I. Introduction

The outbreak of COVID-19 has caused widespread disruptions to economic activity worldwide, which has in turn impacted local and global financial markets. The fund finance market has nevertheless seen significant activity notwithstanding (or because of) COVID-19 in the first half of 2020.¹ While the long-term impact of COVID-19 on local and global financial markets remains unclear, we have seen an uptick in the use of management fee lines of credit and partner loan programs by market participants to bridge the near-term liquidity needs of private equity fund sponsors (each a “Sponsor”) and loan program participants. This Legal Update will provide a general overview of management fee lines of credit and partner loan programs and highlight some of the benefits and other factors to consider in light of recent financial market volatility.

II. Overview of Management Fee Lines of Credit

A management fee line of credit (a “MFLOC”) is typically a revolving credit facility provided by a bank or other financial institution (a “Lender”) to the general partner (the “General Partner”) of a closed-end private equity fund (a “Fund”) or a Sponsor-affiliated management company or investment advisor (collectively, the “Management Company”) of a Fund. As the name suggests, the basic collateral package for a MFLOC consists of the management fees paid to the General Partner or Management Company, as applicable (“Management Fees”), under the Fund’s limited partnership agreement or other applicable management or investment advisory agreement, together with a pledge over the deposit account into which the Management Fees are paid. Additionally, because the General Partner, the Management Company, or another Sponsor-affiliated entity (a “Special Limited Partner”) customarily holds an equity interest in the Fund, a MFLOC may also include a pledge by such entity or other Sponsor-affiliated investing entity’s distributions from the Fund, including carried interest, and,...