The breadth of the fund finance offering is growing significantly as the market matures both in terms of the number of providers and the diversity of products available. The development of this market is typified by the 5th annual European Fund Finance Symposium taking place in London on June 20th which will host hundreds of participants from across the market. Ashurst are Platinum sponsors of the European Fund Finance Symposium and both before and after the Symposium we'll be publishing some primers with our latest thoughts on particular fund finance market developments.
To kick-of off this series, the following is an overview of general market trends we're currently seeing in the fund finance market:
- Diversity of Products: There is an increasing growth in NAV (net asset value), debt-on-debt, secondaries and GP Co-Invest facilities; these are very bespoke financings with significant structuring and due diligence requirements where, as of yet, there are no clear market norms.
- Hybrids: There has also been a marked increase in 'hybrid' facilities where the credit decision takes into account both investor commitments and NAV including variations in the borrowing base directly dependent upon the NAV.
- LPA Terms and Side Letters: LPAs are increasingly lender friendly including provisions such as waiver of any rights of defence, set-off or counterclaim. However, there is also a marked increase in the length and complexity of side letters often with provisions that may be problematic to Lenders (see https://www.ashurst.com/en/news-and-insights/legal-updates/side-letters-front-and-centre/ which will be updated as part of this series).
- Variety of Structures: There is an increasing variety of vehicles being used across various jurisdictions. An understanding of these vehicles and the right to call from investors is required. One particular issue which we are coming across is where the commitment is true debt as opposed to equity or quasi-equity. The difference can be significant and needs to be considered jurisdiction by jurisdiction to ensure the lending banks' credit decision on investor commitments is met.
- Single Investor Vehicles: There is an increased number of facilities with either a single or limited number of investors often as a bridge to a final close or as a separately managed account. Lending banks often require extra comfort in these circumstances such as an investor letter as there is less diversity to their credit risk.
- Luxembourg: The usage of Luxembourg as the fund formation jurisdiction of choice is ever increasing. Where LPAs and other constitutional documents are simply cut and pasted with Luxembourg inserted as the governing law, problems can arise when funds are looking for subscription lines. Ensuring the fund documentation works as expected in accordance with Luxembourg law is crucial.
- Ireland: There has also been a marked up-turn in the use of Irish structures. However, often sponsors are looking to borrow on Irish structures that were set up without contemplating such borrowings. An early and careful look at the constitutional documents and the regulations applicable to the Irish vehicle should be conducted to ensure the proposed borrowing and security structure is available.
- Overcall for Priority Profit Share: There has been an increasing focus on limited overcall rights in relation to Management Fee/Priority Profit Share in particular. More often than not LPAs provide that the GP can not call on other investors where there is a shortfall due to investors defaulting on a call for Management Fee/Priority Profit Share. The inability to call from non-defaulting partners for the shortfall may undercut the credit decision of the lending banks so there needs to be early consideration of how to deal with the same.
- Overcall limitations: LPAs also increasingly have overcall limits (i.e. a limit on how much can be called from Investors to cover shortfalls due to defaulting or excused investors) and there is a greater complexity to these overcall limits. Fund formation lawyers need to think these limits through if they intend to have a subscription facility. There is a significant difference to an overcall limit that is a set percentage of each individual call to one where there is a link to concentration limits on particular investments.
- Abraaj: Ashurst played a leading role for the lenders in dealing with Abraaj. While there has been a lot of talk about Abraaj and its possible impact on the market, it seems to have been accepted as a unique event and has had limited impact. That said, a number of lenders are increasing their scrutiny on the financials of the General Partner and Manager as well as adding provisions relating to mismanagement and dealing with any ability for a General Partner to generally waive investor commitments.
