Manager Liquidity Facilities
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- Fund managers (particularly those receiving management fee
income from multiple funds or vintages) may look to implement
financings secured against their management fee income.
- These manager liquidity facilities may be secured by bank
account pledges granted in favour of the credit provider, as well
as security over the right to future fees receivable by the
manager.
- Such facilities may be a valuable working capital tool for fund
managers, but they can also be implemented to allow the investment
house or fund sponsor to meet its funding obligations to its own
investment funds (see also "GP Co-investment Financing
Solutions" below), to release liquidity for founders, or to
assist in financing acquisitive strategies.
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General partner (GP) Co-investment Financing
Solutions
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- 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.
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Subscription Finance
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- 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).
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Umbrella Facilities
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- 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).
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Single Investor Funds / Managed Accounts
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- 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.
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Net Asset Value (NAV) Financings
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- 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.
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Hybrid Facilities
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- "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).
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Warehousing Facilities
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- 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.
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Leveraged Funds
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- 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.
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Preferred Equity Financings
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- 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).
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Continuation Vehicles
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- 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).
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