Introduction

Documentation and terms in the fund finance markets have evolved differently in the United States, Europe and Asia based on various factors particular to each market, with each market having its own strengths, innovation and trends. Previously, we noted the convergence of certain terms and techniques between the United States and United Kingdom markets in a Legal Update and the growth of second lien financing in the United States in another publication,¹ so it is with interest that we are now observing increased interest from European and Asian market participants in second lien subscription financings.

An opportunity for growth

The term “fund finance” now refers to an array of financial products, but, in many respects, the market staple remains the subscription credit facility (for the purposes of this Legal Update, a “Facility,” and collectively, “Facilities”), whereby lenders make available to private funds (each, a “Fund”) a Facility for the purpose of bridging the Fund’s investment and other activities in lieu of capital being drawn from the investors in the Fund (the “Investors”). As collateral for a Facility, the Fund, its general partner and/or manager will grant in favor of the lenders or a security trustee (a “Security Agent”) security over the Investor commitments and the rights to issue capital call notices to the Investors (and receive the proceeds thereof), as well as over the bank accounts into which the proceeds of such capital calls are required to be paid (this security package, the “Security”). The Security is often accompanied by a negative pledge prohibiting the Fund from granting security over certain of its assets to any party other than the Security Agent.

Facilities can be overcollateralized given that the borrowing base that lenders use to assess availability under a Facility often does not include all Investor commitments a...