This is the first of a two-part extensive report from law firm Mourant of a recent Hong Kong funds conference, with detailed insight on trends in this sector.

Danielle Roman, a partner at Mourant provides this account of an Asia-Pacific fund management conference in Hong Kong. Mourant, an offshore law firm that has close links to the wealth sector, has a ringside seat on the topics concerning the industry. The editors of this news service are pleased to carry these views; the usual editorial disclaimers apply to articles from outside organisations. Jump into the conversation. Email tom.burroughes@wealthbriefing.com

The Fund Finance Association’s annual symposiums brings together investors, fund managers, bankers and lawyers for education and networking within the fund finance market. On 12 October 2023, the Fund Finance Association hosted its 5th Annual APAC Fund Finance Symposium at the Four Seasons Hotel in Hong Kong. 

There is no denying that 2023 has been a challenging year, but the Asia-Pacific (APAC) fund finance community continues to demonstrate resilience and ingenuity.

The symposium's, keynote speaker, Robert Swan, the first person in history to walk to the North and South Poles, reflected the industry's sentiments as he spoke about hope, collaboration, trust, and innovation. 

Financial stability – recent banking turmoil and lessons for APAC
In the aftermath of the March Madness banking crisis, APAC stands strong, being much less affected compared with the US due to regulators in APAC monitoring the situation from the start and diversifying banking relationships. 

The collapse of Silicon Valley Bank prompted funds and venture capitalists (VCs) to diversify banking relationships, benefiting local players and creating opportunities for other banks to fill the void. 

The fund finance market differs between the US and Asia, with the demand for fund finance exceeding supply for the former, allowing banks to charge higher interest rates, while the latter enjoys historically cheaper funding costs. All funds, including mega managers, are experiencing longer fundraising cycles, leading to more extensions and longer draws on credit lines. Lenders are becoming much more selective, focusing on their “sweet spot” and developing strategies tailored to specific types of sponsors. This diversity among lenders creates varying experiences of the current market based on their approach. 

Despite these challenges, the appetite for fund financing remains robust compared with other types of lending, indicating continued interest and demand. Limited Partners (LPs) are increasingly exploring the use of secondaries markets, with a 10 per cent increase in the continuation vehicles in the US. In Asia, there is a greater supply of sub-line money compared with NAV money. However, Asian sponsors face challenges in borrowing due to fewer buyout deals, making it difficult to realise expected returns. 

The evolving landscape – transformative trends in lending
In the current financial landscape, sponsors are cautious given slow fundraising and high interest rates. In the US and Europe, demand for fund finance outpaces supply due to bank capital adequacy requirements, while in APAC supply is increasing with new entrants into the market, particularly Asian banks and US/European banks seeking to become active in Asia. 

There is an increased use of credit ratings in the US and Europe to decrease or distribute risk-weighted assets; from a sponsor perspective, having a rating can streamline the execution process and obtain more flexible pricing or larger commitments from lenders.

Asia’s pricing advantage has attracted some US/EMEA sponsors to the region. Lenders are monitoring loans, considering drawdowns, term length, capital calls and General Partners’ (GP) achievement of Internal Rate of Return (IRR). While the CLO market is well-developed in the US, it is still emerging in Asia. 

Additional trends in APAC include the growing use of subscription lines by SMAs, increased requests for financing from open-ended funds and continued demand for management/GP lines. The industry also shows a growing interest in NAV facilities, but it is difficult to evaluate assets in the portfolio.

Banks dominate fund finance in APAC, with limited activity from alternative lenders. Reasons for limited fund finance engagement from private credit funds include perceived competition from sponsors, lack of ancillary banking services, knowledge on how to underwrite, and the fragmented nature of a multi-jurisdictional region. With alternative lenders making up only 25 per cent of the Asia market (compared with 80 per cent in the US market), there is significant room for private credit to expand. 

Beyond traditional: alternative financing strategies in APAC's fund finance 
The significance of NAV facilities is growing, particularly among Asian GPs seeking to optimise funds and increase liquidity. In the past, NAV facilities were primarily used for bolt-on acquisitions or follow-on investments during periods of increased exist opportunities, but they now serve as defensive tools to address challenges such as debt covenants and investor distributions. Hybrid facilities are gaining popularity in APAC, supporting the fund’s lifecycle, with a strong focus on relationships.

Documentation has shifted towards more tailored Limited Partnership Agreements (LPAs) that reduce the need for retrospective amendments. While the US is moving towards collateral-lite NAV financing, lenders in APAC are maintaining a more conservative approach with a robust collateral package, including equity pledges when they can be obtained. 

The Hong Kong government’s focus is on ESG, fintech and AI initiatives
The collapse of SVB resulted in a loss of an important source of funding for venture capitalists in these sectors. The government, through the Hong Kong Investment Corporation (HKIC), has committed HK$6.2 billion ($792 million) to support initiatives in these areas. China-based companies are seeking international expansion and are turning to Hong Kong as a source of capital and access to international markets.

Navigating complexity in FF documentation
As fund structures become more complex, so do the documentation and security packages. While there is a desire in the market to standardise fund finance documentation, this presents problems due to the uniqueness of fund structures. Negotiating these documents is a balancing act between lenders and sponsors; lenders need to consider hairline triggers (which should be exclusion events) and real events impacting the facility and leading to an event of default. Meanwhile, sponsors need to consider information which needs to be shared with lenders. Following the banking crisis, facility agreements have increasingly included defaulting lender provisions, and lawyers are working on mechanisms to enable transfer of administrative or agent roles to mitigate practical issues where there is default by one of these entities. 

ESG provisions in fund documentation can be purpose-driven or linked to key performance indicators (KPIs). However, achieving consensus on KPIs, reporting requirements and the consequences of not meeting them poses challenges in APAC due to the absence of uniform standardisation. 

Security and sovereign immunity pose challenges in SMA (separately managed account) deals. Understanding the investor’s track record is crucial, with lenders often requiring comfort letters or statements of fact, particularly when dealing with a special purpose vehicle investor. Transfer provisions are also important, especially if the investor intends to transfer to affiliates. 

Investors are increasingly seeking confidentiality provisions in side letters, leading to heavily redacted documents. Addressing redaction rationale and potential additional protections is essential, such as excluding an investor or adding additional representations. Fund counsel may provide a compendium of provisions, and it can be useful to include a representation that the compendium contains all relevant information.

About the author

Based in the Mourant Hong Kong office, Danielle Roman regularly represents private and commercial banks on subscription credit facilities, hybrids, net asset values and GP/management facilities. She is on the global board of the Fund Finance Association, is chair of the APAC Executive Committee, and is also a board member of Women in Fund Finance.