Banks aiming to alleviate capital constraints may find value in insuring fund finance exposures.
The fund finance sector is experiencing rapid growth, leading lenders to pursue more flexibility with non-payment insurance while upholding robust credit risk management, as highlighted by WTW insights.
For banks, insurance can offer limit relief, enabling them to provide additional credit to funds or asset managers while effectively managing internal exposure.
This type of insurance is generally non-disclosable, meaning that fund managers may be unaware that the bank has mitigated some of the associated risks.
Moreover, banks looking for capital relief under Basel regulations may find advantages in insuring their fund finance exposures with reputable insurers.
Private credit funds, which are becoming increasingly involved in fund finance, may also reap the benefits of insurance.
It bolsters risk-adjusted returns by effectively enhancing a borrower’s credit standing, thereby providing additional assurance for investors and limited partners, including those governed by Solvency II or NAIC regulations.
In contrast to co-lending agreements, insurance facilitates the discreet distribution of risk for credit funds without needing to disclose it to investors, creditors, or competitors.
Choosing the right insurer is crucial, as only about 20 insurers are currently active in the fund finance arena.
Insurance brokers are pivotal in guiding the due diligence process, ensuring that lenders and transactions align with the risk profiles outlined by insurers.
Sovereign wealth funds and well-rated asset managers are generally regarded more favorably than lower-rated family offices, for instance.
There is also a growing interest in insuring net asset value (NAV) lending, which enables private funds to increase liquidity without liquidating assets in the secondary market.
While the NAV lending insurance sector is still in its nascent stages, it holds substantial potential, especially for transactions involving unrated or lower-rated assets.
Insurance brokers are assisting lenders in structuring coverage for NAV loans and asset-backed loans, although fewer insurers are currently present in this market.
As the fund finance landscape continues to advance, insurance is increasingly recognized as a strategic asset for banks and private credit funds. By reducing risk and optimizing capital deployment, it offers a competitive benefit in a thriving market.
