Beyond the Balance Sheet – The Future of Private Credit and Fund Finance | DLA Piper

The inaugural Beyond the Balance Sheet: The Future of Private Credit and Fund Finance Summit brought together industry leaders to explore key trends shaping private credit and fund finance.

Hosted by DLA Piper and Opal, the event featured discussions highlighting the convergence for rated feeder funds and collateralized loan obligations (CLOs), the growth of music royalties as a viable asset class in private credit and asset-backed securities, the need for proactive risk management in a volatile market, and the continued rise of net asset value (NAV) loans as flexible, mainstream financing tools.

Together, these insights painted a clear picture of a market in transformation – marked by innovation, strategic adaption, and heightened focus on alignment between stakeholders.

View session recordings here. Below, we summarize key takeaways from the discussions.

Key takeaways

Unlocking opportunities in private debt: CLOs and rated feeder funds

• Rated feeder funds have evolved significantly, becoming more complex and increasingly similar to CLOs. Originally designed to optimize capital treatment for insurance companies, these structures now serve broader investment goals, enabling access to private credit markets through a format that mirrors those of CLOs in function and sophistication.
• CLOs are well established and operate with narrow differences among transactions. They are highly structured such that the composition of the underlying portfolio is more readily accessible to investors, allowing a deeper understanding of the portfolio.
• Rated feeders invest in a less defined portfolio and, therefore, rely more heavily on the expertise of the manager. Rated feeder investors generally focus more closely on the manager than do investors in the CLO space.
• A key distinguishing factor between rated feeders and CLOs is that CLOs own assets directly, and investors have the benefit of a security interest. As currently constructed, rated feeders are at least one step removed from the entity that holds the portfolio and do not have the benefit of a security interest. As a result, there may be different outcomes for investors in distressed circumstances in which debt investors wish to exercise remedies against the structure – where the rights and ability to liquidate collateral is specifically spelled out in CLO transactions.
• Alternatively, rated feeder funds may be more flexible in dealing with stress in the portfolio, whereas documentation for CLOs is more prescriptive in preventing or significantly limiting the ability of CLOs to amend loans or provide additional financing to help stabilize distressed loans.
• The rating agency approach to the analysis of these transactions reflects the realities, limitations, and flexibility of the different structures. CLO analysis is more focused on the investment constraints and modeling the portfolio, whereas rated feeder funds focus more heavily on the manager’s capabilities. As a result, the expected ratings range of CLOs is wider (and higher) than that of rated feeders.
• These investment structures (and other emerging structures) can offer efficient ways for investors to attain access to private credit. A solid understanding of the differences and relative advantages of these structures could help investors make fully informed decisions.

Developments in music royalty private credit and asset-backed security transactions

• Growth in the music industry has been driven by the advent and global expansion of streaming and other digital consumption technologies. Music royalties have become an attractive asset class for private credit investors. Music is both more accessible and utilitarian in nature, with people listening to music in various aspects of daily life. There has been growth in the royalty pool north of 30 percent, and this growth is driving the revenue streams throughout the music assets.
• Recorded music could offer greater long-life investment compared to that of some other forms of intellectual property assets. The length of a copyright protection varies from country to country, but music, along with most other creative works, generally enters the public domain 70 years after the death of the creator. For example, in the US, copyright expires 70 years after the death of the copyright author.
• AI is expanding the music pie and creating additional revenue streams. It is now viewed in some cases and having an upside to the future market growth rather than a threat. It can manipulate the market – for example, it can create algorithms based on revenue stream trends. Further, AI has provided composers with new tools and creative possibilities – it can now generate melodies, harmonies, and even full compositions. As the AI landscape evolves, certain markets offer artists legal protections. For example, in Tennessee, the Elvis Act establishes protections for individual voice and likeness against unauthorized AI-derived deepfakes and voice clones.

Remedies and risks: Enforcing rights in private credit

• In light of recent tariffs, market volatility, and general uncertainties, portfolio management could help investors receive a return on their deployed capital. Additionally, fixed-charge coverage ratios have dropped from around 1.4 to 1 over the past few years as more capital has entered the private credit market. This means that nearly 100 percent of a borrower’s cash flow goes toward payment of maintenance capital expenditures and interest expense. Lenders have adopted a variety of strategies to combat these concerns.
• Many lenders are now prioritizing opportunistic deals with attractive economics, mainly low debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratios and low asset-coverage ratios in overlooked, non-trendy industries. Lenders are also emphasizing stronger covenants in their loan documents.
• Borrowers are encouraged to remain aware of their upcoming debt maturities and ensure they have sufficient cash on hand. If liquidity concerns are a possibility, borrowers may consider engaging restructuring counsel early to help maximize their leverage in negotiations with current and potential lenders.

The evolution of the NAV loan market

• NAV loan issuance continues to grow. The NAV asset class has become more accepted as it is now considered part of a fund’s lifecycle, especially as private equity exit opportunities continue to stagnate. Lenders continue to be drawn to NAV loans due to their risk-adjusted returns and structural protections centered on an over-secured collateral package and low loan-to-value ratios (typically, 15 to 30 percent). Many borrowers are also turning to NAV loans due to their bespoke nature, which allows them to access NAV financing to accomplish a wide variety of financing solutions ranging from:

1. Defensive approaches, focused on generating cash to continue funding an investment
2. Offensive/accretive approaches, focused on increasing a fund’s investment capacity for bolt-on acquisitions or new platform investments, or as markets shift and attractive opportunities arise
3. Portfolio management, focused on funding synthetic distribution or increasing a fund’s leverage

• As the NAV asset class matures, limited partners have generally grown more accepting of the use of NAV loans. Limited partners and their advocates are now negotiating to increase NAV loan-related disclosure and align incentives between general partners and their limited partners. Ultimately, many NAV lenders refuse to lend to GPs whose incentives, consent, and disclosure requirements are misaligned with their LPs’ interests.
• Looking ahead, the NAV asset class could continue to grow. New borrowers, such as family offices and multi-asset portfolios, continue to enter the market. Existing lenders are expanding their NAV offerings, and many new lenders are drawn to the risk-adjusted returns.

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