An aftercare facility may be a viable alternative to traditional financing arrangements. In this Legal Update, we explain:

• the differences between aftercare facilities and other credit facilities
• how aftercare facilities can be used by lenders and funds when financing is needed after the investment period has expired; and
• how lenders can protect themselves when entering into these facilities.

Background

After the investment period of a private equity fund, a significant portion of the committed capital has usually been called down. As a result, there are often insufficient uncalled capital commitments to support a traditional subscription-backed credit facility. While this situation is not new, the current economic headwinds have exacerbated the challenges of investment exits, creating a growing demand for post-investment period liquidity and leverage options to bridge the gap until investments are realized. While considerable attention has been given to net asset value (“NAV”) credit facilities and “hybrid” fund financings as solutions to this trend, another option —known as an “aftercare facility” — is sometimes overlooked.

What to Know

An aftercare facility is essentially a subscription credit facility that calculates the borrowing base using higher advance rates and/or relaxed concentration limits compared to a traditional subscription facility. To mitigate the risks associated with a more aggressive borrowing base, these facilities often include asset-level covenants similar to those found in NAV facilities. However, unlike NAV facilities, aftercare facilities do not require an equity pledge over the assets as collateral (although some may include lender control over an investment proceeds account as additional support).

On the spectrum of fund finance products, aftercare facilities can be considered a “hybrid-light” option. They involve significant asset-level covenants and underwriting, but the collateral is exclusively the “subscription facility” collateral (unless an investment proceeds account is also provided, as noted above). Aftercare facilities are a suitable choice...