FUNDed
GLOBAL
Market Reviews
ESG
Navigating Sustainability in Fund Finance
BLURRED LINES
Rated Note Feeders, Collateralised Fund Obligations and Structured Finance
What's Inside
In this edition, we feature:
Opening remarks from Tina MeighGlobal Head of Finance
Resilience and Evolution in the Asia Pacific Fund Finance Landscape 1 4 6 16 8 18 13 20 2
US Market Review
European Market Review
ESG – Navigating Sustainability in Fund Finance
Blurred Lines – Rated Note Feeder / Securitisation
ICAVs and ILPs in Irish Fund Financing
Boiling Over: The Surge of Luxembourg's Fund Finance Market Amid Regulatory Reforms
Navigating the Jersey Fund Finance Landscape: Insights and Legal Framework
The Maples Group is delighted to present our July 2024 edition of FUNDed.
US Market Review
The fund finance market has continued to evolve over the last 12 months, with existing trends persisting and, in some cases, accelerating. These trends and the market's response to them are indicative of a resilient and increasingly dynamic fund finance ecosystem, and the continued growth and innovation in the market is a cause for genuine optimism.
Subscription Lines
The subscription line market continues to be shaped by constraints on banks' lending capacity, higher interest rates, and a more cautious approach to utilisation by fund managers. Despite these challenges, deal flow was consistent, albeit with extended timelines, that align with the general fundraising climate. On a positive note, higher interest rates do not appear to be dampening overall demand for subscription lines. Extensions of existing deals are common and often accompanied by an increase in margin. The use of hybrid facilities, which are proving particularly useful for continuation funds, but there is currently no indication of a significant uptake in the wider market.
On the supply side, we are still seeing the same big "traditional bank" players across our global practice. While these banks continue to dominate, we are also seeing new bank entrants take advantage of capacity constraints among more established lenders, targeting fund managers who may otherwise be squeezed out of the market.
We have advised on many structured finance solutions that address capacity constraints among lenders, and it will be interesting to see how these can be applied to the fund finance market and the effect this will have on deal flow.
The use of bankruptcy remote structures has emerged as another key trend with a marked increase over the last 12 months.
NAV Facilities and Non-Bank Lenders
Net Asset Value ("NAV") facilities remain a hot topic. Structure and terms vary considerably and we continue to see a high degree of customisation and innovation. Despite some negative coverage in the media, the strategic importance of NAV facilities for fund managers is clear and we expect their importance to continue to grow as the market matures.
Non-bank lenders continue to gain traction, leveraging their ability and deep sector expertise to accommodate niche and complex transaction structures. They are proving to be particularly well-suited to NAV facilities and all indicators suggest that non-bank lenders will become increasingly important in the global fund finance market.
Outlook for Q2 2024 and Beyond
Bankruptcy Remote Structures
The use of bankruptcy remote structures has emerged as another key trend with a marked increase over the last 12 months. The Cayman Islands has shown itself to be particularly well-suited to these transactions, able to draw on a wealth of experience and technology from other segments of the market, most notably securitisations and asset finance. Through our market-leading service offering, encompassing both legal and fiduciary services, we continue to be at the forefront of this exciting trend.
The global fund finance market has proven itself to be resilient in the face of challenging economic headwinds. The market continues to grow and we are seeing a maturing and increasingly diverse and adaptable ecosystem. Having seemingly weathered the impact of higher rates, the market can look forward to the possibility of rate cuts which could stimulate M&A activity, facilitate exits and enhance investor liquidity. Such a shift may serve to improve the fundraising landscape and, in turn, may increase the demand for fund finance products and spur further innovation. Although constraints on lending capacity could temper growth to some extent, they could also prompt a renewed emphasis on finding creative solutions to capacity constraints, as well as expanding opportunities for new market entrants.
For further details, please contact:
Matthew St-Amour
+1 345 814 4468
matthew.st-amour@maples.com
European Market Review
We have seen an active first half of 2024 in the fund financings across our European offices. The increase in the size and activity in the European Fund Finance market was reflected in the recent European Fund Finance Symposium, hosted by the Fund Finance Association (FFA), being the largest of its kind in London to date.
We expect 2024 to remain busy given the current market conditions and the continuing need for liquidity to finance transactions.
We continue to see our clients work on the whole range of products across our offices being sub-lines, NAVs, GP and hybrid facilities across their various fund structures. We expect 2024 to remain busy given the current market conditions and the continuing need for liquidity to finance transactions. Our larger fund clients are requiring increasingly large facilities, resulting in greater use of syndicated loans. There is a continuing strong demand for capital call facilities which are becoming more commoditised with more ratings requirements being observed and developed in the market, and our larger fund manager clients continue to raise substantial funds in conjunction with financing extensions, re-financings as well as moving to utilise NAV facilities particularly for capital relief purposes. As the market matures, the complexity in NAV financings increases with NAV products being designed to adopt features from other forms of lending to offer bespoke solutions to borrowers. Alternative lenders continue to enter the NAV space to take strategic advantage of the higher margins available compared to sub lines.
Our Luxembourg office has been busy with umbrella facilities, which are perceived as an efficient type of financing arrangement, with one framework agreement negotiated and agreed from the outset, leaving the opportunity to fund groups to take advantage of it from time to time by submitting sub-facility requests, with the flexibility to easily adapt pricing, rates and other terms to then prevailing market conditions.
The 2023 trends in the Irish market continue into 2024 owing to various macro-economic conditions. Sub-line facilities are still heavily utilised with one-to-two-year terms, as well as an uptick in the volume of refinancings and extensions. While some NAV financings are anticipated, trading volume is not expected to be significant through 2024. The majority of lenders fall within the traditional bank lender category, although we expect some alternative lenders moving into this space before the end of Q4 2024. Deals on the whole have been slow to progress through the start of the year, likely due to the time lag between fund launch and the subsequent arrangement of a
subscription line facilities that can span several months. This applies to all types of Irish funds, including those structured by Irish Collective Asset-management Vehicles ("ICAVs"), Investment Limited Partnerships ("ILPs"), and unit trusts, as they engage in transactions. There remains some cautious optimism in the Irish market for an EU interest rate reduction this year which, if it happens, will stimulate more demand across the spectrum of fund finance products.
For further details, please contact:
Jonathan Caulton +44 20 7466 1612
jonathan.caulton@maples.com
ESG – Navigating Sustainability in Fund Finance
Navigating Sustainability in Fund Finance: Insights from the LMA Guidelines
In the ever-evolving landscape of fund financing, Environmental, Social, and Governance ("ESG") principles are emerging as important considerations. Investors are increasingly scrutinising a fund's ESG strategy and agenda, recognising its impact on investment decisions. Reflecting this growing emphasis, the Loan Market Association ("LMA") in conjunction with the Fund Finance Association, Asia Pacific Loan Market Association and the Loan Syndications & Trading Association released a comprehensive guide in March 2024 (the "Guide"¹), aimed at providing practical insights into applying sustainability-linked loan principles ("SLLP") to fund finance transactions. The LMA's new guide addresses challenges and identifies opportunities in fund finance transactions. Investors' growing focus on a fund's ESG strategy underscores the importance of aligning with evolving sustainability objectives.
Understanding Sustainability-Linked Loans
Distinguishing between green loans, social loans and sustainability-linked loans ("SLLs") is essential in grasping their unique characteristics. While green and social loans are earmarked for specific environmentally friendly or socially impactful projects, SLLs offer greater flexibility, allowing proceeds to be used for any corporate purpose (including the payment of fees) provided the key elements of the SLL are adhered to. SLLs operate by aligning sustainability performance targets ("SPTs") with commercial terms, offering a versatile approach to fund finance transactions. This nuanced understanding allows fund managers to tailor financing solutions to their specific ESG strategies.
Navigating Challenges
Even for funds with sophisticated ESG strategies, challenges can arise in qualifying for SLLs. The Guide outlines certain notable hurdles, from limited data availability for newly formed borrowers to the complexity of identifying key performance indicators ("KPIs") and Sustainability Performance Targets in uncertain investment scenarios. Proactive adherence to the Guide and leveraging industry best practices can mitigate these challenges, facilitating smoother integration of ESG principles into fund finance transactions.
Selecting Key Performance Indicators
The Guide states that maintaining the integrity of the SLL market necessitates selecting KPIs tied to ambitious sustainability objectives. This can prove challenging where the borrower has limited operational information at a fund level or where there is inherent ambiguity over a fund's anticipated investments. While borrower-level KPIs are common, investment-level metrics are gaining traction. The Guide suggests a number of options include linking KPIs to investment goals, impact metrics or gradually phasing them to accommodate evolving investment strategies. Coupled with these challenges is the fact that some fund financings typically have short life spans with maturity dates falling within 1-3 years meaning that there is a short window of time to apply KPIs and measure a fund's progress. 1
Calibrating Sustainability Performance Targets
The Guide notes that SPTs must be suitably ambitious, aligning with the borrower's sustainability strategy and demonstrating material improvements beyond standard benchmarks. This can be difficult as often the borrower will have recently been formed with limited data available leading to inconsistency in application of the SPTs. External guidance and historical performance comparisons (where available) aid in setting feasible SPTs, ensuring alignment with industry standards and borrower objectives. In a fund finance transaction, although not an exact science, this may involve a review of investments funds under the same sponsor entity to determine the suitability of the borrower's objectives and projected performance.
Verification and Reporting
The Guide emphasises that assessing a loan's compliance with SLLP requires careful evaluation of the fund's ESG strategy and industry policies. Robust reporting and verification mechanisms are essential for ensuring transparency and accountability in ESG integration. While data availability poses challenges, annual reporting on SPTs to lenders is recommended, along with mechanisms for continuous assessment. This can be contentious where the implications of SLL requirements extend beyond the existing requirements of investors generally and, as a result if more onerous, can often be a costly and labour-intensive process. Negotiating reporting requirements during loan discussions ensures clarity and transparency and addressing these considerations early in the negotiation process can lead to a more effective use of information that will already be being prepared in any event for other purposes in connection with the financing. Challenges such as data availability and verification processes exist, however standardised reporting frameworks and third-party verification by for
example ESG-rating providers can enhance credibility and comparability of ESG metrics. Collaborative efforts between stakeholders and regulatory bodies can further streamline reporting requirements, fostering greater transparency and trust in ESG disclosures.
Future Outlook
Escalating climate change effects and geopolitical tensions have magnified the importance of ESG principles in fund finance. Funds embracing ESG strategies are better poised to navigate future risks and capitalise on opportunities, presenting a lower credit risk to lenders. As ESG considerations continue to shape the fund finance landscape, market participants face both challenges and opportunities. As regulations and mandatory disclosure policies evolve, we anticipate a more standardised approach to ESG integration in fund finance matters coupled with increasing investor demand for sustainable investment practices. By navigating these challenges adeptly, stakeholders can pave the way for a more resilient and responsible fund finance ecosystem.
For further details, please contact:
Sarah Francis
+353 1 619 2753
sarah.francis@maples.com
Micaela Wing +1 345 814 5436 micaela.wing@maples.com
Rated Note Feeder / Securitisation
Blurred Lines – Rated Note Feeders, Collateralised Fund Obligations and Structured Finance
As evidenced by increasingly frequent discussions in the fund finance market, rated note feeders ("RNFs") and collateralised fund obligations ("CFOs") are unique structures that, while having been used sporadically for the last few decades, are gaining notoriety in the world of fund finance. RNFs and CFOs encapsulate elements of both structured finance and traditional fund finance, offering sophisticated solutions that enhance a fund's access to new streams of capital and allow for investors to manage risk while gaining new investment opportunities in private markets.
These structures have several similarities to structured finance and with increasing comfort in the market of such structures, the distinctions in certain areas between structured finance and fund finance are becoming increasingly blurred. This article explores at a high level the mechanics of RNFs and CFOs, the potential risks for lenders into RNF and CFO structures, with a cross comparison to the world of structured finance.
Rated Note Feeders
Feeder funds are vehicles in the larger fund structure that provide for specific tax, regulatory or structuring needs of the investor base. An RNF is simply another form of feeder vehicle that is specifically designed for certain types of regulated investors, most commonly insurance company investors, and their use is typically investor-driven. The RNF will issue both notes (backed by the assets of the underlying fund and representing the larger portion of the split) and equity, as opposed to a traditional feeder fund that only issues equity, thus allowing for accessibility of private equity to investors that need to invest with the security of rated debt instruments.
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Declaration of Trust (LP interest or shares, as applicable)
Debt in form of notes (e.g Class A, Class B) (Note Purchase Agreement Indenture)
From a fund structuring perspective, overall, the RNF arrangement is intended to be functionally equivalent to a normal equity investment via investor capital contributions. There will likely be a partnership agreement (if the RNF is structured as a partnership, and in the Cayman Islands, this would typically be an exempted limited partnership) and a subscription agreement, but with the addition of an offering supplement that addresses the rated note product and a note purchase agreement that covers the mechanics for the issue of the notes and funding of further advances. An RNF will have a capital commitment (direct or indirect) to the main master fund in the structure. The RNF's constitutional documents will include provisions tailored to address the bespoke nature of the fund, the RNF and the investor's individual requirements (e.g. different tranches or classes of notes, ratio of debt to equity split). Through the fund structure, there will be corresponding contractual capital call and capital contribution mechanisms to ensure a seamless flow of capital contributions by, and capital returns to, the investors.
Collateralised Fund Obligations
The CFO can be seen as an extrapolation of the rated note feeder into a more typical securitisation structure. The issuer is set up as a special purpose vehicle that invests, often through a Holdco, in a pool of limited partnership or similar equity interests in a diversified range of private equity funds (as opposed to an RNF which is likely to only invest in one single fund structure). Those interests (or the cash proceeds therefrom) comprise a collateral pool for different classes of rated notes that are issued by the CFO SPV to its investors, typically as equity and senior and junior notes, which will offer fixed interest payments funded by distributions from the underlying funds to their investors, and which will be secured by the underlying fund interests.
Similarities with Structured Finance
RNFs and CFOs embody the principles of structured finance through their use of ratings, credit enhancement, tranched structures and, in the case of CFOs, often take the form of bankruptcy remote SPVs. These elements, traditionally associated with instruments like mortgagebacked securities ("MBS") and collateralised debt obligations ("CDOs"), bring a new level of sophistication and risk management to funds and provide a new layer of opportunities for the fund finance market. They also allow for both these forms of structuring to use credit ratings to provide additional transparency and risk assessment for investors, as well as lenders lending into such structures.
While an RNF may only invest into one particular fund structure, CFOs pool investments from multiple
funds which when tracking through to the underlying investments may reach potentially hundreds of underlying portfolio companies. Like CDOs and MBS, CFOs: (i) pool various underlying assets, creating a diversified portfolio that spreads risk; (ii) utilise tranching to appeal to different risk appetites, with senior tranches offering lower risk and higher-rated securities; (iii) have a cashflow distribution that mimics that of traditional structured finance products; and (iv) aim to redistribute risk, allowing investors to choose investments aligned with their risk tolerance and return expectations.
The rating of the notes provides credit enhancement, similar to structured finance products, making RNFs and CFOs attractive to risk-averse investors or those that are otherwise restricted by regulation from pure equity investments (e.g. insurance companies that will benefit
Issuer SPV
from an improved risk-based capital treatment of the notes than they would with equity investments). While not always present, tranching can be used in RNFs and CFOs to cater to different investor risk appetites, akin to the tranching seen in CDOs and MBS.
Points of Consideration
The use of these products will require detailed consideration given their complexity, including regulatory and structuring factors, industry body scrutiny and lender credit approvals.
RNFs and CFOs require comprehensive Cayman Islands and other structuring advice to ensure the efficiency and viability of the overall fund structure and cashflow interaction including consideration of certain risks and concerns (which will likely apply to other jurisdictions where the issuer and fund vehicles are formed):
• where a sponsor's desire to maintain a particular level of rating for the noteholder's risks upsetting direct equity investors in other vehicles that form the wider fund structure. An inherent conflict of interest may arise where the aim of maintaining a rating interferes with the investment manager's duties to other investors;
• the effect of additional closings of the downstream fund(s) and the impact on the RNF or CFO issuer. Can it participate in such closing (perhaps through the use of additional closings of notes at the issuer level, if contemplated in the note issue documentation) or, will a resulting re-balancing at the underlying fund level and return of capital contributions from the underlying fund require allocation of proceeds among noteholders;
• if there is a mismatch in synchronicity of contribution requirements and distribution waterfalls across the structure given the inherent nature of variable timings of these payment processes in private equity investments, especially in a market facing difficulty in exiting investments, scrutiny of underlying valuations and extended investment periods. While a standard master-feeder structure will include cascading language through the structure around capital calls, and potential recycling and recalling of distributions, RNFs and CFOs will need to ensure that they do not risk being unable to "call" capital from the noteholders to make contributions to underlying investments. As interest payments are usually not otherwise
recoverable from debt investors, cash reserves at the CFO or RNF level should be maintained as well as possible issue of delayed draw or variable funding notes in order to maintain cash at the issuer level. Typically, issuers will also have a liquidity facility in place to be used by the issuer to make interest payments, pay expenses and fund capital calls from the underlying investments.
More broadly, caution should be taken with CFOs and RNFs to establish their treatment under securitisation regimes in jurisdictions outside of the Cayman Islands and whether, among others, any risk retention or disclosure requirements will apply in those particular jurisdictions. Different considerations will be applicable to RNFs and CFOs with a US focus as opposed to those with a UK or European focus.
Looking to fund finance lender considerations, as the RNF market is relatively nascent, its use may cause concern for lenders unfamiliar with the product in an otherwise familiar market of subscription-line and NAV facilities. While subscription-line lenders are familiar with feeder funds and how to obtain security over equity capital contributions and rights to call capital at structural levels above a master fund borrower, it may take some time to get comfortable with dealing with investor contributions that come in the form of debt. The usual proposed route to enforcement of security would be to step into the shoes of the general partner and call capital from investors, but if the structure of the notes issued and contractual rights in respect thereof are not aligned to the cascading flow of funds in the structure, a lender may not have the rights it thinks it does.
NAV lenders in the fund finance space may be more comfortable with these structures if they look downstream to CFO investments, particularly if the product has been rated and an independent ratings agency has analysed the risk of the underlying portfolio. While not a substitute for a lender's own due diligence and monitoring of the investment portfolio, there is a level of comfort provided by a third-party analysis of the assets and risk profile.
Aside from overarching structuring concerns in forming the CFO or RNF, it is also a key step in the consideration of establishing a RNF or CFO whether traditional fund financing will be utilised and how that might look in terms of the collateral package that can be offered to the lender.
The Cayman Islands' dominance in the private equity funds space, coupled with its common use as a jurisdiction for structured finance products, will assist in ratings agencies analysing CFO and RNF structures with Cayman Islands vehicles in the structure and we expect to see an increase in their popularity. We noted an increased number of these structures through 2024 and are discussing the rating considerations with various rating agencies in order to further assist the market in developing this product. With further usecases in the market and increased discussion between market participants and industry education, it is expected that these products will be enhanced for the benefit of all stakeholders.
For further details, please contact:
Robin Gibb +1 345 814 5569 robin.gibb@maples.com
ICAVs and ILPs in Irish Fund Financing
In previous editions, we have explored the key features of Irish collective assetmanagement vehicles ("ICAVs") and of investment limited partnerships ("ILPs") and their role as borrowers and security providers in subscription line financings. In this article, we examine the key features of, and differences between, an ICAV and an ILP in the context of Irish fund financings.
Irish Fund Vehicles – Legal Form
Ireland is a leading international domicile for funds; in addition to a service provider ecosystem with global expertise, there is a sophisticated legal and regulatory system. It offers fund managers and investors a wide variety of options to establish and finance fund structures.
Irish funds may be established in various legal forms including ICAVs, ILPs, common contractual funds and unit trusts. This article focuses on ICAVs and ILPs as the most common forms of vehicle in Ireland.
Regulated by the Central Bank of Ireland (the "CBI"), ICAVs and ILPs are each established under their respective statutory regimes, namely the Irish Collective Asset-management Vehicle Act, 2015 and the Investment Limited Partnerships Act, 1994.
An ILP adopts a common law partnership structure familiar to investors as it aligns closely with the limited partnership structures in other international funds domiciles in which the Maples Group operates such as Cayman Islands ELPs and the Luxembourg SCSp. An ILP is formed by a general partner entering into a limited partnership agreement ("LPA") with an unrestricted number of limited partners.
An ICAV is a corporate body with separate legal personality, formed upon registration with the CBI with two or more founder shareholders, whereas the ILP as a partnership has no legal personality and acts through its general partner.
Both the ICAV and the ILP are flexible vehicles (for example both can be set up as umbrellas funds) and can be open-ended or closed-ended and have minimal restrictions on investments. There are no restrictions on the use of financing by the ICAV and the ILP, with a full security package available to lenders over all assets, including contractual call rights in any master / feeder structure, subject to the current guarantee restriction referenced below. There is full flexibility for an ICAV or an ILP to utilise subscription financing, margin lending, NAV and other types of facilities including total return swaps and other derivative arrangements.
As noted above, ICAVs and ILPs differ structurally. While such differences will inform an investor or fund manager's choice of fund vehicle, they have limited impact on the nature of the financing or security.
Regulatory Regime and Wrappers
ICAVs and ILPs may be established as either UCITS (under the UCITS Directive) or AIFs (managed by an AIFM in accordance with AIFMD). UCITS, as per se retail and highly liquid products, are not relevant in the context of fund finance as they have a limited ability to borrow.
A CBI-regulated AIF can be established in Ireland as either a qualified investor alternative investment fund ("QIAIF"), a retail investor alternative investment fund ("RIAIF") or a European long-term investment fund ("ELTIF"). In Ireland, all three types of AIF are (in addition to the statutory regime for the vehicle) subject to the relevant chapter of CBI's AIF Rulebook. In the ELTIF chapter, there are some material differences in the rules
applicable to it as against those applicable to RIAIFs and QIAIFs under their chapters in the AIF Rulebook. This is largely in part due to the fact that the ELTIF has its own EU-level product regulation, which is harmonised across the EU and prescribes the eligible investments diversification / restrictions, borrowing limits and liquidity of the ELTIF.
QIAIFs are currently the flagship form of AIF in Ireland, particularly for private funds, and the one we see most often in the context of fund finance.
Due Diligence
The constitutional document of an ICAV is the instrument of incorporation (akin to the M&A of a company). The constitutional document of an ILP is the LPA.
Both ICAVs and ILPs will also have a prospectus which sets out, among other things, a statement of the general nature and investment objectives of the fund, and any borrowing and leverage restrictions. Each will also have contracts with key fund service providers including its administrator, AIFM (which often delegates discretion to an investment manager) and depositary.
In the context of a subscription line financing for either an ICAV or an ILP, as with other jurisdictions, performing due diligence on the fund's constitutional documents and subscription agreements is fundamental for a lender.
In Irish fund financings, for both ICAVs and ILPs, in addition to the above documents, it is also important to carry out a review of the contracts with the fund service providers. The primary purpose is to establish if:
a. any consents are needed from the fund service providers in relation to the transactions and creation of security contemplated by the financing;
b. capital call rights have been delegated to a fund service provider (for example, the alternative investment fund manager (AIFM) (which will often be the case); and
c. any fund service provider has a role in the issuance, management or registration of capital calls and drawn down capital (for example, an administrator).
The review will impact the drafting of the finance documents and, in particular, the security package. It is market practice for the relevant fund service providers to enter into a side letter with the lender to acknowledge that security has been created over the capital call rights and unfunded capital commitments. This is to ensure that the relevant service provider follows the instructions of the lender in respect of making capital calls upon an enforcement event.
There is full flexibility for an ICAV or an ILP to utilise subscription financing, margin lending, NAV and other types of facilities including total return swaps and other derivative arrangements.
Security and Guarantees
Restriction on Guarantees
As discussed in our June 2023 publication² , pursuant to the CBI's AIF Rulebook, a fund which is established as a QIAIF (whether an ICAV, ILP or other vehicle) is restricted from acting as a guarantor on behalf of a third party. The market view is that the restriction does not apply to providing guarantees for a wholly-owned subsidiary.
The accepted view in the Irish market is that the guarantee restriction also applies to ICAVs or ILPs providing third-party security, i.e. security for a third party's obligations.
The restriction can become relevant in the context of financings to a master / feeder structure with an Irish feeder and a master borrower. In such circumstances, as examined in detail in our June 2023 edition, a cascading security package can be used whereby the Irish funds create security only for their own rights / obligations to the master / borrower fund, which then secures such rights to the lender. This involves a series of security assignments, which protects lenders by providing access to the ultimate source of investor capital commitments. This is widely used and accepted in the market.
Both ICAVs and ILPs can enter into such cascading security arrangements.
Perfection of Security Notices
To perfect the security created over the contractual commitments of the investors to the ICAV or ILP, and in order to ensure that a legal, rather than equitable, security assignment is created over those contractual commitments, a notice of the security must be served on investors. In the context of an ICAV, the investors will be the shareholders in the Irish fund and in the context of an ILP, the investors will be the limited partners.
For both ICAVs and ILPs, the serving of notice should follow the fund's usual method of communication with investors, such as email or posting on investor portals. Evidence that the notice has been received by the relevant investor should also be provided by the borrower (and is generally a CP in the FA).
Security Filings
Subject to certain limited exceptions, in order to perfect the security created by an ICAV, a filing must be made within 21 days of the creation of that security with the CBI.
No filings have to be made at the CBI in respect of security created by an ILP. However, if the ILP has a general partner which is an Irish company, a security filing should be made at the Irish Companies Registration Office within 21 days of the creation of the security against the general partner in its capacity as general partner of the ILP. If the ILP has a general partner which is non-Irish, advice should be sought in the jurisdiction of the general partner in relation to any necessary security filings.
For further details, please contact:
Elizabeth Bradley
+353 1 619 2737 elizabeth.bradley@maples.com
Sarah Francis
+353 1 619 2753 sarah.francis@maples.com
Alma O'Sullivan
+353 1 619 2055 alma.osullivan@maples.com
Vanessa Lawlor
+353 1 619 7005 vanessa.lawlor@maples.com
Please see link to SFDR Brochure for further details.
2 www.maples.com/en/knowledge-centre/2023/6/funded-june-2023
Boiling Over: The Surge of Luxembourg's Fund Finance Market Amid Regulatory Reforms
The boiling Luxembourg fund finance market kept our fund finance team very busy from mid Q1 and through Q2 2024. Despite the challenges the global market faces through 2023, especially on the lender side, deals quickly picked up early in the year and there is a consensus that the volume of deals has been higher than 2023 on a year-to-date basis. We all expected an increased number of NAV facilities and, beyond these, a greater diversity in types of financing arrangements. While this is indeed what has happened, with a higher proportion of NAV and hybrid facilities being set up, we have not seen less sublines. Quite the contrary, in fact. We have worked on many sublines being established, alongside refinancings and the numerous amendments, extensions and increases. It was also reassuring to hear that most market participants were relatively optimistic on the activity for the next few months and so far, the predictions proved to be accurate. A large number of conversations around Luxembourg hinted at the upcoming amendments to the AIFMD entered into force on 15 April 2024 which must be transposed into national law in each Member State within 24 months. There had not been many regulatory updates that affected the EU fund finance market recently, and everyone seems keen to look into this reform and determine to which extent this will impact the funds'
documentation and activity as well as indirectly, our fund finance deals. It is in the field of loan origination that the new regulatory framework will impact our documents.
In a nutshell, one can distinguish two sets of rules. Firstly, those that will apply to all AIFs that originate loans, either directly or, if it is involved in the structuring or the defining or pre-agreeing of the loan characteristics, through a third party or special purpose vehicle. The main obligation bearing on such AIFs will be the retention requirement, whereby an AIF must retain 5% of the notional value of any loan it has originated and subsequently transferred. Other measures may be cited such as the requirement to implement effective policies, procedures and process for the granting of credit and for the assessing and monitoring of credit risk and credit portfolio, or the diversification requirement whereby the notional value of the loans originated to a single borrower is capped at 20% of the AIF's capital where the borrower is itself an AIF, a UCITS or a financial undertaking. There are also concentration limits, i.e. restrictions at the level of the borrowing entity, which cannot be, for instance, the AIFM, the AIF's depositary, or the AIFM's delegates, etc.
Secondly, there are rules that will apply solely to loan-originating AIF, i.e. those AIFs whose investment strategy is mainly to originate loans or whose originated loans' notional value amounts to at least 50% of its NAV. The regime specifically applicable to those AIFs consists of two main elements: (i) the setting up of leverage caps, 175% of the net asset value of the relevant AIF if it is open-ended to 300% if closed-ended, it being noted that such limits will not apply in case the lending activity consists solely of originating shareholder loans (under the condition that the notional value does not exceed 150% of the capital of the AIF) or borrowing arrangements that are fully covered by contractual capital commitments from investors, i.e. capital call facilities / subscription lines; and (ii) for open-ended AIFs only, the requirement for adequate risk management systems compatible with the investment strategy and the redemption policy. Members States shall however prohibit AIFMs from managing AIFs that engage in loan origination where the whole or part of the investment strategy of those AIFs is to originate loans with the sole purpose of transferring those loans or exposures to third parties.
They main exemption that is provided for under AIFMD II are shareholder loans, i.e. loans granted by an AIF to a borrower undertaking in which the AIF lender holds at least 5% of the capital or voting
rights and which cannot be sold to third parties independently of the capital instruments held by the AIF in the same undertaking. Benefiting from this exemption will require extra scrutiny to be applied to these intragroup loan instruments so as to ensure that they are sufficiently linked to the equity.
The intention behind this loan origination regulatory framework is that AIFMs be authorised to carry out the activity of originating loans on behalf of an AIF across the EU, and the Directive calls for common rules to be laid down to establish an efficient internal market and ensure a uniform level of investor protection across all Member States. Obviously, in the transitory phase, most will be looking at their structure in order to determine whether adjustments need to be made to adapt to the new framework or to benefit from the exemptions. But what matters the most are the rather promising perspectives the reform purports to offer.
We are moving from an environment where the granting of loans by AIFs was not regulated (in contrast with the heavily regulated framework applicable to credit institutions), to a uniform EU-wide regulatory framework dedicated to it. The aim is not to discourage the activity of cross-border loan origination, but to encourage and foster its development in order to address the insufficient means of financing
the European real economy, always ensuring investor protection, financial stability and monitoring of systemic risk. Whether these ambitious goals will effectively be achieved remains to be seen. Putting things into perspective, the Securitisation Regulation (EU 2017/2402), looking with envy at the US securitisation market that is disproportionally larger, already aimed, by enhancing legal harmonisation and standardisation, at establishing a Capital Markets Union and promoting securitisation as a key tool on the European financial markets, allowing a diversification of funding sources to help funding the real economy. These results have not been achieved yet, and the Securitisation Regulation is often perceived as suffering from overregulation. We may reasonably be more optimistic in the case of AIFM II and would welcome the development of loan origination by AIFs as a means to stimulate the fund finance market and tackle the lack of funding sources we have been experiencing for a number of years.
For further details, please contact:
Navigating the Jersey Fund Finance Landscape: Insights and Legal Framework
The Maples' Jersey team identified a prevailing sense of optimism about the fundraising environment through the first half of 2024 and noted the sustained popularity of capital call facilities in the jurisdiction. Deal flow suggests that the market will continue to flourish through the rest of 2024. This article aims to provide an overview of the legal considerations and processes relevant to both sponsors and lenders working with Jersey fund structures.
Jersey Fund Structures
The Jersey limited partnership is the preferred structure for funds established in Jersey, sharing many similarities with limited partnerships in other jurisdictions. These similarities extend to the provisions in limited partnership agreements concerning capital calls and the capacity of the fund to secure those call rights. Jersey also offers a variety of corporate structures, including innovative cell structures, which provide additional options for fund formation.
Local Law Security Regime
Jersey's distinct security regime is governed by the Security Interests (Jersey) Law 2012 (the "SIJL"). When dealing with Jersey fund structures or bank accounts, lenders typically take security through a Jersey law security interest agreement (an "SIA"). While this agreement includes Jersey-specific provisions for attachment, perfection, and enforcement, it does not exclude the possibility of taking additional security under other jurisdictions' laws, such as English or New York law.
Market Approach
Consistency In the Jersey market, it is customary for the key provisions of an SIA to align with or reference the principal finance documents. This ensures that the secured liabilities, the security period, and the events of default are consistent across all transaction documents.
Perfection Requirements in Fund Finance Transactions
The SIJL outlines several methods for perfecting security, which vary based on the collateral and the nature of the grantor. A principal method involves registration on the Jersey Security Interests Register (the "SIR"), a public ledger where SIAs can be recorded for grantors located anywhere globally. Registration on the SIR is a common step in fund finance transactions and is significant because it eliminates the need for investor notices or acknowledgments as a requirement for perfection. Nevertheless, it is a common practice in Jersey to notify investors, which is more of a commercial practice than a legal necessity.
Conclusions
The Jersey security regime underwent a significant overhaul with the introduction of the SIJL in 2014, resulting in a modern framework that has been markettested over the past decade. The 'Jersey Private Fund' continues to gain traction among managers, especially with further enhancements on the horizon. Lenders can be assured by the creditor-friendly nature of Jersey's local security regime when engaging with Jersey-based fund structures.
For further details, please contact:
Mark Crichton +44 1534 671 323
mark.crichton@maples.com
Resilience and Evolution in the Asia Pacific Fund Finance Landscape
Overview of Asia Pacific Fund Finance Market
Despite the ripples in the market caused by the collapse of the Silicon Valley Bank last year, the APAC market has remained strong. International investors appear to be moving away from developing markets³ like China or India and favouring developed economies like Japan⁴ . Various large investment firms have publicly expressed their enthusiasm for Japan as a market for traditional buyouts⁵. The Fund Finance Association hosted its first conference in Japan in April 2024. In the APAC market, historically, traditional bank lending has been, and remains the primary source of funding. Banks provide around 80% of market credit⁶ and in the context of fund financing, subscription line facility remains to be the main product. We see that with the high interest rate, banks in the region generally make fewer conventional loans but due to the influx of lenders towards the end of 2023, the cost of subscription line financing has reduced notably. Net asset value ("NAV") financing also seems to be on the rise in Asia.
Typical Investment Fund Structure
Due to its tax neutral status, flexible structuring options and English-based legal system, the Cayman Islands remains a popular choice of jurisdiction for Asian investors. Investment funds are typically structured as Cayman Islands exempted limited partnerships. General partners tend to prefer utilising Cayman Islands exempted limited liability companies as its management vehicles.
Key Due Diligence Questions for Fund Financings in Asia
Historically, partnership agreements in Asia tend to be silent or contain certain restrictions or consent requirements on borrowing or granting security over partnership assets. As fund managers are more conscious of potential financing requirements, it is now common in Asia for partnership agreements to contain express permission for borrowing or guarantee or grant of security to facilitate financing arrangements, but this is still a point to note when working with legacy funds with slightly older partnership agreements.
It is also worth considering the governing law of the security agreements at the outset of the transaction. As Cayman Islands law permits security over Cayman Islands assets to be governed by foreign laws, similar to the market practice in the United States, it is common in the APAC market to have the governing law of the security package aligned with the governing law of the main finance documents.
However, based on a recent uptick in the use of fund financing deals involving Japanese law governed documents, if a security document is not governed by the law of situs of the assets subject to the security interests created pursuant to the security document, there is uncertainty under the laws of Japan as to the validity
of creation and perfection of the security by the secured creditors. It follows that the Japanese legal position in respect of creating, perfecting and ultimately enforcing security over the assets such as the rights to call capital contribution for Cayman Islands partnership remains unclear. For this reason, Japanese secured parties tend to prefer to have the capital call security agreement of a Cayman Islands exempted limited partnership governed by Cayman Islands law to ensure the validity and certainty of the security and its enforcement, should that ever be needed.
Given the complexity of the matters that we have advised clients on through 2024, we have also raised the following additional points for consideration, in particular with fund managers in the space, that would likely apply to many of the deals going forward. Do the fund documents allow flexibility to obtain debt financing?
a. Are GPs authorised to draw down on investor commitments to repay debt, including all related interest and associated costs?
b. Is the purpose of the facility wide enough to service the funds' liquidity requirements?
The Asia Pacific fund finance market remains a buoyant and attractive market for buyouts. GPs are more aware of and amenable to the use of debt to manage liquidity of the fund and facilitate its day-to-day running. Given the macroeconomic environment, funds may be inclined to hold onto assets well after the expiry of their investment period and we see this as having a direct correlation to the increased use of NAV facilities to ensure an increase in investor returns.
Global Expertise
Combining the Maples Group's leading finance and investment funds capability, our Fund Finance team has widespread experience in advising on all aspects of fund finance and related security structures for both lenders and borrowers.
We advise on issues relating to taking security over assets, including shares, limited partnership interests and other forms of securities issued by British Virgin Islands, Cayman Islands, Irish, Jersey and Luxembourg vehicles.
For further information, please speak with your usual Maples Group contact, or the following primary Fund Finance contacts:
British Virgin Islands
Ruairi Bourke +1 284 852 3038 ruairi.bourke@maples.com
Cayman Islands
Tina Meigh +1 345 814 5242 tina.meigh@maples.com
Dubai
Manuela Belmontes +971 4 360 4074 manuela.belmontes@maples.com
Dublin
Elizabeth Bradley +353 1 619 2737 elizabeth.bradley@maples.com
Hong Kong
Lorraine Pao +852 2522 9333 lorraine.pao@maples.com
Jersey
Paul Burton +44 1534 495 312 paul.burton@maples.com
London
Jonathan Caulton +44 20 7466 1612 jonathan.caulton@maples.com
Joanna Russell +44 20 7466 1678 joanna.russell@maples.com
Luxembourg
Arnaud Arrecgros +352 28 55 1241 arnaud.arrecgros@maples.com
Singapore
Michael Gagie +65 6922 8402 michael.gagie@maples.com