Fund Finance: Alternative Financing StructuresDeloitte Debt & Capital Advisory

29th April 2020

2©2020 Deloitte LLP. All rights reserved.

Agenda

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6

7

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Introduction

Lorenzo Parrini – Partner, Corporate Finance Advisory – Business Continuity & Financing Leader

Fund Finance Overview

Jamie Mehmood – Director, Head of Fund Finance Advisory

Market Themes

Ben James - Assistant Director, Fund Finance Advisory

Conclusions

Jamie Mehmood - Director, Head of Fund Finance Advisory

NAV Financing

Jamie Mehmood – Director, Head of Fund Finance Advisory

Ben James - Assistant Director, Fund Finance Advisory

8Q&A

Deloitte Debt & Capital Advisory

Elio Milantoni – Partner, Head of Corporate Finance Advisory

Current Market Situation in Italy

Andrea Azzolini - Director, Head of Debt Advisory

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5

3©2020 Deloitte LLP. All rights reserved.

Deloitte Debt & Capital Advisory

Introduction

Depth and breadth of expertise in a variety of situations

Debt & Capital Advisory

Ben JamesAssistant Director

T: +44 (0) 20 7303 2467E: benjames@deloitte.co.uk

Independent advice

• We provide independent advice to borrowers across the full spectrum of debt markets through our global network.

• Completely independent from providers of finance - our objectives are fully aligned with those of our clients.

Global resources and

execution expertise

• A leading team of 200 debt professionals based across Europe, North America, South America, Africa, Asia and Australia, giving true global reach.

• Our expertise ranges from the provision of strategic advice on the optimum capital structure and available sources of finance through to the execution of raising debt.

Market leading team in the UK

& EMEA

• By size, range and number of transactions, we are widely recognised as the leading UK debt advisory business.

• We pride ourselves on our innovative approachto challenging transactions and the quality of client outcomes we achieve, using our hands on approach.

Demonstrable track record

• In the last 12 months, we have advised on over 100 transactions (c.60 in the UK) with combined debt facilities in excess of €10bn.

• Expertise and strong tack record in the fund finance sector, currently live in the market raising in excess of €6 billion of financing requirements.

Jamie MehmoodHead of Fund Finance

T: +44 (0) 20 7007 7818E: jmehmood@deloitte.co.uk

Andrea AzzoliniItalian Debt & Capital Advisory

T: +39 028 332 5700E: aazzolini@deloitte.it

Fund Finance Advisory Italian Debt & Capital Advisory

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Fund Finance

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Investing

Realising value

Fund raising

Follow-on investing

©2020 Deloitte LLP. All rights reserved.

Liquidity through the fund lifecycle

General Partner (“GP”) financing

• Provision of liquidity for the GP that can be structured either as a personal loan or cash flow loan to the corporate entity

• Lenders view this as a “relationship lend” and will typically only provide if also a subscription line lender

• Hot topics: personal recourse, management fee diversity, succession and incentivisation

1

Asset-backed facility / Net Asset Value (“NAV”)

• Liquidity provided to managers following a levered strategy

• Highly structured financings that look through to a portfolio of assets

• Ability to use liquidity for fund leverage, downstream capital to assets or upstream to investors

• Various lenders provide liquidity across both debt and preferred equity instruments

• Hot topics: LTV, portfolio diversity, asset concentrations, security, repayment profile

3

Hybrid or bespoke financing

• Bespoke financing that typically is representative of a blend of subscription line and asset-backed financing, in which the lender takes security over both the uncalled investor commitments and assets

• Provides additional liquidity at the back end of the investment period when uncalled investor capital is reduced

• Hot topics: security package, cost and efficiency

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Subscription line / capital call facility

• Liquidity to bridge the GP investing in assets and calling capital from investors, providing operational efficiencies and IRR benefit

• Structured around uncalled investor capital commitments

• More lenders and optionality than ever before

• Hot topics: structure (borrowing base construct vs uncalled capital cover), advance rates, LP eligibility, haircuts, step-in rights, recallable commitments

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Finance throughout the fund lifecycle

Fund Finance

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Illustrative fund structure

Fund Finance

LP LP LP LP

Fund

Fund SPV /

Holdco

PC PC PC PC PC PC

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GP

3

1

2

3

Subscription line:

• Purpose: bridge between GP investing and calling capital from LPs

• Borrower: Fund entity

• Security: LP uncalled capital commitments

GP facility:

• Purpose: to fund GP co-invest

• Borrower: GP entity

• Security: management fee flows / carry

NAV facility:

• Purpose: upstream to investors or downstream to assets

• Borrower: Fund SPV / Holdco

• Security: share pledge at Fund SPV over portfolio of assets

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Limited Partners

General Partner

Portfolio Companies

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Market Themes

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Key themes

Market Themes

Capital in abundance

1• Record breaking fundraising throughout the private equity and credit markets driven by

investors’ search for yield

Increased fund size

2• Record fundraising has led to a growth in the size of fund financing requirements and a

broadening of banking groups

Flexibility of terms

4• New waves of lender capital have made financing solutions increasingly borrower-

friendly

Investors

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• Investor are increasingly informed and active, with greater degree of influence

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Increased liquidity

3• Traditional lenders are facing increased competition from new market participants

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Record Private Debt fundraising in the European market

Market Themes

= Fund size (€500 million)

€bn

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Source: Deloitte Alternative Lender Deal Tracker

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Influx of lenders into the fund finance market

Market Themes

Lender type Description Lenders

• Larger UK banks have historically led the UK and European market

• US banks have aggressively sought to steal market share

UK lenders

European lenders• European banks are taking a flexible and

aggressive approach to terms in order to win / maintain market share from the US

Institutional

lenders• Institutional lenders are increasingly

seeking opportunities to deploy capital

North American

lenders

• US-based providers who have traditionally driven the market

• North American market has typically been a forerunner to the European market

Other lenders

• Banks and funds are increasingly providing financing to GPs for a variety of purposes

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NAV Financing

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Illustrative fund structure

NAV Financing

LP LP LP LP

Fund

Fund SPV /

Holdco

PC PC PC PC PC PC

12

GP

3

1

2

3

Subscription line:

• Purpose: bridge between GP investing and calling capital from LPs

• Borrower: Fund entity

• Security: LP uncalled capital commitments

GP facility:

• Purpose: to fund GP co-invest

• Borrower: GP entity

• Security: management fee flows / carry

NAV facility:

• Purpose: upstream to investors or downstream to assets

• Borrower: Fund SPV / Holdco

• Security: share pledge at Fund SPV over portfolio of assets

©2020 Deloitte LLP. All rights reserved.

Limited Partners

General Partner

Portfolio Companies

13©2020 Deloitte LLP. All rights reserved.

Recent themes

NAV Financing

Manager dynamics

1• Fundraising has slowed

• Need for liquidity at the asset-level

• Valuations

• Challenging to finance assets on an individual basis

Lender dynamics

2• Liquidity available, albeit selectively

• Non-bank lenders entering market

• Price widening (leverage finance and fund finance)

• Pragmatism

Investor dynamics

3• Investor pressure on managers to maintain liquidity / asset value

• Increased dialogue

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Illustrative terms

NAV Financing

Consideration Description

• Fund analysis: latest investor reports, valuation sheets, fund documents (PPM, LPA, structure chart)

• Asset analysis: historic/forecast financials, meeting with engagement team, realisation timeframeDiligence

Tenor &

Availability

• Debt structure: 12 months - 5 years

• Preferred Equity: no maturity

• Availability: available for drawing from day 1 to [30] days prior to maturity, with commitments fees typically due on the undrawn portion

Pricing

• Debt margin: L + [4.0% - 9.0]%, depending on LTV and portfolio concentration

• Preferred equity: [9.0% - 15.0%+]

• Arrangement fees: [1.0% - 3.0%], payable on Closing Date

Restrictions

• Financial covenant(s): LTV (can be structured with step downs / trigger points)

• GPs not to amend valuation methodology

• Lenders typically do not restrict what activities GPs / management can undertake at portfolio level but do place restrictions on the SPV

Quantum • LTV varies depending on structure. Typically up to 25% - 30%

Purpose • Return capital to investors

• Additional liquidity to assets (performing or non-performing)

Structure • Facility can be structured either as a loan or preferred equity, typically through an SPV or via the fund vehicle

• Facilities can be term or revolving

• Lenders can afford borrowers flexibility depending on composition of portfolio

• Cash sweep can be flexible with lenders typically seeking to be repaid when asset diversity is below a designated level

Repayment / Cash sweep

• Share pledge at the SPV level (no direct recourse to portfolio assets)

• Security of the banks accounts which distributions pass through

• Right to future cash flows

• Diverse portfolio of assets

Security

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Conclusions

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Fund finance market conclusions

Conclusions

02

Evolving marketA range of financing structures are available to managers01

COVID considerationsRecent events have driven a need for managers to be aware of all financing solutions available03

04Favourable market dynamicsIncreasing number of lenders and optionality available

Weathering the stormThe market will rebound with significant opportunity and dry powder still to deploy

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Q&A

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