USA Trends and Developments Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
considering whether downstream special purpose vehicle (SPV) leverage should be included in fund-level debt calculations. • Disclosure Recommendations: ILPA recom - mended that (i) fund sponsors offer standard - ised disclosures to investors about the ration - ale, key terms, and other potential effects of NAV facilities and (ii) investors engage with sponsors to better understand these facilities. The Market’s Response In response to the ILPA guidance, press cover - age, and LP attention to the use of NAV facilities, many of ILPA’s recommendations have practi - cally been implemented even though standard fund documentation is still evolving with respect to ILPA’s drafting recommendations. Most expe - rienced NAV lenders require that the general partner of the fund borrower disclose the NAV financing to investors and, if the fund has an investor advisory committee or is a fund-of-one or separately-managed account (SMA), obtain consent from the applicable investors for the entry into the facility. Implications of ILPA Guidelines and Market Attention on NAV Credit Facilities As a result of this attention to NAV financing, the one feature of NAV credit facilities where increased competition has generally not loos - ened loan provisions are covenants regarding the use of proceeds. In fact, provisions around the use of proceeds have generally tightened over the past year. Recent changes to use of proceeds provisions in NAV facilities include: • Specific Use Restrictions: Lenders are impos - ing more detailed restrictions on how loan proceeds may be used, often limiting their
use to specific purposes such as refinanc - ing existing debt, funding follow-on invest - ments, or covering operational expenses. It is not uncommon for lenders to incorporate a Sources and Uses spreadsheet into the credit agreement documentation reflecting in detail how the proceeds of the NAV loan will be used. • Enhanced Monitoring: There is a greater emphasis on monitoring and reporting requirements related to the use of proceeds from NAV facilities, with credit agreements now requiring borrowers to report back to their NAV lender shortly after the loan is fund - ed to confirm that the proceeds were used as required under the credit agreement. • Restrictions on Distributions: Restrictions in NAV facilities on fund distributions to inves - tors, regardless of whether such distributions are funded with loan proceeds or not, have tightened significantly. Conclusion NAV financing has emerged as a valuable tool for private investment funds, particularly given the challenging environment for exiting investments over the past year. Increased levels of compe - tition in the NAV lending market have driven a general loosening of key terms in NAV facility documentation, with the exception of provisions relating to the use of loan proceeds and the mak - ing of distributions to investors. Those provi - sions have tightened as a result of attention to NAV facilities by the press, ILPA, and investors. By understanding these trends in the negotiation and documentation of NAV facilities, fund man - agers (i) can make informed decisions about the use of this product and (ii) if they choose to put in place a NAV facility, can negotiate the financing with an awareness of the pressure points to look for in term sheets and facility documentation.
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