Introduction

As the fund finance market continues to expand, we have seen a growing interest among real estate and other private equity funds (each, a “Fund”) in unleashing the value of their assets to optimize investment returns. In order to meet the financing needs of these Funds, a growing number of banks and other credit institutions (each, a “Lender”) are providing credit facility products supported by a pool of the Fund’s unencumbered assets (each a “UAP Facility”). While loan availability under UAP Facilities is most often based on the value of a Fund’s unencumbered real properties, recently we have seen unencumbered private equity assets serve as a basis of loan availability in an increasing number of transactions. In light of this trend, this article will discuss common features of UAP Facilities and compare UAP Facilities to subscription-backed credit facilities (also known as “capital call” or “capital commitment” facilities, and each a “Subscription Facility”), net asset value credit facilities (each a “NAV Facility”) and hybrid credit facilities (each a “Hybrid Facility”).

Common Features of Subscription Facilities, NAV Facilities and Hybrid Facilities

Loan availability under a Subscription Facility is subject to a borrowing base, which is typically tied to the value of the pledged uncalled capital commitments of investors satisfying certain eligibility requirements, multiplied by an advance rate. Subscription facilities commonly outline certain events (e.g., investor bankruptcy, failure to fund capital contributions, withdrawal or excuse rights) that exclude investors from the borrowing base calculation. In connection with a Subscription Facility, a Lender will customarily receive a pledge by the Fund and its general partner of their respective rights: (1) in and to unfunded capital commitments of the investors in the Fund; (2) to make capital calls and enforce the obligations of the investors to contribute capital; and (3) to the deposit accounts...