Fund financings encompass various types of facilities, such as:
- capital call and subscription credit facilities (usually short term, sometimes used to procure finance pending closing of a fund, often for investment bridging purposes),
- NAV or asset backed facilities (with recourse to the underlying investments of the fund),
- hybrid facilities (combining features of the capital call and asset backed financings, often longer term and with recourse to undrawn (sometimes “recallable” depending on the life cycle stage of the fund) commitments of the investors as well as the fund investments),
- umbrella facilities (in which separate loans are provided to multiple borrowers, often structured for individual borrowers under common management).
Borrowers include a variety of fund entities while lenders include traditional banks, credit funds and private equity funds and other alternative investors.
Luxembourg is often chosen for fund financing transactions due to the strong legal framework created by the law of 5 August 2005 on financial collateral arrangements (the “Financial Collateral Law”). The law offers bankruptcy remote security interest agreements and instruments and attracts a wide range of funders due to its creditor-friendly approach. In particular, future assets can be subject to security and related rights to claims (such as capital call rights) can be covered. These aspects provide attractive features for lenders in building security packages around fund finance facilities.
A typical security package for a capital call fund finance includes a pledge over the bank account into which investors are required to deposit their capital contributions to the fund, as well as security over the uncalled capital commitments of the investors, providing the lender with the right, on enforcement, to exercise the capital call rights under the associated fund constitutional agreement (frequently, but not always, a limited partnership agreement) and an associated power of attorney for the beneficiary of the security interest to support these rights.
In connection with the security over investors’ uncalled capital commitments, notice should be served on the investors, which can be done via an ad-hoc communication or via regular communication (e.g., in the periodic reports of the fund) and may be by way of notification on an investor portal or other valid delivery method such as email. In some circumstances (which may be driven by the drafting contained in the fund constitutional agreement) lenders also request waivers by the investors of any rights of defense, set-off or other rights – in this context, appropriate governing law may also need to be assessed, including consideration of the jurisdiction of the investor.
For NAV or asset backed facilities, the security package will extend to the underlying assets of the fund, and can include security over claims and receivables, accounts, notes, bonds, shares or other equity instruments of holding companies for example. We often see more bespoke arrangements in these transactions as parties work to structure the security around issues which might otherwise arise with third party consents and/or intercreditor challenges.
Luxembourg investment funds legislation is constantly evolving and developments are closely followed by our teams. One example of a recent change which provides for more flexibility in the fund formation process is a new law dated 21 July 2023 which recently entered into force, with the objective to improve and modernise the five Luxembourg sectoral laws on investment funds. The changes allow additional corporate forms such as the Luxembourg LP (partnership limited by shares, simple limited partnership, special limited partnership) to be used for Part II funds under the Luxembourg law dated 17 December 2010 on undertakings for collective investment (UCI), which were previously limited to public limited liability companies. The already flexible Luxembourg regulatory regime is becoming even more attractive.
