Opening the Fund Finance Toolkit

General partner (GP) Co-investment Financing Solutions

• Limited partners (LPs) will generally require that a GP invest its own capital in any fund to which they commit. This “GP commitment” is customarily made either through the general partner vehicle itself or an associated co-investment special purpose vehicle.
• Fund executives may look to third party finance providers to fund their co-investment obligations. We are increasingly seeing this as a component of “succession planning” strategies, but it may also be a useful tool to support executives more generally as fund sizes (and therefore GP commitment obligations) increase.
• Such credit facilities are often highly bespoke and are driven by the “art of the possible”, depending on fund structure and tax and regulatory considerations. Lenders may look to a combination of account security, pledges over cash flows (e.g., management fees, co-investment returns, general partner’s share), and/or guarantees and other credit support.
• These facilities may take the form of “partner loan programmes” (provided direct to executives, with associated consumer lending considerations) or term or revolving facilities lent directly into the relevant GP vehicle.

Subscription Finance

• Often seen as the “traditional” fund finance product, subscription lines — also known as “capital call” or “equity bridge” facilities — continue to be a key part of the market for fund sponsors.
• These facilities are normally borrowed at the level of the main fund vehicle(s) (or at the level of a special purpose vehicle below the fund), with the lender taking security over the rights of the GP or manager to draw on the uncalled commitments of investors and the bank accounts of the fund into which those commitments are required to be funded. Cascading pledge structures may also be used to address tax and structuring considerations.
• Over the past year, we have seen demand for these facilities outstrip availability from traditional bank lenders (often due to capital or other regulatory constraints of those banks), leading to the emergence of new bank and non-bank providers.
• Despite the recently increased cost of borrowing, we have seen most fund managers continue to implement subscription lines for their new and existing funds, not least for their treasury utility (albeit with acceptance in some instances of decreased facility sizes (relative to investor commitments) and/or increased openness to partially or fully uncommitted facilities).

Umbrella Facilities

• Managers with multiple funds may look to implement “umbrella” subscription line facilities, entering into a master arrangement with a lender (or group of lenders), pursuant to which each fund is able to access its own sub-facility.
• Entry into such facilities can enable pricing efficiencies, as well as time, cost, and administration synergies.
• The Goodwin Fund Finance and Private Investment Funds teams are experienced in implementing such facilities, which require careful structuring (for example, as to cost allocation between the funds within the umbrella).

Single Investor Funds / Managed Accounts

• As well as putting in place subscription facilities to their co-mingled funds, managers with single investor vehicles or managed accounts may also wish to put in place facilities for those strategies.
• The exposure of any lenders of these facilities is greatly concentrated, often relying on the credit strength of a single LP. As such, lenders will require enhanced legal due diligence of the fund’s governing documentation and may require that the individual investor also provide a legal acknowledgement of the financing or “investor letter” and evidence of investor authority, none of which are typically required when the lender’s recourse is to a more diversified investor pool.

Net Asset Value (NAV) Financings

• NAV financings have become a key component of the liquidity toolkit for many managers. These financings allow a fund to borrow, often at a comparatively low LTV, against the net asset value of the whole of the fund’s investment portfolio (at a level structurally subordinated to any asset-level financing).
• Although in some respects these facilities may be used to implement a leveraged strategy (for example, such facilities may be used to enable an “overcommitment” approach by some participants in the LP secondaries market), recent years have seen their adoption as a liquidity solution across asset classes such as private equity, real estate, and infrastructure.
• See our article here from earlier this year on some of the reasons we commonly see market participants implement NAV financings. From unlocking liquidity for investors to funding follow-ons to supporting stressed assets, NAV facilities are a versatile tool with which LPs and GPs are becoming increasingly familiar.
• Implementation of a NAV financing requires careful consideration and diligence of fund documents, underlying portfolio composition and tax and regulatory considerations. Our Fund Finance team is experienced in working with clients to structure these facilities to achieve a commercially acceptable balance between control and flexibility, balancing the needs of GPs and lenders whilst giving due regard to the considerations of investors and counterparties at the portfolio level.
• NAV facilities may be borrowed by a fund vehicle, a portfolio aggregator vehicle or a “finco” special purpose vehicle. The security package may depend on the fund structure and asset class but customarily incorporates account security, cash sweeps, and/or share pledges.

Hybrid Facilities

• “Hybrid” fund finance facilities will typically combine elements of subscription credit facilities and NAV financing, with both “upward” and “downward” looking components.
• Hybrid facilities may be structured as “whole of life” facilities whereby, as the fund draws capital from investors and deploys it in underlying investments, the covenants under the facility (and the lenders’ recourse) track accordingly. Whilst hybrid facilities may be implemented on that basis when the parties, at the point the financing is implemented, have visibility on the likely profile of a (usually non-concentrated and relatively commoditised) portfolio, in many asset classes these facilities are implemented with one of the two components as a credit enhancement to the other (for example, a subscription facility with downward-looking covenants and account security over distribution accounts, or a NAV facility with recourse also granted to recallable commitments).

Warehousing Facilities

• For some managers, a key component of successful fundraising is the ability to “seed” a fund with investments acquired before its first investor close.
• Such investments may be acquired by a special purpose vehicle with a view to transfer to the fund once investors have been admitted.
• Warehousing facilities are often used in such scenarios to facilitate the acquisition of such investments. These may be supported by security over the assets acquired and/or by guarantees or commitment letters from the fund manager or its prior funds.

Leveraged Funds

• Investment funds may be raised on a “levered” or “unlevered” basis, and some managers may wish to offer prospective investors access to levered and unlevered “sleeves” (allowing investors optionality as to their preferred strategy).
• Levered funds or sleeves may incur debt at the fund level (or an aggregator special purpose vehicle below fund level that may be bankruptcy-remote from the fund) to leverage the acquisition of an investment portfolio and thereby generate enhanced returns for investors.
• The security package granted to lenders in respect of fund leverage facilities may vary according to underlying asset class and the profile of the leverage incurred.

Preferred Equity Financings

• Although not strictly a debt product, preferred equity can be an alternative (or complementary) to many of the above products, including at the GP, manager, fund, and aggregator levels.
• A preferred equity provider will typically subscribe for an equity interest in a fund structure, in return for receipt of a “hurdle” payment before cashflows are paid back up through the structure to investors (or fund management, as applicable). Bespoke preferred equity waterfalls may be calibrated with more than one hurdle threshold, as well as different parameters at each stage for sharing distributions between the preferred equity provider and the fund.
• Preferred equity can be an attractive solution for fund managers as a source of financing without some of the controls associated with debt in terms of maturity, security package etc.
• Earlier this year, we took a look at pref/NAV optionality, and we increasingly see these tools used in conjunction with one another (for example, by way of back-leveraged preferred equity interests).

Continuation Vehicles

• The well-documented explosion in continuation funds has brought with it a review by market participants of the use of debt, particularly in relation to such vehicles (by which a fund manager can unlock liquidity for certain of its investors, whilst continuing to manage one or several of its portfolio investments, and offer continued exposure to existing or new investors).
• Continuation vehicles may deploy variants on subscription financing, which can be used as a bridge to syndication for a cornerstone secondaries investor.
• Additionally, continuation vehicles may deploy NAV financing-like solutions to lever the acquisition of the vehicles to be acquired by the vehicle (whether one or several).