Beyond subscription lines: fund financing trends spreading across the Atlantic

When we talk about “fund financing”, discussions tend to focus on subscription line facilities - the traditional “capital call” facility is the original cast member in an industry which has evolved and grown substantially over the last 15 to 20 years.

Data today suggests 90 percent or more of European closed-ended funds currently being established will intend to use a subscription line. This is a credit facility provided to predominantly closed-ended funds, including private investment funds, which is secured on the fund’s ongoing rights to call for, and receive, capital from its investors— whether for short-term equity bridge financing, liquidity and cash flow management, or for other reasons. 

Based on Q1 2019 figures released by the Guernsey Financial Services Commission, and applying the same growth across all four quarters, Guernsey could see 64 new closed-ended funds launching this year, 57 of which should be looking to put in place a capital call facility. As fund size grows, so too does facility size, and at a typical 35 percent loan-to-value we have seen revolving facilities in the global market in excess of $3 billion in recent years.

Beyond subscription lines, however, there is a range of other finance products being offered to funds (both closed and open-ended) by an increasingly diverse lender base. A net asset value, or asset-backed, facility will come into play when a fund has called down capital to make investments and can provide security for its borrowings over those assets, the holding vehicles for those assets or the income stream arising from those assets. Given that a fund may need a subscription line and a NAV facility, we now see several lenders offering a “hybrid” facility—taking security over capital call rights and, as uncalled commitments decrease and assets under management increase, taking security over the fund’s underlying investments. This is a useful solution for those funds looking for a long-term facility from launch through to end of life. 

And this market encompasses more than just fund borrowers. General partners are expected to have “skin in the game” and to make their commitment in cash, rather than through a waiver of their management fee, so there are opportunities for lenders to provide funding at the general partner level, security for which might be taken by way of an assignment of the general partner’s right to receive the management fee and/or security over the account into which it is paid. Similarly, fund managers are increasingly looking to provide key employees with co-investment plan opportunities, whether by way of incentive or as part of the fund’s succession planning strategy. The employee’s investment into the fund can be leveraged and its limited partnership interest in the fund secured in favour of the bank or other financial institution. We have seen numerous such transactions in the US market for a number of the large private equity houses and the trend looks to be spreading into Europe.

The fund finance market has traditionally been a relatively small and relationship-driven sector. Low-interest rates and the perceived low credit risk of the products, among other factors, has resulted in rapid growth. The number and type of leverage counterparties available to funds and other borrowers in the market are at an all-time high, with the result that lenders will be vying to launch new products and structure innovative collateral arrangements. While competition among banks and alternative lenders (such as debt funds) increases, we have also noted the emerging presence recently of debt advisers into this sector, with approximately 10 active participants in the European market.
We will wait to see what impact this has on the industry, but it is clear that for Guernsey funds looking for leverage, the market is looking favourable.

Walkers Contributes 4 Chapters to ICLG's Private Client Guide 2020

Walkers has provided four chapters to ICLG's Private Client Guide 2020. The guides provide expert legal commentary on key issues and covers the important developments in the most significant jurisdictions. The guide covers common issues in private client laws – including pre-entry tax planning, connection factors, taxation issues on inward investment, succession planning, trusts and foundations, immigration issues and tax treaties.



Cayman Islands



Getting the Deal Through | Asset Recovery | Ireland 2020

Walkers (Ireland) partner Gavin Smith and of counsel William Greensmyth have provided their jurisdictional knowledge on asset recovery to Getting the Deal Through: Ireland.

Reproduced with permission from Law Business Research Ltd. Getting the Deal Through: Asset Recovery 2020, (published in October 2019; contributing editors: William Christopher, Fiona Simpson, Mary Young, Alun Milford and Melinka Berridge, Kingsley Napley LLP)


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Ireland - EBA Guidelines on Outsourcing

Ireland Update: Outsourcing – in-scope firms have been busy identifying any changes required to their outsourcing frameworks and services agreements following the entry into force of the European Banking Authority Guidelines on outsourcing arrangements in September 2019. As part of the review, considering domestic rules and key areas of priority for the Central Bank of Ireland (Central Bank) is also important. This advisory from our Regulatory team sets out some key focus areas for firms as part of their review, as well as recent messages from the Central Bank in this area.


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Burning Questions – Grand Court considers the effectiveness of "Firewall Legislation"

In an unreported judgment of the Grand Court of the Cayman Islands (the "Grand Court") In the Matter of HSBC International Trustee Limited v Tan Poh Lee (7 November 2019), Justice Kawaley provides helpful clarification of the manner in which the Cayman Islands "firewall" legislation will operate. This decision affirms the exclusive application of Cayman Islands law to questions concerning the administration of Cayman Islands trusts.

The purpose of the Cayman Islands "firewall" legislation is, in essence, to insulate trusts governed by Cayman Islands law from challenges under foreign laws or judgments on the basis of forced heirship or a personal relationship with the settlor or any beneficiaries of the trust. Firewall provisions are a common and important feature of the trusts laws of many offshore jurisdictions.

This Cayman application arose because of proceedings issued in Singapore by one of the adult beneficiaries of the Tan Kim Choo Family Scholarship Trust (the "Trust") seeking an order that the Trust be terminated. The Trust deed contained provisions naming the law of the Cayman Islands as the proper law of the Trust and the initial forum for the administration of the Trust. HSBC International Trustee Limited (the "Trustee") made an application to the Grand Court seeking, among other declarations, urgent Beddoe relief.

Kawaley J granted the Beddoe relief and approved the majority of the declarations sought. In summary:

  1. The Grand Court has exclusive jurisdiction to determine all questions raised by the Trustee as the Trust is governed by the laws of the Cayman Islands in light of the operation of section 90 of the Trusts Law (2018 Revision) (the "Trusts Law") and the terms of the Trust Deed. Section 90 determines that all questions in relation to a Cayman Islands trust are to be governed by the laws of the Cayman Islands without reference to those of any other jurisdiction.
  2. In accordance with the Trusts Law and Cayman Islands public policy relating to Cayman Islands trusts, an order of a foreign court in respect of the administration of the Trust which does not result from the application of Cayman Islands law will not be enforced or recognised in the Cayman Islands.
  3. Kawaley J was reluctant to declare that an order of the Singapore Court applying Cayman Islands law"…will not be enforced, recognised or give rise to any estoppel in the Cayman Islands." Instead he elected to substitute the word 'will' with 'may', as he found that it was not clear that the legal position operated so as to prevent the Singapore Court under any circumstances, even when applying Cayman Islands law, from determining those questions.
  4. The Grand Court is able to act as an auxiliary court in circumstances where a foreign court will not give up jurisdiction in a matter involving a Cayman Islands trust.

This judgment confirms the effectiveness of the Cayman Islands firewall provisions in circumstances where a foreign court has made an order in respect of a Cayman Islands law governed trust without any application of Cayman Islands law.