The use of managed accounts as an investment vehicle has been widely publicized of late with institutional investors such as the California State Teachers’ Retirement System and the New York State Common Retirement Fund (referring to such vehicles as “separate accounts”), and the Teacher Retirement System of Texas and the New Jersey Division of Investment (referring to such vehicles as “strategic partnerships”) making sizeable investments with high-profile private equity firms such as Apollo Global Management, LLC, Kohlberg Kravis Roberts & Co. and the Blackstone Group.1

Read full store here

Introduction

As the fund finance market continues to expand, we have seen a growing interest among real estate and other private equity funds (each, a “Fund”) in unleashing the value of their assets to optimize investment returns. In order to meet the financing needs of these Funds, a growing number of banks and other credit institutions (each, a “Lender”) are providing credit facility products supported by a pool of the Fund’s unencumbered assets (each a “UAP Facility”). While loan availability under UAP Facilities is most often based on the value of a Fund’s unencumbered real properties, recently we have seen unencumbered private equity assets serve as a basis of loan availability in an increasing number of transactions. In light of this trend, this article will discuss common features of UAP Facilities and compare UAP Facilities to subscription-backed credit facilities (also known as “capital call” or “capital commitment” facilities, and each a “Subscription Facility”), net asset value credit facilities (each a “NAV Facility”) and hybrid credit facilities (each a “Hybrid Facility”).

Common Features of Subscription Facilities, NAV Facilities and Hybrid Facilities

Loan availability under a Subscription Facility is subject to a borrowing base, which is typically tied to the value of the pledged uncalled capital commitments of investors satisfying certain eligibility requirements, multiplied by an advance rate. Subscription facilities commonly outline certain events (e.g., investor bankruptcy, failure to fund capital contributions, withdrawal or excuse rights) that exclude investors from the borrowing base calculation. In connection with a Subscription Facility, a Lender will customarily receive a pledge by the Fund and its general partner of their respective rights: (1) in and to unfunded capital commitments of the investors in the Fund; (2) to make capital calls and enforce the obligations of the investors to contribute capital; and (3) to the deposit accounts into which the investors are required to fund their capital contributions.

In contrast to Subscription Credit Facilities (which look “up” to capital commitments of investors to determine loan amount availability), NAV Facilities look “down” to the net asset value of the underlying portfolio investments of the Fund in determining borrowing availability. Consequently, NAV Facilities may be particularly useful for mature Funds in which the investors have already funded a majority of their capital commitments and the Fund has deployed this equity for purposes of assembling a portfolio of investments. Loan availability under a NAV Facility is customarily limited to the net asset value of the “Eligible Investments,” multiplied by an advance rate, subject to certain adjustments and limitations. Similar to Subscription Facilities, Lenders under a NAV Facility will typically impose certain eligibility criteria when determining which Eligible Investments to include in the borrowing base (including considerations based upon investment strategy, liquidity and diversification of investments), and ongoing inclusion is subject to the absence of specified adverse credit/exclusion events (e.g., liens, bankruptcy or insolvency events with respect to the investments; failure by the Fund or portfolio company to pay obligations; breaches of material contracts with respect to the investments; etc.). Although some Lenders will consider NAV Facilities on an unsecured basis in the case of high-quality asset classes, most Lenders will require a pledge of collateral that typically includes: (1) distributions and liquidation proceeds from the Fund’s portfolio investments; (2) equity interests of holding companies through which the Fund holds such investments; and (3) in certain cases, equity interests relating to the investments themselves.1

Hybrid Facilities represent a combination of the collateral characteristics supporting Subscription Facilities and NAV Facilities an approach that allows Funds and Lenders maximum flexibility in structuring the credit facility. And although Hybrid Facilities were originally utilized by Funds nearing the end of their investment period (and following the accumulation of portfolio investments), they are now also being put in place at the time of the initial investor closing to provide seamless funding throughout a Fund’s lifecycle. In determining loan availability under a Hybrid Facility, Lenders will typically look down to the net asset value of the underlying portfolio investments of the Fund, as they would in a NAV Facility; however, unlike a NAV Facility, Hybrid Facilities almost always include a borrowing base component tied to undrawn investor commitments and covenants that ensure there is a sufficient surplus of uncalled capital commitments. As a result, hybrid facility Lenders typically coordinate between product groups and share institutional knowledge in order to provide bespoke collateral support solutions in the form of uncalled capital commitments and a pool of known and potentially unknown portfolio assets (as proceeds from the Hybrid Facility may be used to purchase these assets). And because support for a Hybrid Facility is typically made up of some combination of the collateral pledged under Subscription Facilities and NAV Facilities, both Lenders and Funds are able to craft customized liquidity solutions based on the availability and suitability of such collateral.

Common Features of UAP Facilities

Unlike Subscription Facilities (which look to the uncalled capital commitments of certain investors) or NAV Facilities and Hybrid Facilities (which primarily look to the net asset value of Eligible Investments), UAP Facilities look to the value of a subset or pool of the Fund’s and/or its affiliates unencumbered assets to determine loan availability and are unsecured. Lenders will only give borrowing base credit with respect to assets that are unencumbered, meaning the assets are free and clear of all secured indebtedness and liens and encumbrances, and the value of such assets is typically multiplied by an advance rate and subject to certain deal-specific adjustments. Similar to Subscription Credit Facilities, NAV Facilities and Hybrid Facilities, Lenders will often impose additional borrowing base eligibility requirements when determining loan availability under a UAP Facility. For example, in a UAP Facility where the unencumbered asset pool is real estate, common eligibility criteria include requirements that: (1) the owner of the property has no secured or unsecured indebtedness with respect to the property, subject to certain carve-outs; (2) the owner of the property has the rights to create liens on the property to secure its indebtedness and to sell, transfer or otherwise dispose of the property; (3) the property is fully developed and the improvements thereon are completed; (4) the property is wholly owned by the Fund or an affiliate thereof; (5) the property is located within a specific geographic area; and (6) the property is in compliance with laws and regulations and is free from major architectural deficiencies, title defects, environmental conditions or other adverse matters. Likewise, UAP Facilities typically provide mechanics for removal of unencumbered assets that may cease to satisfy the eligibility criteria and addition of unencumbered assets that meet the eligibility requirements after the closing of the facility.

The ability to add and remove assets from the availability pool provides the Fund with tremendous flexibility relating to its financing options for such assets. In many cases, a Fund may utilize a UAP Facility during the process of acquiring a portfolio of investments due to the efficiency of adding assets to the line. Thereafter, a Fund may optimize individual asset pricing and liquidity by negotiating secured financing terms (and simply removing the asset from the UAP Facility pool). And although UAP Facilities are commonly comprised of unencumbered real estate assets, in recent years we have also seen Lenders extend credit to Funds and their affiliates based on the net asset value of unencumbered private equity assets. The borrowing base for these UAP Facilities have included pools of equity interests in a Fund or portfolio company, portfolio company indebtedness and equity securities issued by an entity in connection with collateralized loan obligations.

In terms of UAP Facility covenants, perhaps the most prominent provision is the negative pledge with respect to the unencumbered assets (meaning that the Fund and the other loan parties agree not to pledge the unencumbered assets receiving borrowing base credit to secure indebtedness). And unlike a NAV Facility, which will typically prohibit liens on all assets of the Fund and its affiliates (subject to specific carve-outs), the negative pledge featured in a UAP facility is customarily limited to the unencumbered assets receiving borrowing base credit and the equity of the entities holding such assets, thus affording the Fund and its affiliates the flexibility to encumber properties that are excluded from the borrowing base to meet ongoing business needs. UAP Facilities typically also include financial covenants applicable to the Fund and/or its affiliates, such as maximum leverage ratios, maximum indebtedness levels, minimum net worth, interest coverage, fixed charge coverage, etc. These covenants serve to give the Lender comfort as to the financial health of the applicable loan parties.

While the nature and extent of the collateral is a distinguishing feature of Subscription Credit Facilities, NAV Facilities and Hybrid Facilities, UAP Facilities, by contrast, are typically unsecured. As such, Lenders will often require each owner of the unencumbered assets included in the borrowing base to fully guaranty the obligations under the UAP Facility to the extent that such owner is not a direct borrower under the facility. UAP Facilities also often include specific financial covenants addressing the unencumbered assets used to support the borrowing base, such as minimum asset value, minimum number of assets and concentration limits with respect to such assets (e.g., no more than a certain percentage of the aggregate value of unencumbered assets is attributable to any single unencumbered asset or no more than a certain percentage of assets are located in a single jurisdiction). Some UAP Facilities include a covenant that the Fund will grant a security interest in some or all of the unencumbered assets included in the borrowing base if certain performance metrics are not satisfied. Further, UAP Facilities may also be structured without a borrowing base, in which case the Lenders rely on financial and other covenants to monitor the asset pool and financial condition of the Fund.

Conclusion

As the fund finance market matures, Lenders and Funds continue to explore new and innovative ways to finance investments and otherwise obtain liquidity from existing pools of assets. Alongside the rise in NAV Facilities and Hybrid Facilities, we have seen a number of Funds in recent years seek out financing under UAP Facilities for a growing number of asset classes. Because UAP Facilities provide Funds with an alternative method for satisfying financing needs and optimizing returns for Fund Investors, we expect to see continued growth of these facilities in the coming years.

Endnote

1 For further discussion of NAV and Hybrid Facilities, see “Net Asset Value Credit Facilities” in the Mayer Brown Fund Finance Market Review Summer 2013, starting on page 44.

In the fund finance market, there are a wide array of financing structures that are utilized by private investment funds (“Funds”) to improve liquidity and/or obtain leverage and a variety of collateral and credit support packages that lenders rely upon for repayment.1

While the fund finance market has unique characteristics when compared to other types of corporate borrowers, the types of credit support used by Funds and lenders have much in common with traditional lending facilities and rely heavily on tried and true lending instruments. This article will examine three types of credit support commonly used in the fund finance market: (i) the unfunded equity capital commitments of limited partners of a Fund (“Capital Commitments”), (ii) a guaranty (“Guaranty”) and (iii) an equity commitment letter (“ECL”). Each of these forms of credit support are broadly accepted cornerstones of fund finance that provide a suitable and reliable means by which a Fund can access debt while providing a lender with an enhanced credit profile in any transaction.

Capital Commitments

Perhaps the most well-known type of credit support in the fund finance market is the unfunded Capital Commitments of third-party investors in a Fund. Under a subscription-backed credit facility or a capital call facility (“Subscription Facility”), a Fund and its general partner pledge (a) the rights to the unfunded Capital Commitments of the limited partners, (b) the right of the general partner of the Fund to make a call (“Capital Call”) upon the unfunded Capital Commitments of the limited partners after an event of default and to enforce the payment thereof pursuant to the terms of the partnership agreement, and (c) the account into which the limited partners fund capital contributions in response to a Capital Call, in each case in order to secure the obligations of the Fund owing to a lender.2 Upon a default by the Fund under the Subscription Facility, a lender may enforce the right of the general partner of the Fund to make a Capital Call upon the unfunded Capital Commitments of the limited partners and require the payment of capital contributions pursuant to the terms of the partnership agreement. As contrasted with other types of credit support, such as a Guaranty, the obligation of the limited partners to honor their Capital Commitments and make capital contributions in response to a Capital Call will run directly in favor of the Fund as opposed to the lender.

Capital Commitments, however, do not necessarily need to be pledged as collateral in support of repayment obligations and can be used as credit support in facilities that are not a standard Subscription Facility. For instance, in connection with a Fund level credit facility that is secured by all or a portion of the Fund’s underlying investment portfolio, the collateral pledged by the Fund may consist of deposit or securities accounts or the equity shares held by the Fund in a portfolio company and various rights relating thereto. For these types of facilities, the unfunded Capital Commitments may be viewed by a lender as a potential source of repayment rather than as a direct part of the collateral. To support this view, the loan documents for such a facility may include representations, warranties and covenants related to the amount of unfunded Capital Commitments that must be maintained by the Fund for the duration of the facility, with the expectation that if the underlying assets of the Fund are insufficient to repay the facility, there is another liquid and substantive source of repayment that the Fund may rely upon. This type of credit support may provide the Fund with needed flexibility to avoid placing a lien on the Capital Commitments, which may in fact be prohibited under the terms of the partnership agreement, while allowing a lender to rely on the Fund’s access to the Capital Commitments as a potential source of repayment. Using Capital Commitments as credit enhancement may provide a Fund with significant debt opportunities while at the same time bolstering its credit profile in the eyes of a lender.

Guaranties

A second type of credit support commonly used in the fund finance market is a Guaranty. A Guaranty is an agreement by one entity (“Guarantor”) in favor of a lender to support the repayment by a principal obligor of its outstanding obligations to such lender in connection with a credit facility. The Guarantor is most commonly a Fund that provides a Guaranty in support of the obligations incurred by one of its subsidiaries or portfolio companies, but a Guaranty may also be provided by a sponsor, a feeder fund or portfolio company, in each case to support repayment by the Fund of its obligations. Guaranties have wide applications in the fund finance market, and the use of a Guaranty may be preferable in a scenario where a portfolio company incurs debt but does not itself have the ability to call upon the unfunded Capital Commitments of the parent Fund. The Fund may agree to provide a Guaranty in such instance in order to provide the appropriate amount of credit support requested by the lender to support the repayment obligations of the portfolio company. The obligation of the Guarantor to make payments under a Guaranty on behalf of the principal obligor, should it default on its obligations, runs directly in favor of the lender.

There are several types of Guaranties employed in the fund finance market, and they will vary both in scope of the guaranteed obligations and the liability of the Guarantor thereunder. The scope of a “bad-boy” Guaranty, for instance, is typically limited to losses incurred due to certain bad-acts or material misrepresentations made by the general partner of a Fund under a credit facility, but will not be triggered by the Fund’s financial ability to make payments to the lender. Payments from the Guarantor under a “bad-boy” Guaranty will only be required if the loss results directly from the bad-act or false misrepresentation specifically covered by the terms of such Guaranty. Whether a Guaranty is a guaranty of payment versus a guaranty of collection is another distinction. A guaranty of payment will typically be an absolute and unconditional guaranty that permits the lender to seek payment directly from the Guarantor without any obligation to first seek payment from the principal obligor. A guaranty of collection, also known as a conditional guaranty, will require that the lender exhaust its remedies against the principal obligor (including, without limitation, foreclosing on any collateral) prior to seeking payment from the Guarantor. Under New York law, a guaranty of payment is presumed unless the parties have otherwise explicitly agreed that the Guaranty is a guaranty of collection.3

The relationship of the Guarantor to the principal obligor is as important as the substance of the Guaranty itself. Upstream guaranties (i.e., a Guaranty given by a subsidiary of a Fund), cross-stream guaranties (i.e., a Guaranty given by a sister entity or other affiliate of a Fund) or downstream/parent guaranties (i.e., a Guaranty given by a Fund to support a portfolio company) are all potential types of Guaranties that may be employed in the fund finance market. Understanding the nexus between the Guarantor and the principal obligor will allow a lender to assess the validity of a Guaranty and whether the Guarantor has received adequate and fair consideration in exchange for providing the Guaranty. This analysis is fundamental to the enforceability of the Guaranty, is particularly relevant in respect of an upstream or cross-stream Guaranty, and will be necessary to help avoid any fraudulent transfer defenses that other creditors of a Guarantor may invoke if a Guarantor is later deemed insolvent after making a payment under the Guaranty.4 Experienced legal counsel can assist both Funds and lenders in navigating the specifics of using a Guaranty as credit support.

Equity Commitment Letters

A third commonly used form of credit support in the fund finance market is an ECL. An ECL is an agreement that evidences a commitment to contribute capital or other financial support by one entity (the “ECL Provider”) in favor of another entity (the “ECL Recipient”) and may be used to demonstrate to a lender that the ECL Recipient has additional resources for the repayment of its obligations under a credit facility.5 Use of an ECL may be more expedient or efficient in some instances than arranging for other types of credit support and provide a potentially significant credit enhancement. ECLs have broad application in the fund finance market, but the most common scenario for employing an ECL is when a Fund issues an ECL in favor of one of its portfolio companies to support repayment of debt incurred by such portfolio company. A lender may be wary of relying strictly on the performance of a portfolio company for purposes of repayment, and the use of an ECL by a Fund in this instance will provide added comfort to the lender that there are additional sources of repayment available to the portfolio company. There are a variety of applications for an ECL, and the use thereof does not need to be limited to the Fund/ portfolio company scenario described here for illustration.

An ECL should be distinguished from other similar arrangements, such as a keepwell agreement, pursuant to which a sponsor may undertake to monitor and safeguard the financial health of a Fund, or a letter of support/comfort letter, the purpose of which is to provide a lender with some assurance that a Fund will be able to meet its obligations to such lender. In the fund finance market, an ECL should be viewed as a commitment by the ECL Provider to contribute capital to the ECL Recipient and stands in contrast to a keepwell agreement or letter of support/comfort letter that are merely statements of intent rather than an actual commitment to undertake financial support. The obligation of the ECL Provider to contribute capital under and pursuant to the terms of the ECL runs in favor of the ECL Recipient, with only the ECL Recipient having the right to enforce the terms of the ECL. A lender, however, may be specifically designated as a third-party beneficiary under the terms of the ECL, and the rights of the ECL Recipient under and pursuant to the ECL can also be collaterally assigned to a lender under a credit facility.

Each ECL is a bespoke instrument that implements the specific level of credit support required and the conditions under which such credit support will be available. For purposes of the fund finance market, an ECL will also likely include, among other things, waivers of defenses, counterclaims and offset rights (including with respect to those rights arising under the US Bankruptcy Code that may pertain to a bankrupt ECL Recipient) in respect of the ECL Provider’s obligation to contribute capital to the ECL Recipient and other suretyship-related defenses that may be available to an ECL Provider under applicable law. Experienced legal counsel can assist both Funds and lenders in tailoring an ECL to achieve the necessary level of credit support while ensuring that it is distinguishable from other types of credit support.

Comparing Capital Commitments, Guaranties and ECLs

While Capital Commitments, Guaranties and ECLs can each be used as credit support in the fund finance market, the nuances specific to each type of credit support will dictate the effectiveness of the applicable credit support when applied to a specific lending arrangement.

As noted above, the use of unfunded Capital Commitments as credit support (as opposed to being pledged to the lender as collateral under a Subscription Facility) will run in favor of the Fund. The lender, by placing parameters around maintaining a certain level of unfunded Capital Commitments, is effectively relying on a liquidity test and ensuring that capital will be available to the Fund in order to repay indebtedness owed the lender. The lender will not have the ability, however, to enforce the payment of the unfunded Capital Commitments when used simply as credit support as opposed to collateral. In contrast, a Guaranty is credit support that runs in favor of the lender and allows the lender to seek payment directly from the Guarantor. With direct recourse to the Guarantor under a Guaranty, a lender will effectively have two sources of repayment – the principal obligor and the Guarantor. An ECL will artificially create two sources of repayment (the ECL Recipient and the ECL Provider), but the ECL will only run directly in favor of the ECL Recipient. The use of a collateral assignment of an ECL, however, will permit the lender to enforce the terms of the ECL on behalf of the ECL Recipient.

Conclusion

The use of Capital Commitments, Guaranties and ECLs are all appropriate ways to provide credit enhancement in the fund finance market and can be utilized effectively in numerous situations. Each of these types of credit support, while tailored to the particular characteristics of fund finance, are not novel to fund finance and are widely accepted forms of credit support in lending generally. Despite the prevalent use of these forms of credit support, the effectiveness of the credit enhancement and the strength of the credit support provided thereby must be determined on a case-by-case basis. The strengths and weaknesses of Capital Commitments, Guaranties and ECLs must be determined by analyzing a variety of factors including the proposed credit structure, the supporting documentation and the specific language included therein. Only after a detailed review can any of these forms of credit support be viewed as the preferred solution in a given financing. When used properly and with the assistance of experienced legal counsel, each method of credit support can provide a creative solution that delivers needed access to debt and liquidity for a Fund and appropriate credit support for a risk-averse lender.

Endnotes

1 For a detailed update on current trends and developments in the fund finance market, please see Mayer Brown’s Spring 2018 Market Review, on page 285.

2 For a more detailed description of the subscription facility market and features of the subscription-backed credit facility product in general, please see our article “Fall 2016 Market Review” in Fund Finance Market Review, Fall 2016 on page 195.

3 NY Gen Oblig L § 15-701 (2016).

4 See Restatement (Third) of the Law of Suretyship and Guaranty § 9.

5 Equity commitment letters are often used in more traditional acquisition financings as evidence that the acquisition vehicle has sufficient funds to complete the acquisition but are equally effective in the fund finance market as a commitment to ensure repayment of the indebtedness incurred by a Fund or one of its portfolio companies.

Our outlook for the fund finance market for 2018 is positive, as we expect the market to build upon the successes experienced over the last calendar year. In 2017 strong credit performance, record-breaking fundraising and product expansion fueled significant market growth. In addition to a significant uptick in the number of traditional subscription credit facility (each, a “Subscription Facility”) closings, Mayer Brown closed a record number of alternative fund financings. As expected with any mature market, however, we did see episodic defaults and borrowing base exclusion events in 2017. Such defaults were primarily technical in nature, and the exclusion events were isolated in respect of individual investors (each, an “Investor”) and did not indicate broader systemic issues for the Subscription Facility market or the private equity fund (each, a “Fund”) asset class. Below, we expand on our views on the state of the fund finance market as well as current trends likely to be relevant in 2018.

2017 Fundraising and 2018 Outlook

Fund fundraising experienced a banner year in 2017. Investor capital commitments (“Capital Commitments”) raised in 2017 exceeded $453 billion, representing the largest amount of capital raised in any year, according to Preqin.1 This continues the upward trend experienced in 2016 and is only the second year ever in which total fundraising has exceeded $400 billion.2

As we predicted in our last Market Review, Investors continued to flock to a smaller group of preferred sponsors in a flight to perceived quality, with fewer funds being closed but with a larger total Fund size.3 This trend was evidenced by numerous Fund asset classes raising their largest single funds ever—including buyout, infrastructure and private debt Funds.4 So too, consistent with prior years, we witnessed significant growth in the number of Facilities in favor of single managed accounts (also known as funds-of-one)— a trend we think will continue in 2018.

The rise of private credit and direct lending Funds (both in number and size) has been notable as they continue to fill the gap in the lending market left by traditional banks scaling back their lending operations in light of regulations imposed as a result of the last recession.5 Notwithstanding recent indications that regulators may ease pressure on traditional banking institutions, many market participants expect that the leverage loan markets will continue to be popular with private credit arms of less-regulated Funds. Thus, the trend of sponsors forming credit funds has continued its upward trajectory through 2017 with many sponsors recruiting traditional bankers to Funds in order to increase their capacity and fine-tune their expertise. This optimism in the private credit and direct lending asset classes was evidenced by 136 vehicles closed and over $107 billion being raised for funds in this sector last year.6 While we expect 2018 to continue this trend, many market participants expect fundraising to ease as a result of the fact that dry powder is also at a record high as a result of successful fundraising.7

Consistent with prior years, most of the capital raised in 2017 originated in North America with North American-focused private equity Funds raising $272 billion and Europe-focused funds raising $108 billion.8 Additionally, Preqin’s data indicates that Investors continue to have a positive outlook on the industry, with 63 percent of Investors having a positive perception of private equity and a majority seeking to increase their allocation in the longer term.9

Product Diversification

Consistent with this data, our experience and anecdotal reports from a variety of market participants strongly suggest that the Subscription Facility market continues steady growth and is as robust as ever. We also continue to see diversification in fund finance product offerings, including hybrid, umbrella and unsecured or “second lien” facilities. In particular, “Alternative Fund Financings,” such as fund-of-hedge fund financings, management fee lines, 1940 Act lines (i.e., credit facilities to Funds that are required to register under the Investment Company Act) and net asset value credit facilities have garnered more interest by Funds and lenders alike. We have also seen more open-ended Funds interested in Subscription Facilities. Accordingly, many lenders have customized their loan programs to capitalize on this need. For more information on these alternative financings, including structural considerations, please visit our webpage at www. mayerbrown.com/experience/Fund-Finance/.

Trends and Developments

TAX REFORM

The recent Tax Cuts and Jobs Act passed into law by the United States will significantly impact Funds and their portfolios. In addition to the much-publicized drop in US corporate income tax rates, changes in the tax rates for “passthrough” entities and the ability to repatriate overseas earnings, the legislation altered the tax treatment with respect to “carried interest.”

Carried interest refers to equity interests that the general partner or sponsors of a Fund may receive as compensation. By characterizing this compensation as equity, the general partner or sponsor will benefit from a lower long-term capital gains tax rate (as opposed to ordinary income or short-term capital gains) on such compensation. The deduction for “carried interest” has largely survived the tax reform with certain tweaks to how and when it is calculated. One of the most significant is that in order to obtain long-term capital gain treatment, the required asset holding period has been changed from at least one year to at least three years. Additionally, amounts that fail to meet the three-year test are not treated as ordinary income but rather are treated as short-term capital gain. In addition to the carried interest, other changes to the tax code also affect Funds and Facilities, which among others, include:

Deductibility of interest expense – The limitation of deductibility of interest expense on debt negatively impacts the private equity industry as Funds often rely upon leverage to finance transaction purchases and sales. Previously, there was no limit on the amount of interest that could be deducted. Favoring the use of leverage by Funds, a company can now only deduct interest expense equal to 30 percent of its EBITDA (earnings before interest taxes, depreciation and amortization) (and, after 2022, 30 percent of EBIT (earnings before interest and taxes)). This will likely result in a higher cost of capital and may affect valuations for assets making them relatively more expensive.

Long term Capital Gains – As noted above, the changes now require Funds to own companies for three years before getting lower capital gains tax treatment, although real estate Funds are exempt from this requirement.

Excise Tax on University Endowments – Certain private colleges and universities will be subject to a 1.4-percent excise tax on their net investment income. Given that these endowments are frequent Investors in Funds, this will likely impact their strategic planning and the investable assets available for private equity allocations.

Others – Other changes that may have an impact include limitations on the usage of net operating losses and limiting UBTI loss offsets to income to require such offsets from the same unrelated business (and not other businesses as was previously permitted). Additionally, the taxation of gains and losses on partnership interests owned by foreign investors have also changed and may also negatively affect their tax position when they choose to dispose of such investments in private equity funds. The totality of the impact of the tax overhaul on Investors in Funds and Funds themselves remains to be seen, and an experienced tax advisor is necessary to determine the impact on any particular set of Investors and Funds.

FLEXIBLE BORROWING BASE APPROACHES AND BRIDGE FACILITIES

Traditionally, lenders in the United States have employed one of three standard borrowing base approaches for Facilities: (1) a borrowing base of only highly rated “included” investors with a high advance rate; (2) a low advance rate across all investors for a larger fund; or (3) a two-tier approach, which provides for both highly rated included investors with a high advance rate and a designated investor class, where the latter has a lower advance rate. However, in the case where a Subscription Facility is being looked at during the early stages of fundraising, lenders have not always had the flexibility to optimize the borrowing base approach to best fit a Fund’s needs, and Funds have had to make a decision as to the best approach for their borrowing base, guided by an estimate of what their final investor pool will be. More lenders have started to respond to this issue by offering flexible borrowing base approaches. One approach consists of single bank bridge facilities until a final investor closing. This can help in that the Fund can determine what borrowing base will ultimately work best. Other lenders have included an option in the loan documentation that permits the Fund to switch to an alternative borrowing base approach within a short window of time after the final investor closing. Another approach being used with more regularity is to increase advance rates once investors have funded a predetermined percentage of committed capital. Likewise, as we have noted in prior Market Reviews and above, more lenders are offering “hybrid” credit facilities—where the borrowing base is calculated off both the uncalled capital commitments and the assets of the Fund.

INCREASED SCRUTINY

Given the significant growth of the Subscription Facility market, many lenders have reported that they are being audited by internal risk officers and bank regulators with greater frequency. Among other things, these audits have focused on how lenders calculate and monitor the overall credit exposure to each Investor, the lender’s portfolio management systems and whether the lender has an action plan for both market-wide disruptions and credit-specific defaults. In response, we are working with many lenders to adopt a standardized approach to track investor-byinvestor and fund-by-fund exposure, restructuring their compliance and portfolio management programs, and adopting a written policy on how best to address default and foreclosure scenarios. (For more information on possible foreclosure remedies, see Default Remedies under a Subscription Credit Facilities: A Guide to the Foreclosure Process)

LENDER RESPONSES TO TECHNICAL DEFAULTS

In response to the increased focus by regulators and auditors and in the rise in the number of technical defaults, lenders are starting to require more robust collateral monitoring provisions. For example, more lenders now require that the collateral accounts be held at the agent bank rather than a third-party depository. Generally, Funds establish their treasury management relationships ahead of entering into a Subscription Facility, resulting in lenders often agreeing to use the existing accounts held at a third-party institution as the collateral accounts. In such event, such accounts are subject to a lien permitting the agent to take control of the account during an event of default, including if a mandatory prepayment is not made. However, more lenders are now implementing the approach used in the broader loan markets, which provides a collateral sweep mechanic during the pendency of a mandatory prepayment from a collateral account, rather than simply using the control over the account as a default remedy. Given this approach is operationally difficult with an account that is not at the agent bank (due to the need to block and unblock an account multiple times), another route to achieving this result is requiring the accounts be held at the agent bank. This permits intermittent account blocks and sweeps to be achieved in a simpler and less costly manner.

ADDITIONAL EXCLUSION EVENTS

As reported in our last Market Review, market participants have been closely monitoring the impact of currency controls imposed on Investors by foreign regulators. As more Investors have defaulted under their capital commitment in light of these currency controls over the last quarter, many lenders are now contemplating adding a specific “exclusion event” to Subscription Facility loan documentation that would remove Investors subject to these restrictions from a Subscription Facility’s borrowing base. We expect that this exclusion event and other exclusion events aimed at even larger geopolitical issues may develop over the next year to become common.

Industry Conferences

FUND FINANCE ASSOCIATION GLOBAL FUND FINANCE SYMPOSIUM IN NEW YORK

Once again, Mayer Brown will be a platinum sponsor at the Global Fund Finance Symposium. Held in New York City on March 21, 2018, this year marks the symposium’s eighth anniversary. As the founding institution of the symposium, Mayer Brown is proud to support the Fund Finance Association and the significant growth of the conference—as well as the addition of the European Fund Finance and Asia-Pacific Fund Finance symposiums. Building on the prior success, we expect this year’s symposium to bring together leading market participants to share their insights on the trends affecting the fund finance industry.

FUND FINANCE ASSOCIATION WOMEN’S EVENT

Mayer Brown is proud to host the next Women in Fund Finance event on March 20, 2018, in our New York office. The Women in Fund Finance Speed Networking Event is an opportunity to meet with some of the leading names in alternative investment for an evening of networking and conversation. To register for this event or to learn more, please go to www. womeninfundfinance.com/events.

MAYER BROWN MID -YEAR MARKET REVIEWS

Mayer Brown will also host Mid-Year Market Reviews in New York City and Chicago this autumn. These Mid-Year Market Reviews traditionally address market developments in fund finance and focus on providing real-world advice on how such developments should be addressed by market participants. For more information on these events or to register, please email Dena Kotsores at dkotsores@mayerbrown.com.

Conclusion

After 2017 ended with steady growth in the fund finance market, and given the fund closings achieved through year end, we expect an uptick in the number of fund financings to occur in the near term—especially in favor of private credit funds and single managed accounts. While the impact on the recent tax reform remains to be seen, we envisage that overall health of the market for Subscription Facilities and other Fund Financings will continue through 2018

Endnotes

1 Preqin Global Private Equity & Venture Capital Spotlight, January 2018, p. 10.

2 Id.

3 Preqin Q4 2017 Fundraising Update, December 2017.

4 Id.

5 For more information on this trend, see “Leveraged Loan Regulatory Uncertainty Presents Opportunities for Direct Loan Funds” on page 185.

6 Id.

7 Fund Manager Says Red-Hot Private Debt Market May Cool Off, Institutional Investor Online, January 21, 2018, by Alicia McElhaney.

8 Preqin, p. 10.

9 Id., p. 10

Introduction

A power of attorney (“POA”) is a written agreement wherein an individual or organizational person (the “principal”) provides advance authority to another party (the “agent”) to make certain decisions, to execute certain documents or to act on the principal’s behalf, generally or in certain circumstances. POAs can take the form of stand-alone documents or can be included within other documents (e.g., within a security agreement for a secured lending transaction). Grants of POAs are commonly included in security documents for secured lending transactions to enable the agent to take actions (e.g., direct the disposition of proceeds within the principal’s account, execute and deposit checks) on behalf of the principal and usually spring into effect upon the occurrence of an agreed triggering event, such as an event of default under the related credit documents. While POAs are likely to be found in almost all secured lending transactions, there can be nuances related to how such POAs are used in a given transaction and/or jurisdiction. This article discusses some of the issues, considerations and concerns with the use of POAs in subscription credit facility transactions in the United States. A subscription credit facility (a “Facility”), also frequently referred to as a capital call facility, is a loan made by a bank or other credit institution (the “Lender”) to a private equity or other type of investment vehicle (the “Fund”). The defining characteristic of such Facilities is the collateral package, which is composed of the rights to make capital calls on the unfunded commitments of the limited partners in the Fund (the “Investors”), to receive capital contributions (“Capital Contributions”) when called from time to time by the Fund’s general partner or manager (the “General Partner”) and to enforce the same, pursuant to a limited partnership agreement executed by the Investor and the General Partner.

Powers of Attorney in Subscription Credit Facilities

GENERALLY

POAs are widely used in Facilities in the United States and are most commonly included as grants of authority within standard collateral documents, as opposed to stand-alone documents. For example, a POA provision within a security agreement might read as follows:

The Lender is hereby granted an irrevocable power of attorney, which is coupled with an interest, to, during the existence and continuance of any Event of Default, (a) execute, deliver and perfect all documents and do all things that the Lender considers to be required or desirable to carry out the acts and exercise the powers set forth in this Security Agreement, and (b) execute all checks, drafts, receipts, instruments, instructions or other documents, agreements or items on behalf of any Pledgor, as shall be deemed by the Lender to be necessary or advisable to protect the security interests and liens herein granted or the repayment of the secured obligations, and the Lender shall not incur any liability in connection with or arising from the exercise of such power of attorney, except as a result of its own gross negligence or willful misconduct

Under such a POA, upon the occurrence of an “Event of Default”, the Lender could take any of the specifically aforementioned actions or other unspecified actions that the Lender deems necessary or advisable to protect its security interests and the liens granted under the security agreement, without the requirement to provide prior written notice or obtain written or other consent from the pledgor/principal granting the power of attorney. It is generally understood that a Lender could utilize the POA to, among other things, issue capital call notices, initiate litigation against an Investor in connection with the enforcement of remedies available under the limited partnership agreement, or establish a new bank account of the Fund, in each case in the name of the General Partner. Any such actions would be taken in the name of and on behalf of the General Partner and not in the name of the Lender.

It is generally understood that to be enforceable under New York law, a POA must generally, at a minimum: (a) be clearly stated in writing and (b) be signed and dated by a principal with the capacity to grant the POA. If the power of attorney states that it takes effect upon the occurrence of a contingency (e.g., the occurrence of an event of default under a loan agreement), the power of attorney takes effect only at the time of that occurrence and is not in effect before the occurrence. Depending on the jurisdiction for applicable governing law, and/or the purpose of the POA or other factors, there may be additional requirements that may be dictated by statute, case law, or otherwise. Such other requirements could include execution by a witness, the inclusion of specific statutory language or otherwise take a specific form. It is also important that any granted POA is irrevocable, such that the granting party cannot freely revoke the authority or powers provided in the POA. Generally, a POA coupled with an interest or given as security will be irrevocable unless the parties add express language to preserve the revocability of the POA.1New York courts have held that a POA will only be irrevocable to the extent that (a) the POA affects the legal relations of its creator, (b) the authority under the POA is held by the creator for the benefit of the creator or another third party, (c) the POA was given for consideration and (d) the POA was given to secure the performance of a duty (other than any duty to the creator by reasons of agency).2

OTHER USES OF POWERS OF ATTORNEY IN FACILITIES

While POAs have always been an important component of the security package in a Facility, there are also some uses of a POA outside of inclusion in a broader collateral package. First, a Lender could rely on a power of attorney where a pledge of typical Facility collateral is not available. Such a scenario could arise where the limited partnership agreements or other constituent documents, other contracts or local applicable laws may prohibit the direct grant of security over the right to call Capital Contributions from Investors. This could also arise where the Fund has already granted security over the right to call Capital Contributions from Investors to another creditor. Lastly, we have seen such a POA in the context of equity commitment enhancements where a full grant of security over the right to call Capital Contributions from Investors was not otherwise contemplated. In such scenarios, it is common for the POA to take a more detailed form than the example set forth above that is typically included in a security agreement. Such a POA would typically be expected to contain fairly detailed descriptions of the specific actions that are able to be taken thereunder by the Lender. In such scenarios, Funds and Lenders should take care that the POA does not contravene or conflict with any applicable restrictions on an outright draft of security over the right to call for Capital Contributions from Investors.

Another scenario where a Lender may rely more heavily on a POA is where the Fund’s limited partnership agreement leaves uncertainty over which entity has the rights or the ability to call for Capital Contributions from Investors and the related authority to pledge such rights as security for a Facility. This could arise where a General Partner of a Fund has delegated certain categories of rights to an investment manager for the Fund pursuant to an investment management agreement, where the Fund is organized as a corporation or a limited liability company with a board of directors, or in jurisdictions where the rights to call capital belong to the Fund alone, notwithstanding that the General Partner may issue capital call notices. In these situations, it is typical not only to take a standard grant of security over the right to call Capital Contributions from Investors but also to supplement such grant with a POA from any applicable parties who may have rights to call capital.

Conclusion

POAs are one more tool that can provide a Lender with rights in connection with a Fund’s ability to call Capital Contributions from Investors. Drafted properly, POAs can provide a Lender with the ability to take immediate action after an agreed triggering event, such as the occurrence of an event of default under the Facility documentation, without the need to provide prior written notice to or obtain the consent or cooperation of the Fund or an order of a court. Lenders can benefit from consulting an experienced counsel who is knowledgeable about Facilities, POAs and coordinating with applicable local counsel to draft security or other documentation that is likely to achieve the desired effect and be upheld by the courts in insolvency or other stress scenarios.

Endnotes

1 See Rest.3d Agen §3.12; see also NY General Obligations Law Sec. 5-1511(3)(a).

2 See Ravalla v. Refrigerated Holdings, Inc., No. 08-cv-8207 (CM), 2009 U.S. Dist. LEXIS 23353, at *10-11 (S.D.N.Y. February 25, 2009).

Introduction

Real estate, buyout, debt, secondary and other closedend funds (“Funds”) have often used subscription-backed credit facilities—also known as “capital call” or “capital commitment” facilities (each a “Subscription Facility”)—to access cash quickly or as a bridge to capital calls or other permanent asset-level financing. Under these facilities, Lenders look to a Fund’s uncalled capital commitments and rights to call capital as security for the loans and for purposes of calculating borrowing base availability. However, as Funds mature beyond their investment or commitment periods and most or all of the investor capital commitments have been funded, some Funds turn to net asset value (“NAV”) credit facilities with availability based on the underlying portfolio investments of the Fund (each a “NAV Facility”) for financing needs on account of the diminished borrowing availability under a Subscription Facility. While both Subscription Facilities and NAV Facilities continue to grow in number and use, Funds are also exploring other financing options,1 including hybrid facilities, which provide Lenders with recourse to both the uncalled capital commitments (the typical collateral under Subscription Facilities) and the underlying investment assets (the traditional credit support under NAV Facilities). These hybrid facilities offer both Funds and Lenders added flexibility in tailoring a financing package that works for all parties.

Subscription Credit Facilities

Traditionally, Subscription Facilities have helped Funds (among other things) harmonize capital calls, both in terms of size and frequency. A Fund’s governing documents typically require that its investors be provided at least 10-15 business days’ notice prior to funding a capital contribution. Subscription Facilities, however, permit Funds to receive borrowings on short notice (often within one business day), permitting them to move quickly on time-sensitive investments and avoid the lead time required in calling capital from investors. Subscription Facilities also help Funds avoid the need to make frequent capital calls in small amounts for working capital and similar expenses, potentially including management fee payments.

BORROWING BASE AND COLLATERAL

Loan availability under a Subscription Facility is subject to a borrowing base, which is customarily based on the value of the pledged uncalled capital commitments of investors satisfying certain eligibility requirements, with advance rates based on the credit quality of the relevant investors. Lenders will also often impose concentration limits that specify the aggregate amount of capital commitments from a single investor or category of investors that may be included in the borrowing base. Subscription facilities may also outline certain events (i.e., investor bankruptcy, failure to fund capital contributions, material adverse changes, withdrawal or excuse rights) that exclude investors from the borrowing base calculation. Lender diligence with respect to Subscription Facilities, therefore, will likely focus on the obligations and capacity of the individual investors to fund their respective capital commitments. Subscription Facilities will also have events of default tied to the investors (e.g., if a specified percentage of investors default on capital contributions).

The chief characteristic of a Subscription Facility is the collateral package, which consists of the unfunded commitments of the limited partners in the Fund to make capital contributions and not of the underlying portfolio investments themselves. Subscription facilities typically involve a pledge by the Fund and its general partner of the following as collateral: (1) rights in and to unfunded capital commitments of the investors in the Fund; (2) rights to make capital calls and enforce the obligations of the investors to contribute capital; and (3) the deposit accounts into which the investors are required to fund their capital contributions.

The pledge of rights in the unfunded capital commitments and rights to make capital calls enables Lenders in a foreclosure situation to step in and make capital calls to the investors directly in the event the general partner fails to do so. Lenders can then use the incoming capital contributions to repay the debt under the facility. And with respect to the pledged deposit accounts, the Fund covenants that all the capital contributions will be funded to the collateral account (which is typically held by the Lender or otherwise subject to its control pursuant to an account control agreement).

NAV Credit Facilities

As Funds mature beyond their investment or commitment periods, they have greatly diminished borrowing availability under traditional Subscription Facilities because investors have funded a majority of their capital commitments. NAV Facilities help fill financing gaps by looking down to the net asset value of the underlying portfolio investments of the Fund instead of looking up to the investor capital commitments in determining borrowing availability. These facilities are particularly desirable to Funds that may have immediate liquidity requirements but no imminent distributions from portfolio investments.

BORROWING BASE AND COLLATERAL

NAV Facilities require a significantly different credit underwrite than Subscription Facilities, and Lenders have historically taken a cautious approach. Loan availability under a NAV Facility is traditionally limited to the “Eligible NAV” of the “Eligible Investments,” multiplied by an advance rate (which tends to be lower than other asset-based credit lines due to the lack of immediate liquidity of the portfolio investments). Eligible NAV is generally defined as the net asset value of the Eligible Investments, but this value may be adjusted for any concentration limitations. For example, there may be limits on how much value is attributable to any one portfolio investment or type of investment. Lenders will also set forth requirements regarding diversification of the underlying portfolio investments, minimum liquidity and investment strategies. Lender diligence will often focus on the historical performance of each portfolio asset and any issues that may be related to the pledge and foreclosure on the collateral (discussed below). The Eligible NAV calculation can be tailored so that it (a) excludes the fair market value attributable to investments subject to exclusion events, write-downs or concentration limits and (b) provides adjustments and recalculations based on financial reporting delivered to the Lender. The Eligible Investments must satisfy enumerated underwriting criteria (evidence of ownership, no liens, etc.), and ongoing inclusion is subject to no specified adverse credit/exclusion events (bankruptcy or insolvency events with respect to the investments, failure by the Fund or portfolio company to pay obligations, breaches of material contracts with respect to the investments, etc.).

One of the primary challenges of NAV Facilities is the Lender’s comfort with respect to the NAV calculations of the underlying portfolio investments. A Fund’s organization documents, however, may contain robust valuation procedures that help mitigate these risks, and a Lender may request the right to have a third-party valuation process if the valuations provided by the Fund seem inaccurate and/or require interim reporting covenants related to adverse credit events.

One of the chief characteristics of NAV Facilities is the inclusion of certain covenants related to the underlying portfolio investments. A common covenant is that the Fund maintain a certain minimum net asset value. Lenders may also insist on mandatory prepayment provisions tied to investment performance, including following payments or other proceeds distributed from the underlying investments to the Fund. Other covenants may include prohibitions on transfers of investments during default or if an overadvance results, negative pledges, separate financial covenants beyond Eligible NAV and providing copies of all investment-related documents and compliance certificates.

In certain instances Lenders will consider NAV Facilities on an unsecured basis in the case of high-quality asset classes. However, there is still a strong preference towards a secured facility, even if complete security over the portfolio investments can be a difficult commercial request by Lenders. While the collateral varies on a case-bycase basis, Lenders will typically look to the following collateral to secure their loans: (a) distributions and liquidation proceeds from the Fund’s portfolio investments; (b) equity interests of holding companies through which the Fund may hold such investments; and (c) equity interests relating to the investments themselves.

The method of obtaining a security interest in the cash distributions and liquidation proceeds is similar to Subscription Facilities— the Fund pledges its rights in collection accounts into which such proceeds are deposited and covenants that all cash from its portfolio investments will be directed into these accounts. Typically the Fund is prohibited from making withdrawals unless the borrowing base is satisfied on a pro forma basis.

Equity pledges under NAV Facilities look very similar to those in the leveraged loan market. A Lender will be able to foreclose on the equity interest collateral and either take ownership control of the interests in the holding companies or sell such equity interests and apply the foreclosure sale proceeds to its debt. However, Lenders must also be aware of any transfer restrictions or consent requirements that may compromise a valid equity pledge (particularly in the context of an equity interest in individual portfolio investments), and obtaining any necessary general partner consents to such pledge may require considerable lead time. Lenders should also be sensitive to various perfection issues, especially when non-US law may apply. Ultimately, experienced legal counsel can advise both Funds and Lenders on obstacles when developing a working collateral package.

Hybrid Facilities

Hybrid facilities represent a combination of the collateral characteristics supporting Subscription Facilities and NAV Facilities and provide both Lenders and Funds with maximum flexibility in terms of satisfying liquidity needs throughout the life cycle of a Fund. Hybrid facilities, like NAV Facilities, have been used by Funds that are nearing maturity of (or have matured beyond) their investment or commitment periods and have significant investment portfolio equity value. For example, some facilities take an aftercare approach, extending the life of an existing subscription facility by (a) modifying the borrowing base to set the advance rate for included investors to 100 percent, eliminating concentration limits or advancing 100 percent against all investors (not just certain eligible investors) and (b) adding a covenant that the Fund must maintain a minimum net asset value or comply with a debt coverage ratio. At the same time, a significant market trend has been for Funds to turn to longer-term hybrid facilities in their early stages—beginning with the first closing of investors into a Fund and extending until all of the investor capital commitments have been fully drawn down and the Funds are fully invested.

BORROWING BASE AND COLLATERAL

Hybrid facilities provide covenants that ensure there is a sufficient surplus of undrawn investor commitments (echoing Subscription Facilities), as well as ensuring the net asset value of the Fund remains above a minimum level (a NAV Facility concept). And borrowing availability unrelated to investor commitments, like under NAV Facilities, is based on the “Eligible NAV” of the “Eligible Investments.”

Consequently, one difficulty for hybrid facility Lenders is the need to underwrite both investors providing collateral support in the form of uncalled capital commitments and a pool of known and potentially unknown portfolio assets (as the loans under the facility may in fact be used to purchase these assets). This means more due diligence may be required, including, in respect of the NAV collateral support, determining if there may be transfer restrictions in respect of any portfolio company assets. Lenders are addressing these concerns by relying on substantial amounts of existing data on investors (in respect of uncalled commitment collateral) and pre-agreed investment eligibility criteria, mandating a tailored investment strategy or limiting expansion of the borrowing base beyond capital commitments until sufficient assets have been acquired by the Fund in connection with NAV collateral support of the hybrid facility.

Collateral under hybrid facilities is determined on a case-by-case basis, but Lenders can provide a tailor-made solution to any Fund based on the availability and suitability of the typical collateral under both Subscription Facilities and NAV Facilities. Lenders and Funds typically cooperate in establishing a collateral package containing all or some form of the following as part of negotiating appropriate risk-adjusted pricing:

1. A pledge by the Fund and/or its general partner of its rights in and to the unfunded capital commitments of the Fund’s investors, as well as rights to make capital calls and enforce the obligations of the investors to contribute capital;

2.A pledge by the Fund of deposit accounts into which (a) the Fund’s investors are required to fund their contributions and/or (b) the distributions and liquidation proceeds from the Fund’s portfolio investments are deposited;

3.A pledge of equity interests in the holding companies through which the Fund holds its underlying investments (particularly in circumstances where underlying portfolio investment documentation prohibits a lien being placed on the asset); and a pledge of the equity interests relating to the investments themselves to the extent not otherwise prohibited as noted above.

The clear advantage of hybrid facilities is that Lenders and Funds alike can benefit from continuous funding under a single credit facility (and without the costs and inconvenience of multiple refinancings) by drawing upon the collateral packages that have historically and successfully supported both Subscription Facilities and NAV Facilities.

Conclusion

As both Subscription Facilities and NAV Facilities continue to mature, Lenders and Funds are pushing towards even more flexible financing solutions. This includes relying on the traditional subscription-backed collateral pool while also looking to the value of portfolio investments and structuring practical financing around both. This “one-stop shopping” benefits both Lenders and Funds by providing seamless liquidity without duplicating costs (both in terms of dollars and allocation of human resources) associated with refinancing or restructuring credit facilities instead of focusing energy on new opportunities.

While the atmospherics are ripe for continued growth in the Subscription Credit Facility and NAV Facility markets, it is clear that the future is trending in the direction of hybrid facilities; they combine the positive attributes of both products and can be tailored to service a particular Fund’s needs while maximizing the efficiency of Lender and Fund resources.

Endnotes

1 For information on fund-level debt facilities, see Benefits of Fund-Level Debt in Acquisition Finance, on page 260.