Fund Finance, Capital Call Securitizations and Private Credit

Fund Finance lending includes several structured finance asset classes including middle market corporate lending. The transactions include both revolving and term facilities whereby the lender is actively involved in loan origination, servicing, due diligence, structuring and surveillance.

Fund Finance securitizations are a relatively recent development within capital markets, offering several advantages over mainstream public securitization transactions. Issuers benefit from a cheaper, more rapid recycling of capital and investors benefit from an established security framework with a calculable risk profile and are being compensated well relative to risk for lack of liquidity.

Using traditional asset-backed financing techniques, the portfolio size is lower than comparable public transactions.  They can accommodate smaller niche markets and esoteric asset-classes and customers across the credit spectrum.

Asset-classes can include a diverse range of products such as middle market corporate loans, auto finance, bridging loans, invoice financing, asset finance, second charge lending (which are reasonably familiar) or more esoteric receivables such as storage facilities, whole business securitizations and transport assets. Additionally, private securitizations are an option for issuers in other niche circumstances, for instance where a subset of the portfolio is more challenging to securitise publicly (e.g. limited performance history) or for assets where there is not yet a developed rating methodology. 

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What are Capital Call Securitizations?

Capital call securitizations are a relatively new and innovative financial structure within the fund finance industry and involve the securitization of subscription credit facilities. These facilities are essentially lines of credit that private funds use to meet short-term liquidity needs, such as making new investments or covering ongoing expenses. When a fund needs capital, it can "call" funds from its investors based on their commitments.

How Do They Work?

In a capital call securitization, the rights to future capital calls are pooled together and sold to investors as securities. This allows funds to access liquidity upfront, while investors receive returns based on the future capital calls.

Why Are They Important?

These securitizations provide several benefits:

• Liquidity: They offer funds immediate access to capital, which can be crucial for early-stage funds or during periods of rapid growth.
• Risk Management: By securitizing capital call rights, funds can manage and mitigate liquidity risks.
• Market Expansion: They attract a broader range of investors, including institutional investors, to the fund finance market.

Recent Developments

Recently, there has been significant interest and activity in this area. For example, a US investment bank closed a $475 million capital call securitization, which has generated a lot of attention in both fund finance and structured finance circles.  More information in relation to Capital Call Securitizations can be found here: https://www.taosolutions.ca/capital-call-securitizations

Private Credit

Private credit securitization involves packaging private loans into securities that can be sold to investors. This process allows private credit funds to access liquidity by converting future cash flows from loans into marketable securities. Here’s a brief overview:

Key Features:

• Credit Tranching: Similar to Collateralized Loan Obligations (CLOs), private credit securitizations use credit tranching to distribute risk among different investor classes.
• Payment Waterfalls: These define the order in which cash flows are distributed to investors.
• Coverage Tests: These tests ensure that the securitization maintains certain financial ratios, providing protection to senior tranches.

Benefits:

• Liquidity: Provides immediate access to capital for private credit funds.
• Risk Management: Helps manage and mitigate liquidity and credit risks.
• Market Expansion: Attracts a broader range of investors, including institutional investors.

Recent Trends:

There has been a growing interest in private credit securitizations, especially as an alternative to traditional bank financing. These structures are becoming more common as they offer tailored solutions for both borrower and lender.

How TAO Solutions helps!

TAO Solutions technology enables industry participants to administer private transactions and introduce transparency from the underlying data to the generated reporting results.  This is particularly important given many transactions are unrated, unlisted (not public), pre-placed and therefore generally illiquid.

Our software as a service solution includes a number of key features that are used by our tier 1 customers around the world.  This includes:

• Automated data ingestion, validation and normalisation.
• Analytics of underlying data and related trend analysis / dashboards
• Efficient and effective pool selection and sale processes
• Ease transaction structuring and reporting without the need to understand coding language
• Standardised management reporting for on-going surveillance
• Finance – audit, accounting and bank reconciliation features
• Investor reporting

TAO Solutions also includes an ‘investor portal’ that enables the dissemination of confidential reports via a web portal.