“We envision more lenders
participating in the close-ended
private credit, real estate and
infrastructure fund space.”
74 CAYMAN FUNDS | 2019
Kristin Castellanos is head of
banking and treasury products
at MUFG Investor Services.
She can be contacted at:
FX trade execution itself is also an area of emphasis for many
alternative investment managers. Greater visibility to spreads and
trading counterparties, flexibility to trade at best execution or at the
WM Reuters FIX, post-trade analytics and electronic trade execution
are of increased importance to many market participants.
FX platforms which were once available to only the most sophisticated
asset managers are now more publicly accessible, and these tools are
driving clients to consider options that they may not have had in the past.
Regarding visibility, the Bank of International Settlements’ issuance
of the FX Global Code (updated August 2018), had a significant focus
placed on the providers of FX hedging services and how information
around FX pricing and execution are communicated and documented
with clients. The Code strongly supports full transparency around all
processes relating to calculation, trade execution and trade settlement
and provides guidance around maintaining adequate documentation
around these matters. MUFG has adopted the Code and is proud to
endorse these efforts.
Another area of growth is fund financing. Although hedge funds will
typically source financing from prime brokers, funds of hedge funds
and private equity funds typically turn to specialist lenders for their
borrowing needs. As the private equity market has rapidly expanded
with record-breaking capital inflows year after year, so has the demand
for credit facilities to bridge capital calls and deal financing needs.
In recent years, the fund financing market has soared above $400
billion in size, owing to private equity general partners’ increasing
reliance on subscription facilities for short-term liquidity and working
capital. To that effect, private equity subscription lines of credit have
evolved into somewhat of a commodity for many general partners
(GPs), supplemented by over 50 active bank and non-bank lenders in
Conversely, the fund of hedge fund industry has experienced some
consolidation through mergers and acquisitions (M&A) activity as well
as a shift in investor allocations to direct investments. As a result,
only a select number of key players remain in the fund of hedge fund
Nevertheless, there continues to be an appetite by large institutional
investors for financing to bridge subscriptions and redemptions, as
well as post margin and settle FX trades.
Although the utilisation purposes are similar, credit facilities for fund
of hedge funds and private equity funds are analysed very differently
from a collateral perspective. Fund financing for fund of hedge funds
requires a lender to “look down” at the underlying hedge fund assets
to determine the eligible value it is willing to extend credit against
(often referred to as an “asset-based facility”).
Private equity fund financing, on the other hand, calls for the lender
to “look up” at the unfunded capital commitments of the limited
partners to determine the size of the borrowing base on which it will
extend credit (referred to as a “subscription facility”).
Looking ahead, we envision more lenders participating in the closeended
private credit, real estate and infrastructure fund space. As new
lenders enter the traditional private equity and fund of hedge fund
markets, legacy lenders with more established business models and
seasoned employees will use their experience and technology to lend
to these other alternative asset class funds.
In addition to institutional lenders, the private credit market itself
is filling the void and launching funds today that service other
alternative funds, primarily in the middle markets, as well as newer
Again, when combined with administration, this leads to the lender
having full visibility to the assets and/or limited partners (LPs) of the
borrower resulting in faster drawdowns, more flexibility in repayments,
faster credit decisions and less reporting.
For clients that have both FX services and fund financing from the
same bank, it is often possible to arrange for synthetic margining
(which effectively means that the facility is synthetically drawn rather
than posting cash margin). As cash is generally not required to be
posted under the arrangement, the fund removes the cash drag that
would have otherwise impacted performance.
In summary, throughout the value chain of services required by
alternative investment managers, banking is a key component
(Figure 1). Being able to provide a comprehensive service offering
through a local Cayman Islands bank with global resources offers
many advantages that managers continue to value when selecting
Looking forward, Cayman Islands banks will continue to
provide attractive options to alternative investment funds but the
level of investment in product development, infrastructure and
technology is likely to be the best predictor of tomorrow’s future
leaders in this space.
Figure 1: The role of the banks for alternative