In a recent analysis by Abrdn, fund finance has been identified as an increasingly attractive option compared to short-term government bonds. According to Abrdn’s head of fund finance, Shelley Morrison, the use of subscription lines and net asset value (NAV) loans has grown in popularity as a means of increasing liquidity for funds and reducing the need to frequently call on investors for capital.
Morrison stated that fund finance is a versatile asset class, with investors utilizing subscription-line loans for various purposes including portfolio diversification, optimizing risk-adjusted returns, and capital efficiency. She also highlighted the potential for achieving higher yields without compromising credit quality or taking on excess credit risk compared to shorter-dated government bonds.
Discussions with Abrdn’s European insurer clients have indicated that fund finance is viewed as an attractive investment option due to its capital efficiency and expected return perspective. Morrison emphasized the attractiveness of the solvency capital requirement, which typically ranges from two to three per cent based on the loan’s tenor, rating, and the insurer’s ability to model the collateral benefit of asset-backed lending strategies.
Furthermore, there has been a surge in demand for ESG or sustainability-linked subscription lines, with the loan margin charged depending on the fund’s performance against agreed ESG key performance indicators. Morrison noted an increase in funds with impact-led investment strategies aligned with the United Nations Sustainable Development Goals, underscoring the potential for fund finance to help investors achieve their sustainability objectives.
It is expected that the trend of growth in NAV financing will continue, attracting interest from a wide range of investors. The combination of versatility and potential for higher yields positions fund finance as an intriguing investment avenue.
In conclusion, fund finance has shown promise as an alternative to government bonds, drawing the attention of investors seeking diversification, enhanced returns, and alignment with sustainability goals. The continued expansion of NAV financing underscores the potential of this investment option, indicative of a promising future for fund finance.