November 7, 2016 / 10:38 AM / 9 months ago

LPC-Fund financing booming as Europe's institutional sector grows

LONDON, Nov 7 (Reuters) - Fund financing is increasing lending to financial institutions in Europe, the Middle East and Africa as corporate-style loans for institutional investors, including private equity funds, grow in size and scale and more banks target the sector, which offers attractive yields for relatively low risk.

Firms including Macquarie and Tikehau Capital Partners have tapped the market this year for loans that bridge commitments from limited partners (LPs), which can boost funds' returns and provide currency hedging.

The sector is being targeted by banks as a growth area in 2017 and could double in size if the increasing use of facilities across the private market asset class continues, senior bankers said.

"Overall, the fund financing market has grown substantially and we expect to see this trend continuing throughout the rest of the current year and into 2017. In fact, it has the potential to continue growing significantly if the increasing use of facilities across the spectrum of private market asset classes remains on trend," said Robina Barker Bennett, global head of financial sponsors at Lloyds Bank Commercial Banking.

Loan funds are being mobbed by banks that are offering to provide bigger loans with longer maturities as lenders eye a lucrative stream of business that offers better returns than low-yielding corporate loans, strengthens relationships with clients and could even provide buyout mandates.

"We are inundated with banks wanting to provide loans and we are turning them away," a private equity financier said.

Lending to financial institutions in EMEA was previously limited to a smattering of Turkish, African and Middle Eastern banks, but fund financing is becoming a bigger focus as Europe's institutional investor base continues to grow and their assets under management increase.

Fund financing is often offered to firms that are fundraising. The deals were previously 364-day facilities that would be rolled over annually and were provided by two to three banks on a bilateral basis but have now grown to multi-billion dollar facilities that require syndication.

"It was a bilateral market, driven by banks looking for attractive risk returns. Facility sizes have been increasing because funds have been getting bigger, so they are moving out of bilaterals and into syndicated facilities," a loan syndicate head said.

Maturities have stretched to three years and some borrowers are now considering five years, bankers say. Banks typically charge just under 2% for the loans, which compares favourably with razor-thin pricing on loans to blue-chip investment-grade corporate clients.

GOOD RISK

The deals are secured on the portfolio of assets in the fund. As the underlying risk is LP money, and as many LPs are highly-rated institutions including sovereign wealth funds, banks view the deals as relatively low risk.

"Three to four years ago only a couple of banks wanted to do these loans, now banks have woken up to the fact that they are high quality investments as they are lending against LPs and asset values. It is very good risk to lend against such high quality loans," the private equity financier said.

The loans, which are usually revolving credit facilities, mean that private equity firms do not have to draw money from LPs to finance equity commitments every time they buy a company. It gives them certainty of access to funds and means that they are able to limit LP drawdowns to once or twice a year.

This also buys funds' time to improve businesses before calling on LP money, which can help to boost their internal rates of return. The deals can be drawn in any currency, which also offers a form of currency hedging.

The loans also prevent private equity firms drawing down from LPs during the first year of a fund's life, when they are in negative value, which can help LPs to avoid booking losses.

Tikehau Capital and Macquarie tapped the loan market in 2016, taking advantage of the deep liquidity on offer in order to carry out their objectives, according to Thomson Reuters LPC data.

Tikehau Capital Partners secured a 200m five-year syndicated loan in September, which is the firm's first syndicated facility and is allowing it to accelerate its international expansion. The loan was signed by eight banks led by BNP Paribas, Credit Agricole CIB and LCL.

Australian financial institution Macquarie Bank, the lending arm of Macquarie Group, raised a debut £1.465bn loan in June that was led by mandated lead arrangers and bookrunners HSBC, ING Bank and Lloyds Bank. (Editing by Christopher Mangham)

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