Fund finance market grows, banks leverage non-payment insurance

Banks seeking capital relief may benefit from insuring fund finance exposures.

The fund finance market is expanding rapidly, prompting lenders to seek greater flexibility with non-payment insurance whilst maintaining strong credit risk management, according to a WTW insight. 

For banks, insurance can provide limit relief, allowing them to extend additional credit to funds or asset managers whilst managing internal exposure. 

This insurance is typically non-disclosable, meaning the fund manager may not be aware that the bank has transferred some of the risk. 

Additionally, banks seeking capital relief under Basel regulations may benefit from insuring their fund finance exposures with highly rated insurers.  

Private credit funds, which are increasingly active in fund finance, also stand to gain from insurance. 

It enhances risk-adjusted returns by effectively upgrading a borrower’s credit rating, providing additional security for investors and limited partners, including those regulated under Solvency II or NAIC. 

Unlike co-lending arrangements, insurance allows credit funds to distribute risk discreetly without disclosing it to investors, creditors, or competitors.  

Selecting the right insurer is critical, as only around 20 insurers are currently active in the fund finance market. 

Insurance brokers play an essential role in navigating the due diligence process, ensuring that lenders and transactions meet insurers’ risk criteria. 

Sovereign wealth funds and highly rated asset managers, for example, are viewed more favorably than lower-rated family offices.  

Interest is also growing in insuring net asset value (NAV) lending, which allows private funds to raise liquidity without selling assets on the secondary market. 

Whilst the NAV lending insurance market is still developing, it presents significant opportunities, particularly for transactions involving unrated or lower-rated assets. 

Insurance brokers are helping lenders structure coverage for NAV loans and asset-backed loans, though fewer insurers currently operate in this space.  

As fund finance continues to evolve, insurance is increasingly seen as a strategic tool for banks and private credit funds. By mitigating risk and optimising capital allocation, it provides a competitive edge in a market experiencing strong growth.