Real estate, buyout, infrastructure, debt, secondary, energy and other closed-end funds (each, a “Fund”) frequently seek to obtain the benefits of a subscription credit facility (a “Subscription Facility”). However, to the extent that uncalled capital commitments may not be available to support a Subscription Facility (for example, following expiration of the applicable investment or commitment period, a Fund’s organizational documentation does not contemplate a Subscription Facility) or a Subscription Facility already exists, alternative fund-level financing solutions may be available to Funds based on the inherent value of their investment portfolios (each, an “Investment”). As Fund finance continues to grow in popularity, banks (each a “Lender”) have been working with their private equity and hedge fund clients in particular to assist them with unlocking the value of their Investments. The appetite for liquidity among these Funds dictates facilities that share similar characteristics, although hedge fund financing includes unique issues to address in this expanding market.

One solution for providing liquidity to a Fund is to structure borrowing availability based on the net asset value (“NAV”) of a Fund’s Investments. Although lending against a Fund’s Investments is a far different credit underwrite than a traditional Subscription Facility, we have seen a steady increase in NAV-based credit facilities (a “NAV Facility”), particularly in the context of Funds which invest in other Funds (“PE Secondary Funds”). In a typical structure, the PE Secondary Fund arranges for a credit facility to be provided to a subsidiary of the Fund (the “Vehicle”) as the borrower that is established for purposes of holding/ acquiring Investments on behalf of the PE Secondary Fund, and such Vehicle is restricted from having any indebtedness other than the NAV Facility. As security for this type of NAV Facility, 100 percent of such Vehicle’s equity is pledged in favor of the Lender...