Abrdn: Fund finance “interesting alternative” to government bonds
Fund finance is “an interesting alternative” to shorter-dated government bonds, according to Abrdn analysis.
Shelley Morrison, head of fund finance at the asset manager, noted the rise of both subscription lines and net asset value (NAV) loans to boost a fund’s liquidity and reduce the need to call capital from investors regularly.
“Fund finance is a versatile asset class,” Morrison said. “Investors are making allocations to subscription-line loans to achieve many different objectives. These include portfolio diversification, optimising risk-adjusted returns and, where relevant, capital efficiency.
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“By investing in subscription-line loans, it’s possible to achieve higher yields without compromising credit quality or taking on excess credit risk. This asset class is therefore an interesting alternative to assets like shorter-dated government bonds.”
Morrison said that conversations with Abrdn’s European insurer clients have revealed that fund finance is seen as one of the more attractive investments from a capital efficiency versus expected return perspective.
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“Depending on the loan’s tenor, rating and the insurer’s ability to model the collateral benefit of asset-backed lending strategies such as fund finance, the solvency capital requirement is approximately two to three per cent,” she added.
Additionally, Morrison noted growing demand for ESG or sustainability-linked subscription lines. In these cases, the loan margin charged depends on the fund’s performance against agreed ESG key performance indicators such as delivering a reduction in carbon consumption across portfolio companies.
“We’ve also seen an increase in funds with impact-led investment strategies closely aligned with the United Nations Sustainable Development Goals,” she said. “It’s now possible to invest in a diversified portfolio of fund finance facilities that can help investors achieve their sustainability objectives.”
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