The rapid expansion of the fund finance market has prompted banks to explore non-payment insurance solutions, enabling them to manage credit risk more effectively while maintaining flexibility, according to insights from WTW.
In the wake of this growth, lenders are increasingly turning to insurance as a way to achieve capital relief. By utilizing non-payment insurance, banks can extend additional credit to funds or asset managers without significantly increasing their internal exposure. This allows for continued lending while keeping risk levels under control.
A key feature of this approach is the non-disclosable nature of the insurance, which means the fund manager may not be aware that a portion of the risk has been transferred to an insurer. This confidentiality is an attractive feature for banks looking to manage their exposure discreetly.
For banks seeking relief under Basel regulatory requirements, insuring their fund finance exposures with high-rated insurers offers an effective solution. Additionally, private credit funds—becoming more prominent in the fund finance sector—stand to benefit greatly from insurance arrangements. These policies improve risk-adjusted returns by enhancing a borrower’s credit rating, thereby providing extra security to investors and limited partners, particularly those subject to Solvency II or NAIC regulations.
In contrast to co-lending structures, which require public disclosure of risk distribution, insurance enables credit funds to manage risk privately. This is especially beneficial for protecting sensitive details from investors, creditors, and competitors alike.
Choosing the right insurer is crucial, with only about 20 insurers currently operating in the fund finance market. Insurance brokers play a vital role in guiding lenders through the due diligence process to ensure that transactions align with insurers’ risk criteria. Notably, sovereign wealth funds and top-rated asset managers tend to be more attractive to insurers than lower-rated entities, such as family offices.
The market for insuring net asset value (NAV) lending is also gaining traction. NAV lending allows private funds to secure liquidity without liquidating assets on the secondary market. Although this segment is still in its developmental stages, it presents promising opportunities, particularly for transactions involving unrated or lower-rated assets.
Insurance brokers are working closely with lenders to structure coverage for NAV loans and asset-backed loans. However, this segment remains niche, with fewer insurers currently offering coverage in this area.
As the fund finance market continues to evolve, insurance is becoming an increasingly important tool for banks and private credit funds. By reducing risk and optimizing capital allocation, it provides a significant competitive advantage in a rapidly growing market.
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