Lending to funds
Produced in partnership with Heather Culshaw and Kristen Roberts of Herbert Smith Freehills LLP
Lending to funds

The following Banking & Finance guidance note Produced in partnership with Heather Culshaw and Kristen Roberts of Herbert Smith Freehills LLP provides comprehensive and up to date legal information covering:

  • Lending to funds
  • What is 'fund finance'?
  • Credit analysis
  • Security
  • Prepayment events
  • Financial covenants
  • Scope of representations and warranties, covenants and events of default

What is 'fund finance'?

The term 'fund finance' is used to cover a broad spectrum of debt financing arrangements but principally refers to:

  1. equity bridge facilities (or capital call bridge facilities), which may be used to assist funds in bridging an investment gap pending receipt of capital contributions from investors (equity bridge facilities), and

  2. facilities made available to limited partners to purchase partnership interests in funds and to meet fund commitment obligations

This Practice Note focuses on some of the typical terms and core protections sought by lenders when making equity bridge facilities available to funds. These types of facilities can, however, follow a number of different forms and have divergent security packages and covenant structures. Although concentrating on private equity funds, a number of the issues discussed are equally relevant to investment trust financings.

This Practice Note assumes that facilities are lent into a typical private equity fund structure using a limited partnership registered under the Limited Partnerships Act 1907 (LPA 1907). Within such structures, the fund will contract through its general partner acting on behalf of the partnership.

Credit analysis

A lender may base its credit analysis on one or both of:

  1. the recourse of the fund to its limited partners (an upstream credit transaction), and/or

  2. the investments made by the fund (a