Lending to funds
Produced in partnership with Heather Culshaw of Herbert Smith Freehills and Susie Nguyen of Herbert Smith Freehills

The following Banking & Finance practice note produced in partnership with Heather Culshaw of Herbert Smith Freehills and Susie Nguyen of Herbert Smith Freehills provides comprehensive and up to date legal information covering:

  • Lending to funds
  • What is 'fund finance'?
  • Security
  • Upstream credit transaction
  • Downstream credit transaction
  • Prepayment events
  • Financial covenants
  • Scope of representations and warranties, undertakings and events of default

Lending to funds

What is 'fund finance'?

The term 'fund finance' is used to cover a broad spectrum of debt financing arrangements. The type of fund finance available to any particular fund will generally depend on where that fund is in its life cycle. We briefly outline the four main forms of fund finance below.

Capital call facilities (or subscription line facilities or equity bridge facilities)

Capital call facilities are short term debt facilities provided by lenders to funds where the amount available is calculated by reference to the uncalled commitments of investors and investor creditworthiness, and where the primary recourse is to such uncalled investor commitments. Accordingly, capital call facilities are commonly used at the beginning of a fund’s life and throughout the fund’s investment period.

Capital call facilities were traditionally, and continue to be, used to bridge the investment gap pending receipt of capital contributions from investors. However, they can also be used for a range of other purposes including funding fees and expenses (formation expenses, service provider costs and management fees) and issuing letters of credit, bid bonds or guarantees in lieu of cash escrow arrangements.

Net asset value (‘NAV’) facilities (or asset-backed facilities)

There has been a significant uptick in demand for NAV facilities recently, particularly in light of the COVID-19 pandemic as managers sought options to finance opportunities in the market.

NAV facilities are debt facilities provided

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