Real estate, buyout, debt, secondary and other closed-end funds have often used subscription-backed credit facilities — also known as “capital call” or “capital commitment” facilities (each a “subscription facility”) — to access cash quickly, or as a bridge to capital calls or other permanent asset-level financing. Under these facilities, lenders look to a fund’s uncalled capital commitments and rights to call capital as security for the loans and for purposes of calculating borrowing base availability. However, as funds mature beyond their investment or commitment periods and most or all of the investor capital commitments have been funded, some funds turn to net asset value (NAV) credit facilities with availability based on the underlying portfolio investments of the fund (each a “NAV facility”) for financing needs on account of the diminished borrowing availability under a subscription facility. While both subscription facilities and NAV facilities continue to grow in number and use, funds are also exploring other financing options,[1] including hybrid facilities, which provide lenders with recourse to both the uncalled capital commitments (the typical collateral under subscription facilities) and the underlying investment assets (the traditional credit support under NAV facilities). These hybrid facilities offer both funds and lenders added flexibility in tailoring a financing package that works for all parties.

Subscription Credit Facilities

Traditionally, subscription facilities have helped funds (among other things) harmonize capital calls, both in terms of size and frequency. A fund’s governing documents typically require that its investors be provided at least 10 to 15 business days’ notice prior to funding a capital contribution. Subscription facilities, however, permit funds to receive borrowings on short notice (often within one business day), permitting them to move quickly on time-sensitive investments and avoid the lead time required in calling capital from investors. Subscription facilities also help funds avoid the need to...