Ogier's cross-jurisdictional fund finance team has experts located in our Cayman Islands, BVI, Guernsey, Jersey, Hong Kong and Luxembourg offices. The global fund finance market has shown much resilience over the last 18 months and as we head into the last few months of 2021, our team offer their thoughts and insights on what we are seeing in each of our regions.
- Private Funds Act: A lot has been written about the Private Funds Act (PFA) since it was implemented at the start of 2020. On a practical level, PFA covenant language has, for the most part, settled down and "market standard" positions have emerged. The Cayman Islands Monetary Authority (CIMA) continues to process PFA registrations efficiently and CIMA's website is regularly updated to demonstrate evidence of registration. In the six months to the end of June,1,125 private funds were registered with CIMA taking the total number of private funds that are registered to 13,820.
- Debt commitments: We have seen an increase in deals where closed-ended funds are structured with investors funding a proportion of their commitment with a debt commitment, which when called is evidenced in the form of a note or debt advance.
- Alternative lenders: We have started to see an uptick in alternative lenders to funds, particularly in relation to NAV financings to funds focused on real estate. This is a trend that we see continuing particularly for transactions and opportunities that fall outside the more conventional credit parameters and risk appetite of the commercial banks. In our experience, alternative lenders have been able to benefit from their relationships with sponsors and industry knowledge. They are also able to provide more tailored solutions for a yield that is commensurate with risk.
- Hedge funds financing: On the hedge fund side, we have seen a fair amount of activity in the fund of fund space with financings based on the NAV of the eligible investments portfolio. These have taken a number of forms, including credit facilities, note purchase agreements and derivative transactions.
- Exempted limited partnership formation: The Cayman Islands exempted limited partnership (ELP) has a variety of uses and, as many will be aware, is the vehicle of choice for closed-ended funds in Cayman. As of the end of 2020, the total number of active ELPs reached a record 31,144 and ELP formations have continued to increase this year. In the first half of 2021 an additional 2,836 ELPs were formed – this represents the highest number of ELP formations in the first six months of a calendar year and is a 28% increase on formations from the first six months of 2020.
- Private Investments Funds: Like the Cayman Islands, BVI enacted legislation at the start of 2020 in order to regulate close-ended fund structures – such in-scope funds being "Private Investment Funds" (PIFs). The licensing process for PIFs continues to run smoothly. From a structuring perspective, we have begun to see BVI being utilised more frequently by investment managers as the venue for the formation of their co-investment vehicles given that for an entity to fall within the definition of a PIF one of the purposes of its establishment must be "diversification of risk", which means that co-investment vehicles intended to invest into a single asset are not required to register in BVI as a PIF, when they would, if structured in Cayman, be required to be registered in Cayman as a private fund.
- Security: Whilst a typical subscription facility security package in Guernsey consists of the usual security over capital call rights and the account(s) into which capital contributions are deposited, we have recently advised on fund finance transactions where alternative security packages have been put in place, which are, in some instances, novel in Guernsey. Some examples include:
- security over distribution rights arising under the fund's limited partnership documents, coupled with a contractual ability for the lender to be registered as a limited partner of the fund should it so require; and
- cascading capital call security granted by each entity in a fund structure to secure the capital contribution that each entity has committed to its underlying fund, with the ultimate beneficiary (and borrower) of such security then assigning all security interests to the lender as security for the loan monies.
- Investor notices: Post Abraaj, lenders appear to be increasingly adamant about investors being notified individually of the creation of capital call security. Where a corporate administrator has been appointed under a fund's limited partnership agreement to legally accept notices on behalf of investors, lenders still require notices to be served on each investor individually. Often an acceptable approach is for a notice to be delivered to the corporate administrator acting for and on behalf of each investor and the general partner of the fund to upload the investor notice to the fund's investor portal, and to then provide the lender with evidence or confirmation that this has been done.
- GP commitment/NAV facilities: The majority of facilities we are seeing are subscription facilities, although we are also seeing GP commitment facilities and, increasingly, NAV facilities.
- Resilience: Fund finance facilities have again demonstrated, through the toughest of environments, their sound credentials. The last few years have seen an increasing number of lenders (from international, regional and local banks) entering the market and we expect this trend to continue as a result. Private debt looks set to take capture a larger portion of the Asia Pacific loan market in the next few years and we are already seeing interest from direct-lending funds entering the subscription facility market.
- Net asset value facilities: The exit environment has been challenging for private equity, in recent years. If this continues and further extends the time period for which investments remain on the balance sheet, net asset value facilities (or hybrid facilities) may become more prevalent. Slower exits may make these facilities more attractive, if it means more private equity funds require access to debt at the fund level, after the end of the fund's investment period.
- Syndication: There continues to be more mega fundraises in the Asian private equity market. For example in April 2021, KKR announced the close of its US$15 billion KKR Asian Fund IV. While Asian subscription facilities have traditionally been provided by one lender (or, at least, on a sole underwriter basis, with a sell down post-funding), we expect the frequency of club or syndicated deals to increase, to service the needs of the mega funds.
- Environmental, social and governance (ESG): ESG is truly on the radar and Covid-19 has further illustrated its importance. Investors are increasingly concerned with the ESG provenance of the assets in which they invest and the asset class is increasingly viewed as a value driver. We expect ESG linked fund finance facilities to trend in the coming years.
- Single investor strength: We have seen a number of instances of lender credit approval focusing on the strength of a single investor (in a multi investor fund) sometimes supported with an investor letter and, as a result, those lenders have had to navigate capital call mechanics (which generally only contemplate pro rata calls across all investors instead of discretionary calls against selected investors) in the context of capital call security accordingly.
- Equity commitments: We have seen some instances of investor strength superseding the usual capital call security package with an equity commitment letter/agreement being offered (and accepted) instead.
- ESG: We have started to see facilities with ESG incentive margin reductions baked in or including a covenant for both lender and borrower to come to the table to negotiate ESG incentives when the lender's ESG framework is confirmed (for lenders that are still working on their internal policies).
- Hybrid/NAV facilities: We have also seen more NAV/hybrid facilities than previously, with lenders happy with the credit worthiness of the assets of the relevant fund(s) when the commitment period has ended or is near to ending.
- Security: It is now generally accepted market practice in Luxembourg to require either standalone or, as is usually the case, parallel Luxembourg law governed security over the capital call rights of a Luxembourg fund in respect of its investors. Having a Luxembourg law security agreement in the form of a Luxembourg law pledge is necessary to provide protection to the lender in case of enforcement, allowing the lender to enforce the Luxembourg pledge in Luxembourg while pursuing traditional avenues of enforcement pursuant to the US or English law governed loan documents.
- Investor notices: Subscription credit facilities have traditionally been viewed as low risk for lenders. Consistent with our Guernsey colleagues, on European originated deals post Abraaj we have seen lenders taking a stricter approach with respect to the investor notice. In Luxembourg, evidence of delivery is now an expected requirement, in addition to the usual requirement of investor notices being delivered to investors on the same day as closing. Tighter restrictions on investors transferring out of the fund are also included in the loan documents with lenders requiring prior written consent to the transfer of any fund interests.
- Due diligence on delegated powers: Where a Luxembourg fund is an alternative investment fund it will be required to appoint an alternative investment fund manager (AIFM). On occasion, AIFM agreements are not drafted with a subscription facility in mind and can therefore sometimes be unclear as to delegation of specific powers. As part of the due diligence process, it is important to thoroughly review any AIFM agreement, investment adviser agreement or investment management agreement, in tandem with the fund's limited partnership agreement, to ascertain exactly what rights have been delegated from the fund and its general partner to an AIFM, or sub-delegated to an investment advisor (IA) or investment manager (IM), as applicable. Should any power beyond general portfolio and risk management services be delegated to an AIFM, IA or IM, it is becoming increasingly common practice to add such parties to the loan documents.
- NAV facilities: Whilst subscription facilities remain the most common fund finance product we are fielding more enquiries from lenders about potential NAV facilities. We are starting to see more activity in this space and expect NAV financings to be an area of growth in the future.