Subscription Credit Facility Market Review

Keywords: Fund Financings, Credit, Facility

The past year was an active year for Fund Financings, with positive growth and strong credit performance through 2015 as an asset class. Capital call subscription credit facilities (each, a "Facility") continued steady growth and followed the uptick of closed funds and capital raised through Q3 and Q4 2015. Additionally, anecdotal reports from many of the major Facility lenders (each, a "Lender") and Mayer Brown's practitioners noted a substantial increase in alternative fund financings, including unsecured Facilities looking to the assets of private equity funds, such as hybrid and NAV Facilities, a trend that seems to be continuing through 2016 ("Alternative Fund Financings"). Additionally, Investor capital call (each, a "Capital Call") funding performance continued its near-zero delinquency status, and we were not aware of any Facility events of default in 2015 that resulted in losses. Below we set forth our views on the state of the Facility market and current trends likely to be relevant in 2016.

Fundraising and Facility Growth

Fundraising in 2015

Overall, 2015 was a positive year for private equity funds (each, a "Fund"). Fundraising was up slightly from 2014 levels, which were the highest levels seen prior to 2008. Globally, through Q3 2015, Funds raised over $391 billion in investor (each, an "Investor") capital commitments ("Capital Commitments"), higher than the same period in 2014 with $389 billion of commitments raised.1 Continuing the prior year's trend of flight to quality, Investor capital was attracted to larger sponsors. During the same periods, fewer Funds were formed, with 760 Funds in 2015 as contrasted to 889 in 2014, resulting in a larger average Fund size. We note that the focus of such fundraising appears to be in the more mature North American and European markets as well as in the buyout, real estate and infrastructure sectors.2 Additionally, anecdotal reports from Mayer Brown practitioners point to Europe in particular having a good early 2016 in terms of Funds and amount of capital raised.

Moreover, Investors have expressed continued interest in private equity, and the majority of Investors in 2015 expressed that they were below their target allocation to private equity, which is encouraging for the prospects of new commitments in 2016.3 Given that Facility growth typically follows fundraising activity, this appears to bode well for the coming year.

Facility Growth

Although the Fund Finance market lacks league tables or an overall data and reporting and tracking service, it is clear that the market continued to expand in 2015. In respect of Fund Financings, Mayer Brown represented Lenders and Funds in new money transactions ref lecting in excess of $30 billion of Lender commitments, a significant increase from $25 billion in 2014. We believe this growth to be steady, and initial indications are that this will be sustained into 2016. Notably, we are seeing growth not only from the continued penetration of Facilities with Funds and sponsors who have traditionally not utilized them but also from the continued diversification in product offerings in the Facility market (including hybrid, umbrella and unsecured or "second lien" Facilities). We note that the active European market has also been focused on product diversification (perhaps even more so than in the United States), and we have seen growth in respect of unsecured Facilities in that market as well. Such diversification makes Facilities more attractive to a broader spectrum of Funds and increases the utility and lifespan of the product for Funds. Separately, throughout 2015, we have also seen a proliferation of interest in Alternative Fund Financings such as fund-of-hedge-fund financings, management fee lines and facilities based on net asset value ("NAV") of a Fund's underlying assets with our representing Lenders and Funds in...