UK Law and Practice Contributed by: Sam Kay, Philippa List, Mark Stapleton and Nicolas Kokkinos, Dechert LLP
main advantage of this type of facility is that it will allow quick and efficient access to capital. The fund documents (eg, the limited partnership agreement) will normally require at least ten busi - ness days’ notice to be given to the investors prior to the date of any capital call, whereas the lender under a capital call facility will allow the money to be drawn on shorter notice. This type of arrangement therefore gives the GP/manager greater certainty of funding, particularly when the fund needs capital for investment purpos - es. It also allows the GP/manager to smooth out when capital calls are made to investors because the fund is able to make use of the facil - ity for irregular cash requirements, such as fees and expenses. Other types of fund finance have been devel - oped in addition to capital call facilities, includ - ing: • net asset value (NAV) facilities secured on the underlying assets of the fund; • fund finance arrangements to unlock liquidity for investors; and • facilities targeted at GPs/managers to assist team members to participate in any “GP commitment” requirements. Despite the developments in the market, the general principle for closed-ended private funds in the UK is that investors will not want the fund to be leveraged. This is particularly the case for a private equity fund because the investment strategy of the fund itself normally includes leveraged buyouts, so investors will not want a double layer of leverage (ie, at both the fund level and the investment level). Therefore, the limited partnership agreement in a closed-ended private fund will normally impose restrictions on the amount of leverage that may be incurred
by the fund (for example, the lower of 20% of commitments made by investors or the amount of uncalled commitments), and any borrowing incurred must be on a “short-term” basis. Furthermore, under the AIFMD, any fund that incurs leverage (short-term borrowing is excluded for these purposes) is subject to addi - tional disclosure requirements, and the AIFM is required to observe a higher degree of regula - tion. As a consequence, it is important for com - mon forms of fund finance (eg, capital call facili - ties) to adhere to both the investor-imposed and regulatory-imposed requirements. It would be usual for the lender of a capital call facility to take some form of security. A common approach would be for the lender to have the right to require the GP/manager to drawdown from investors to pay any outstanding indebt - edness under the facility. It is even possible for the lender to step into the shoes of the GP/man - ager and issue drawdown notices directly to the investors. For this to be possible, the lender must be assigned the right to issue these drawdown notices under the limited partnership agreement of the closed-ended private fund. This can give rise to negotiation with investors as to whether they are required to counter-sign security documents. A possible compromise is that the investor signs an acknowledgment that the right to drawdown has been assigned to the lender without the investor being a direct party to the security arrangements. An additional issue is whether the fund or investors are required to provide information to lenders. As a general rule, investors will not want to provide non-public information.
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