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After catching our collective breath after a furiously busy 2021 in the US, Europe and Asia (the usual December deal frenzy closing was only exacerbated by the LIBOR correction), all signs point to a solid 2022.
Here we share some observations on the past year, as well as what we expect in particular in 2022.
Fund raising
The fundraising market had a strong year in 2021, fueling both transaction volume and, just as importantly, product innovation.
Last year, global mergers and acquisitions were reported to have topped $5 trillion (boosted by a significantly increased number of private equity outflows) after an earlier difficult period. Preqin reported fundraising at an all-time high, with more than $1 trillion raised in the private fund market. Not to mention over $3 trillion of investor dry powder awaiting deployment.
Continuing a trend, fewer funds were raised last year than in previous years, meaning fund sizes continued to grow – something we’ve seen trickle down to fundraising, as Sponsors have increasingly demanded larger fund lines and larger commitments from their relationship banks. .
The strength of the fundraising and investment market has fueled managers’ confidence. Last year, several mergers and acquisitions of leading fund managers (as well as IPOs) propelled the demand for liquidity solutions at the management company level.
The Evolution of Fund Financing
We predict that this year’s buzzword will be “Find Finance 2.0”. Perhaps more than in any other year in quite some time, innovation in the fundraising market really kicked off in 2021.
It was exciting to be part of the adoption of preferred shares, NAV and hybrid loans by a growing number of providers, coupled with sponsors’ appetite for inventive liquidity solutions. This trend has continued into early 2022 and we believe it will continue for the foreseeable future.
We also expect an increase in the number and complexity of credit lines from GP and management companies, as well as funding from SMAs, after a robust 2021 (in the case of SMAs, with an increase in the number of sponsors at the looking for umbrella or platform arrangements in their SMA portfolios).
Additionally, 2021 has been an interesting year for the subscription line market. Alternative lenders have started to show flexibility, with direct loans from investors and joint venture agreements with sponsors providing alternative liquidity solutions. This year we have worked with several new lenders in the subscription line market – both new banking players and an increased appetite from insurance companies and institutional investors (as well as the development of new lending platforms for support these institutions).
On the sponsor side, managers continue to seek longer installation times, prices continue to trend towards pre-pandemic levels and, as noted above, demand for larger installations continues to grow. This optimistic attitude from powerful sponsors has also manifested itself in term sheet processes, with many GPs striving for increased flexibility around covenants, authorized payments and other structural considerations.
Hot topics
The transition from LIBOR has kept lawyers, bankers and sponsors busy for much of the last year in the “year of the amendment,” and the move to December 31, 2021, the LIBOR termination date for the first lot of currencies, will undoubtedly have been a relief for many.
The fun isn’t over yet, of course: USD LIBOR is set to end in 2023, but the FCA has banned its use for further transactions in the UK market from January 1, 2022, while in North America , the ARRC and banking regulators have made similar recommendations to US participants. While we have seen increased convergence in RFR market conditions in the US and London, divergences remain with European and Asian markets, where we expect market participants to look to their guidance for guidance. throughout 2022, especially with the increasing number of unionized installations around the world.
The year 2021 has witnessed a real shift in market attitude towards ESG installations. The first half of the year saw the development of market consensus reflected by the LSTA, LMA and APLMA, particularly with the release of the Green Lending Principles Update in February, social lending in April and principles of sustainability lending in May.
Investor pressure has led to an increase in demand for the creation of ESG-related funds and the addition of a significant ESG component to new fund-level facilities. We have seen a rapid increase in the number of ESG-related products over the course of 2021, and expect to see even more in 2022.
Conclusion
Fund finance continues to be an innovative and exciting practice space and the depth and experience of Mayer Brown’s fund finance team in the US, Europe and Asia means we are uniquely positioned to offer our customers a global perspective on market developments and trends, both in commodity and also at the forefront of innovation.
We are privileged to work with so many great customers and partners and look forward to strengthening these relationships and building new ones in 2022.
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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.
