documents as anticipation for the use of this product by each of their funds, and are increasingly adding flexibility to expressly pledge their assets for use in net asset value (NAV) facilities.
Latest estimates put the global fund finance industry at more than $1 trillion. Many leading lenders in the space are operating at their maximum internal capital allocation. Nevertheless, they want to continue to maintain and expand their relationships with key sponsors. To that end, these institutions are turning to structured finance tools to reduce their capital reserve requirements, including credit facility ratings, conduit lending structures, securitizations, silent participations and capital relief trades.
Several leading rating agencies have expanded the scope of finance products they rate to include subscription line facilities, collateralized fund obligations and NAV financings. Once a predominantly European concept, ratings have been gaining ground in North America, with public and private ratings being requested by both borrowers and lenders. This trend is an attempt to attract different lenders, allow for higher holds from syndicate members due to enhanced capital treatment and offer more competitive pricing and terms.
Securitizations, capital relief trades and other capital market solutions are being explored by banks to help alleviate capital reserve requirement constraints. Early users of these tools are facing difficulties securitizing portfolios of facilities in an industry with private and bespoke terms, but as the pressure for solutions offering capital relief increases, the industry may begin to coalesce around a set of standardized terms that allows these capital market solutions to flourish.
Finally, a somewhat recent development in the industry has been the introduction of various non-bank lenders, primarily insurance companies. This has come with its own set of challenges, including the need to structure some deals with term and revolver components or include USD and alternative currency tranche lenders. But it has also come with opportunities to syndicate deals to a much broader pool of institutions.
NAV financings
The growth in NAV financings reminds market participants of the early stages of subscription line facilities. Many of the same criticisms once levied against subscription line facilities (which are now an industry-wide accepted and beneficial leverage and cash management tool) are being raised with respect to NAV financings. Despite all the criticisms, there has been growth on both the supply and demand side for NAV financings, with lenders and borrowers highlighting the legitimate uses and trying to educate LPs, rating agencies, regulators and others on the benefits of this form of leverage.
More than 70 percent of sponsors and lenders at NAVember (an annual NAV-focused event hosted by Haynes Boone) expected growth in their NAV financings portfolio in 2024. Lenders that offer this product include traditional subscription line lenders expanding into NAV financings, but also specialized non-bank lenders, offering flexible and tailored terms and structures.
Interest rate environment
Rising interest rates and higher pricing has been one of the most significant changes in the fund finance market in recent years. Our data shows that pricing has largely stabilized over the last two quarters, after adjusting for the anticipated regulations surrounding the capital reserve requirements that banks must hold for these products and some of the supply side issues caused by regional bank failures in 2023. While rates and pricing have increased at a much faster rate than prior business cycles, it’s important to note that current rates are not unprecedented, and markets have weathered high rates in the past and continue to do so.
Funds are still actively utilizing the product, with industry surveys from H1 2024 indicating that 81 percent of PE funds are maintaining the use of their subscription line facilities notwithstanding the higher interest rate environment and, as of September 2023, more than 95 percent of private capital funds have access to subscription credit facilities. A survey by Haynes Boone of 120 sponsors, lenders and other fund finance market participants found that 74 percent of institutions are expecting some level of growth in their fund finance exposure in 2024, with 63 percent expecting an overall increase in the fund finance market in 2024.
And even if pricing does not return to the lower levels seen in the past decade, subscription line financings still provide certainty and flexibility of funding, quick access to liquidity and reduce the administrative burden. With higher rates, funds are more judicious on the sizes of their facilities and increasing/decreasing the size to better match their predicted needs, and also on the tenor of outstanding borrowings.
Geographic expansion
The fund finance industry is well established in North America and Europe, with the Fund Finance Association hosting its 13th and eighth annual symposium in these respective geographies. Additionally, the Asia-Pacific region has been an area of recent growth, both domestically in APAC, but also with regional lenders entering the European and North American markets. This year, there was enough interest and participation in the Japanese market for FFA to launch a separate fund finance conference focused on Japanese sponsors, lenders and investors, and a discussion on some of the nuances and market practices in Japan – in addition to FFA hosting its sixth annual Asia-Pacific symposium in Singapore.
With the continued expansion of private capital and renewed fundraising efforts on specific types of investors and new geographies, fund finance lenders are adapting to the regional needs of private capital firms and the shifting supply and demand of financing in different regions, while law firms are expanding and gaining expertise across various jurisdictions as a response to the increased diversification of investor jurisdictions that funds are exploring.
Artificial intelligence
Artificial intelligence is poised to disrupt almost all industries and markets, and the private capital, banking and legal industries are no exception.
In the coming years, funds will develop AI tools to analyze potential deals and suggest optimal leverage levels/techniques and employ AI strategies to add value to existing portfolio companies. Lenders will utilize AI to assist with diligence and underwriting, monitor portfolio exposure and run risk assessments. Lawyers and law firms will use AI to assist with due diligence, drafting and negotiating documents, reviewing large volumes of data, and more readily identify market trends. Although AI cannot replace the judgment, experience, common sense and analytical capabilities of our industry’s experts, it will continue to be a tool to enhance those capabilities and become more accurate, efficient and productive.
Albert Tan is a partner and co-head of fund finance, and Aleksandra Kopec and Brent Shultz are partners in fund finance, at Haynes Boone
The seven-week military conflict in the Middle East will redefine Hong Kong’s role as a global financial centre, positioning the city as a safe harbour for capital and investments.
Anecdotal evidence suggested that more banks had turned to Hong Kong to protect their businesses and committed themselves to expanding their presence in the city. At the same time, inquiries about adding allocations of mainland Chinese assets among global investors had recently increased, potentially enlarging the customer base for the city’s asset-management industry and family offices and driving demand for offshore yuan-linked financial products.
For years, Hong Kong’s status as a financial centre in the Asia-Pacific region has been challenged by Dubai, which has risen to prominence as a gateway linking Asia and Europe in capital flows, transport and logistics. With the war destabilising the Middle East – at one point forcing the closure of the Dubai International Airport and sending stocks in the Gulf region plunging – Hong Kong has re-emerged due to its geographical location, a pegged exchange rate, free capital flows and support from China’s economic strength.
“In that context, China and Hong Kong are attracting renewed attention,” said Gary Dugan, CEO of The Global CIO Office in Dubai, which advises family offices and ultra-high-net-worth individuals globally. “There is growing interest among some clients in increasing exposure to China and Hong Kong. It is less a simple flight to safety and more a reassessment of where investors see relative value, policy consistency and long-term strategic opportunity.”
Dubai now relies on trade, tourism and finance as the pillars of its economy, reflecting the success of its four-decade diversification away from oil for sustained growth. The United Arab Emirates city is home to Jebel Ali Free Zone, the biggest free-trade zone in the Middle East, and the second-largest stock market in the region, with combined market values of US$1.01 trillion. The city, also a global hub for gold trading, has a population of 4 million, about 80 per cent of which are foreign expatriates. Dubai’s economy grew by 4.7 per cent in the January-to-September period last year.
Before seeking a new referendum MPS needs to rebuild trust in the community through completing state audits, putting in place controls to prevent overspending and routine reports to the public.
For MPS Superintendent Brenda Cassellius, who just wrapped up her first year leading Milwaukee’s public school system, her tenure has been punctuated by some very big numbers.
The first is $252 million. That is the amount of new spending voters narrowly approved in an April 2024 referendum to support operations in Wisconsin’s largest school district. Just months later, MPS was rocked by revelations the district was months behind in filing key financial reports to the state, which led to former Superintendent Keith Posley’s resignation.
The second is $1 billion. MPS faces a deferred maintenance backlog exceeding $1 billion. The district’s enrollment has declined 30% over the last 30 years, leaving many schools at less than 50% full. That, in part, is driving a plan to close some schools and to improve others to help lower costs.
The final is $46 million, the deficit MPS was running for the 2024-25 school year, an unexpected shortfall which has led to hundreds of staff layoffs.
Getting the district’s accounting, budgeting and financial reporting back on track has dominated Cassellius’s first year at MPS. In an April 15 interview with the Journal Sentinel’s editorial board, she talked in detail about the challenges putting that into order and progress she sees in restoring transparency into its operations.
State funding and aging buildings create budget nightmares
Cassellius says state needs to keep up its share of school funding
In an interview with the Journal Sentinel editorial board, MPS leader Brenda Cassellius says budgets and buildings are her two top worries.
Cassellius said the on-going budget crisis is her top concern. She said the state’s failure to live up to its share of funding is exacerbating MPS’ budget woes. A group of school districts, teachers and parents filed suit against the state Legislature and its Joint Finance Committee claiming the current state funding system is unconstitutional and prevents schools from meeting students’ educational needs.
Funding for special education is especially critical. About 20% of MPS students have disabilities, almost twice the share of the city’s charter schools, and the average of 14% across Wisconsin.
“What’s keeping me up now, you know, is really just the budget crisis we’re in, with not only this year but multiple years going out without additional state aid, we’ve been not getting funding for what our needs are for our students, and particularly our students with special needs,” she said.
Although the state budget increased special education funding to a 42% reimbursement rate, the actual rate has been about 35%. Another component to the budget headache is the age of MPS buildings. The average age is 85 years-old compared to 45 across the nation.
“We have just kicked this can down the curb or kicked it down the street or whatever you call it for too long. And it’s time that we really take on a serious conversation about the conditions of the learning environments in which we send our children,” she said. “Particularly in Milwaukee Public Schools, we serve the most vulnerable children. Children who have language barriers, children who have disabilities, children in high-concentrated poverty.”
What needs to happen before MPS seeks another referendum
Voters need to be comfortable MPS has made tough budget decisions
In an interview with Journal Sentinel editorial board, Brenda Cassellius said voters will need to see budget improvements before seeking more spending
Cassellius said MPS will definitely need to go back to voters for a new referendum in the future. In addition to the 2024 measure, voters approved an $87 million plan in 2020.
Before doing that, she said the district first needs to rebuild trust in the community through completing required state audits, putting into place controls to prevent overspending and routine reports to the school board and public about finances.
“I don’t think that the voters are going to want us to bring something forward until they feel comfortable that we have done the cleanup that is necessary,” she said. “And we’ve built the trust that we have the sufficient controls in place.”
In the interim, she’s hoping the state will meet its constitutional responsibility to adequately fund public schools.
“What the public expects is you know where the money is, you’re spending it as close as you can to children, you’re getting good on the promise around art, music, and PE, and the things the public said they wanted to fund,” Cassellius said. “And they want their kids to have so that they have a quality education and an excellent education in Milwaukee Public Schools, and that they had the right amount of staff that they actually need. In the school to be safe and to run a good operation.”
Rebuilding finance staff in wake of $46 million in overspending
MPS is rebuilding school finance staff in wake of reporting lapses
In an interview with the Journal Sentinel editorial board April 15, MPS superintendent discusses accountability for district’s financial problems.
The $46 million budget shortfall from the 2024-25 school year started coming into view last fall and was confirmed in mid-January. Cassellius noted that in addition to hiring a new superintendent, MPS also parted ways with its comptroller and CFO.
“We are really rebuilding the personnel and staff of the finance department. That is what’s critical, is having the right people in the right seats doing the work,” she said. “Also critical is making sure that you have the right controls in place. The audit findings found that we did not have proper controls in place and now we have those proper controls in place and when we find things we put new SOPs in place and that is what any business does.”
Identifying that shortfall, though painful, was the result of better accounting.
“Being three years behind in auditing means that you don’t have full sight on your actual revenues and expenditures. And so we have now full sight of our revenues and our expenditures and that’s why we were able to see this new deficit of $46 million,” she said. “And we still continue to work with DPI on those processes to make sure that every month we’re doing monthly to actuals and doing those accounting, reporting that to the board. In a way that is consumable to the public that they can understand.”
Jim Fitzhenry is the Ideas Lab Editor/Director of Community Engagement for the Milwaukee Journal Sentinel. Reach him at jfitzhen@gannett.com or 920-993-7154.
Property markets move in cycles, and with interest rates rising and other pressures like high fuel costs, some markets are clearly slowing down. Many first-home buyers who have only ever seen markets going up are conditioned to think that when purchasing, competition is always intense and decisions need to be made quickly.
In those times, buyers often feel they need to act fast, stretch their budget and secure a property at almost any cost. But things have definitely changed.
In a softer market, the dynamic shifts. Properties take longer to sell, competition thins, and it’s the vendors who begin to feel pressure.
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For buyers who understand how to navigate that change, the balance of power quickly moves in their favour. The opportunity is not simply to buy at a lower price. It is to negotiate from a position of strength.
If that’s you right now, these are the key skills first-home buyers need to take advantage of in softer market conditions.
The most important shift in a soft market is psychological. In a rising market, buyers often feel like they are competing for limited opportunities. In a softer market, the opposite is true. There are more properties available, fewer active buyers and less urgency overall. This gives buyers options.
When buyers understand that they are not competing with multiple parties on every property, their decision-making improves. They are more willing to walk away, compare opportunities and avoid overpaying. Negotiation strength comes from not needing to transact immediately. When that pressure is removed, buyers are able to engage more strategically.
One of the most common mistakes first-home buyers make is continuing to apply strategies that only work in rising markets. Auction urgency is a clear example. In strong markets, auctions often attract multiple bidders and create competitive tension. In softer conditions, properties are more likely to pass in, shifting the process away from a public bidding environment into a private negotiation.
This is where leverage increases.
Private negotiations allow buyers to introduce conditions that protect their position. These may include finance clauses, longer settlement periods or price adjustments based on due diligence. Opportunities that are rarely available in competitive markets become standard in softer ones.
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