Key Takeaways
- • S&P Global published a case study presenting a scorecard framework to help credit risk and fund finance teams at lending institutions assess the creditworthiness of Alternative Investment Funds (AIFs).
- • The case study identifies fund financing, including subscription-line facilities and NAV or asset-backed facilities, as a growing practice used by AIFs to improve liquidity and boost Internal Rate of Return (IRR).
- • Rising fund-level leverage across AIFs, including venture capital, private credit, and hedge funds, creates potential credit risk for lenders to these funds.
- • The analysis is aimed at lenders and credit teams rather than limited partners, though its subject matter is LP-facing vehicles such as pension funds, endowments and family offices.
Summary
S&P Global has published a case study titled "Alternative Investment Funds Scorecard," designed to help credit risk and fund finance teams at financial institutions and other lending organizations evaluate the creditworthiness of Alternative Investment Funds (AIFs). According to the publication, AIFs offer exposure to asset classes including venture capital, private credit and hedge funds, primarily for Limited Partners (LPs) such as large pension funds, endowments and family offices.
The case study highlights the growing use of fund financing within the AIF universe. In this structure, a lender takes risk against the uncalled capital of the underlying investors. Fund financing methods include subscription-line facilities, Net Asset Value (NAV) or asset-backed facilities, and other fund-level structures. S&P Global notes that such facilities can help a fund's liquidity and boost its IRR.
According to the case study, fund financing has become more attractive in the current environment, as funds seek liquidity amid the economic slowdown caused by the COVID-19 pandemic, while lenders seek to enhance yield in a low interest rate setting. The publication warns that this increased leverage within the AIF universe poses potential credit risks to various lenders to the funds, which is the rationale for the scorecard framework.
The case study highlights the growing use of fund financing within the AIF universe. In this structure, a lender takes risk against the uncalled capital of the underlying investors. Fund financing methods include subscription-line facilities, Net Asset Value (NAV) or asset-backed facilities, and other fund-level structures. S&P Global notes that such facilities can help a fund's liquidity and boost its IRR.
According to the case study, fund financing has become more attractive in the current environment, as funds seek liquidity amid the economic slowdown caused by the COVID-19 pandemic, while lenders seek to enhance yield in a low interest rate setting. The publication warns that this increased leverage within the AIF universe poses potential credit risks to various lenders to the funds, which is the rationale for the scorecard framework.
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