Overview of Fund Finance
The accelerated growth of the global alternative markets following the 2008 global financial crisis and the more recent rapid growth in private credit has seen the explosion of the fund finance industry.
Fund finance is any form of credit provided to investment funds, with the most typical financing structures currently involving either security over commitments from investors (subscription line facilities) or security over underlying invested assets (NAV facilities). Funds and fund managers use financing for a variety of reasons including liquidity and operational requirements.
Providers of fund financing have historically been traditional large banks but in recent times, due to a number of global factors ranging from increased regulatory oversight, a change to the number of traditional bank providers in the market, as well as an increased demand from managers for bespoke leverage throughout the life cycle of a fund, there have been new entrants to the market in the form of institutional investors and credit funds, who are increasingly interested in this low-risk, income generating asset class.
TYPES OF FUND FINANCE FACILITIES
The most common types of fund finance facilities are:
Subscription Line Facilities (also referred to as Capital Call Facilities)
• A short-term facility to a fund secured on the uncalled capital commitments of the investors of the fund and on the related bank account into which capital call proceeds are paid.
• Utilized to bridge the gap in funding pending a close of the fund and/or to manage the timing and administration of investor drawdowns versus immediate access to funds for investment purposes. The lender’s risk is on the creditworthiness of the fund’s investors.Typically revolving, uncommitted, bilateral, one-two year term facilities.
NAV Facilities (or asset-backed facilities)
• A longer-term facility to a fund secured on the fund’s underlying investments (and the cash flows and distributions related to them).
• An increasingly attractive source of liquidity for end- or near end-of-life funds that have called and deployed all or a significant portion of their investors’ capital commitments, where subscription line facilities are no longer a viable option.
• Typically 3-5 year, bilateral or syndicated, committed term facilities.
Hybrid Facilities
• A blend of NAV and subscription line facilities. Often originated as a subscription line facility that then “flips” into a NAV facility once a certain percentage of capital commitments has been funded.
• Security is over the uncalled capital commitments of the unpaid investors of the fund and the underlying investments of the fund, as well as all related bank accounts.
Generally, fund finance facility agreements are governed by the law of the jurisdiction in which the lender is based and are predominantly New York law or English law governed.
Borrowers will be various regulated or unregulated entities. It may be that the Irish entity in the fund structure is not itself the borrower but is a feeder fund/vehicle to the borrower.
Due Diligence of Irish entities for Subscription line facilities
Various types of Irish entities may form part of a fund structure, such as Irish collective asset-management vehicles (“ICAVs”), investment limited partnerships (“ILPs”), investment companies, unit trusts, common contractual funds (“CCFs”) and Section 110 companies (“S110s”).
The most commonly used Irish entities in fund structures are the ICAV, ILP and S110. ICAVs and ILPs are investment fund structures regulated by the Central Bank of Ireland, whereas S110s are non-regulated SPVs (special purpose vehicles) often seen in a fund finance context as subsidiaries of regulated Irish structures.
As subscription line facilities are the most common fund finance facilities we see in Ireland, we have set out the key considerations when carrying out due diligence on an Irish entity that is, or is part of a fund structure that is, entering into a subscription line facility:
Power to borrower and grant security
It is essential that the entity has the power under its formation/constitutional documents to borrow and grant security.
As Fund Finance has become a more common feature of the life cycle of an Irish fund, we are seeing these powers built into the fund’s formation/constitutional documents. This informs investors that the fund expects to borrow and allows for efficient transactions with lenders, as it removes the need for any amendments to constitutional documents or additional documentation to cater for financing requirements.
That said, it is important to determine whether there are any limitations on these powers, such as any investor consent requirements or leverage limits, which may have an impact in the context of the financing.
No statutory borrowing limits apply to ICAVs, ILPS and S110s, with the exception of regulatory restrictions applicable to loan origination funds. For further information on loan origination funds please see our Loan QAIF guide
Capital call rights
As a subscription line facility is dependent on the fund’s uncalled capital commitments to repay the loan, the fund’s ability to call for capital from investors under its fund formation documentation, subscription agreements, any side letters and fund service provider agreements must be carefully checked.
In an Irish fund, capital call rights may vest in a number of different parties:
• Directors – the directors of the fund have the right to call for capital from investors.
• Alternative investment fund manager (“AIFM”) – the directors often delegate the capital call rights to the AIFM.
• Investment Manager (“IM”) – the AIFM may delegate the capital call rights to the Investment Manager.
• Administrator – the Administrator can also play a role in managing the capital call process, such as issuing the notices, processing the calls and updating the share register.
Any time limits on issuing capital calls should also be identified, as that may encroach on a lender’s enforcement rights. For example, if a capital call is made on an investor and pursuant to the fund’s constitutional/formation documents an investor has 10 Business Days from the date the call is made to fund, that time period will need to be built into the facility agreement to allow sufficient time for capital calls to be made and funded before an event of default would be triggered.
Identifying who has the right to call for capital and any time limitations will inform the drafting of the capital call-related representations, undertakings and events of default in the facility agreement, as well as determining the nature and scope of the security package provided to the lender.
Bank accounts
It is critical to determine which bank account the fund’s capital call proceeds are paid into, the location of the bank account and whether the account is held directly by the fund or by its depositary. Typically, a fund’s capital call account is held by it directly.
The location of the bank account is key to determining the governing law of the bank account security. An Irish fund’s bank account may not necessarily be located in Ireland, so it is imperative that this is clarified early in the transaction.
ICAV Security Package
• Irish Security and Non-Irish Security
As Irish law will govern the relevant subscription agreements (for ICAVs/S110s) and limited partnership agreements (for ILPs) and the capital call rights thereunder, an Irish security assignment must be taken over those documents to secure the capital call rights and unfunded capital commitments in favour of the lender.
If the bank account into which the fund’s capital call proceeds are paid is located in Ireland, Irish law security must also be taken over that bank account.
In US transactions, we often see New York (“NY”) law security also being taken in addition to the Irish security, as the US lender’s preference is to take NY law security regardless of the situs of the assets. The NY security is either built into the credit agreement, into a loan and security agreement, or is a separate standalone NY law security agreement.
• Side Letters
Where capital call rights have been delegated to a fund service provider, (e.g., to the AIFM or IM), or a fund service provider has a role in the issuance, management or registration of capital calls, (e.g. the Administrato)r it would be market practice that such service provider enter into a side letter with the lender acknowledging the security created over the capital call rights and unfunded capital commitments, and that in the event the lender enforces their security, they will act on the instructions of the lender in respect to making capital calls.
• Perfection Requirements
A notice of the security created over the capital call rights must also be served on the investors. This is typically done using the method by which communications are usually made to the investors by the fund. We increasingly find that notice of the security to the investors is being posted on investor portals, which has become an acceptable form of service once evidence of the posting is provided.
A notice to the account bank is required to perfect the lender’s security interest over the Irish bank account. Ideally, an acknowledgement from the account bank of that notice is also obtained but is not a requirement to perfect the security. While account control agreements are not usually required by an Irish account bank, we have seen an increase in such requirements in recent times, led by the US market.
• Security Filings
The particulars of the security created by an Irish entity over its capital call rights must be filed within 21 days of the date the security is created at the Central Bank of Ireland (for ICAVs) or at the Companies Registration Office (“CRO”) (for Irish general partners (“GPs”) of ILPs and for S110s). A notice to Revenue should also be made within the same timeframe for Irish GPs of ILPs and for S110s.
If both Irish and NY law security is created over the capital call rights, security filings will need to be made for each charge taken.
Below is a helpful illustration of a typical security package in a subscription line financing to an ICAV:
Irish ICAV Security Package
Guarantee prohibition and cascading pledge
• Guarantee prohibition
Under the Central Bank of Ireland’s AIF Rulebook, there is a prohibition on Irish regulated alternative investment funds (i.e., ICAVs and ILPs) acting as a guarantor on behalf of a third party, which includes another sub-fund within the same umbrella structure. The term “guarantor” is not defined, but in practical terms it is understood to mean that regulated funds, though they can guarantee and secure their own obligations and the obligations of their wholly-owned subsidiaries, cannot guarantee or give security for any third party’s obligations.
The impact of the guarantee restriction is felt in transactions where an Irish fund is acting as a feeder fund to a third party master fund as part of a wider structure. The issue for the lender in a subscription line financing is that it cannot take direct security over the uncalled capital commitments and capital call rights of the Irish feeder fund (i.e., the Irish fund cannot act as a guarantor or third party obligor, as might be the case in other jurisdictions).
However, there is a solution to this, commonly known in the market as the “cascading pledge” arrangement.
• Cascading pledge arrangement
A “cascading pledge” is essentially a series of security assignments that ensures lenders have a route, albeit indirect, to the ultimate source of capital commitments. The Irish feeder fund creates security over its uncalled capital commitments in favour of the master fund (which may be a foreign law LP) in order to secure its obligations to fund its capital commitments to the master fund. The master fund, in turn, makes an onward assignment of that security interest to the lender: in other words, a security assignment over a security assignment.
This cascading pledge arrangement allows the lender, in an enforcement scenario, to step into the shoes of: (i) the borrower and make a capital call on the Irish feeder fund under its LPA; and (ii) the Irish feeder fund (via enforcement of the borrower’s rights under its security assignment from the ICAV), so as to call capital from the ultimate investors.
The “cascading pledge” arrangement is well accepted in the global fund finance market and we regularly see cascading security used in a variety of fund finance structures that contain upper-tier feeder funds, intermediate feeder funds or SPVs and lower-tier master funds (these often include Delaware and Cayman LPs, Luxembourg funds, Irish funds and Irish SPVs).
The table below is an example of a fund structure with cascading pledge arrangements in a subscription line financing:
Reference to “ICAV” means ICAV acting on behalf of its Sub-Fund
”PPNS” means Profit Participating Notes
Cascading Security
ICAV Security Assignment Security by ICAV to S110, securing ICAV's own obligations to fund capital calls made by S110 under the PPNS, over (i) ICAV’s capital call rights on Investors under subscription agreements and (ii) ICAV bank account
S110 Security Assignment
• Security by S110 to Borrower, securing S110's own obIigations to fund capitaI calIs made by Borrower under LPA/Subscription Agreement, over (i) S110's rights to calI for capital from ICAV under PPNS, (ii) S110’s bank account and (iii) S110's rights under the ICAV Security Assignment
Borrower Security Assignment
• Security by Borrower to Lender, securing Borrower’s obiligations to Lender under facility Agreement, over (i) Borrower's rights to call for capital from S110 under LPA/Subscription Agreement, (ii) Borrower’s bank account and (iii) Borrower’s rights under the S110 Security Assignment
Subscription Agreement for shares/Capital Commitments
Subscription Agreement for PPNS LPA/Subscription Agreement
S110 Company
(Cayman, Delaware) Borrower
Example Fund Structure with Cascading Pledge Arrangement
• Withholding Tax
In all cases where financing carrying a right to interest is made available to an Irish entity, Irish withholding tax will need to be considered. Withholding tax generally applies on Irish-source interest at a rate of 20%. However, the Irish legislation contains a variety of exemptions which will often mean the Irish borrower is not required to withhold on payments of interest to a lender. In particular, Irish domestic exemptions apply to payments of interest:
• to a bank carrying on a bona fide banking business in Ireland;
• to a company resident in an EU Member State or in a country with which Ireland has signed a double tax treaty, where that territory imposes a tax that generally applies to interest receivable in that territory from outside that territory;
• to a US corporation subject to tax in the US on its worldwide income; and
• to certain Irish entities, including S110s, other fund entities and certain government bodies.
Irish Fund Structures
The Irish funds regulatory framework is split between Undertakings for Collective Investments in Transferable Securities (‘’UCITS’’), which are available to retail investors, and Qualifying Investor Alternative Investment Funds (“QIAIFs”), which are targeted at professional, institutional and high-net-worth individual investors, who must meet minimum subscription requirements (“Qualifying Investors”). QIAIFs are the most common category of Irish regulated funds used in the context of fund financing arrangements.
The QIAIF is Ireland’s flagship alternative investment fund. Each QIAIF is authorised by the Central Bank of Ireland and must appoint either an EU- or non-EU AIFM.
The QIAIF is the most adaptable category of Irish regulated fund and is the structure used most frequently for real asset, private equity, real estate, infrastructure, credit funds, loan origination (“LQIAIFs”), hedge funds and hybrid strategies. The QIAIF is also the preferred structure for fund of funds and / or masterfeeder structures.
QIAIFs may be structured as ICAVs, ILPs, investment companies, unit trusts and CCFs.
The ICAV and the ILP are the most commonly used structures. We have set out in the table below some of the key features of the ICAV and the ILP.
• ICAV Tax Treatment
An ICAV is generally exempt from tax on its income and gains and is not required to apply withholding or exit tax on payments to shareholders. Other aspects of the tax treatment of ICAVs are set out in further detail in our ICAV guide referenced below.
Where an ICAV is acting as borrower under a fund financing arrangement, Irish interest withholding tax needs to be considered and appropriate drafting included in the documents.
• ILP Tax Treatment
The ILP is transparent for Irish tax purposes and is not subject to Irish tax on its investment income and gains. Instead, the income and gains of the ILP are treated as arising to each limited partner in accordance with the apportionment under the LPA. Other aspects of the tax treatment of ILPs are set out in our ILP guide referenced below.
Where an ILP is acting as borrower under a fund financing arrangement, Irish interest withholding tax needs to be considered and appropriate drafting included within the documents.
For further information on the ICAV and the ILP, please see our ICAV Guide and our ILP Guide.
• S110s
S110s are commonly interposed as holding company vehicles under a regulated Irish fund such as an ICAV or an ILP and may, in certain cases, be used as an investment vehicle to invest into an Irish or foreign fund. S110s are not regulated entities, although in cases where they sit under a regulated fund, certain aspects of the fund’s regulatory regime need to be considered.
S110s issue profit-participating notes to subscribers, typically the feeder funds, and usually hold shares in an ICAV or limited partnership interests in an ILP or other foreign law governed limited partnership, which entity is usually the borrower. Therefore, it is important to understand where a S110 sits within a fund structure and to carefully check its constitutional documents in the context of considering cascading pledge arrangements over the capital calls for a subscription line financing.
S110s are ordinary Irish limited liability companies established as “qualifying companies” under Ireland’s Section 110 regime. The Section 110 tax regime effectively provides for tax-neutral Irish special purpose companies, subject to their meeting the various conditions set out in the Irish tax legislation. As a corporate entity subject to tax, Section 110 companies should generally be entitled to benefit from reduced withholding rates on underlying investments under Ireland’s treaties.
For further information on S110s please see our Irish Section 110 SPV guide
Key Features of the Main Irish Vehicles used in Fund Financings
Legislation
Regulated/ unregulated
Constitutional/ capital commitment documentation
• The Irish Collective Asset-management Vehicles Act of 2015 (as amended)
• Investment Limited Partnerships Acts 1994 and 2020
Equity instruments
Who can make capital calls
• Regulated by the Central Bank of Ireland
• Instrument of Incorporation
• Prospectus and Supplement
• Subscription Agreement
• Side letters, if any
• Shares
• Directors of ICAV
• AIFM
• Investment Manager
• Regulated by the Central Bank of Ireland
• Limited Partnership Agreement
• Prospectus
• Subscription Agreement
• Side letters, if any
• Limited partnership interests
• General Partner
Borrowing power/ limitations
Security/ guarantee limitations
• Wide borrowing powers, unless it is an LQIAIF subject to leverage limits
• Can secure its own obligations
• Prohibited from securing or guaranteeing obligations of a third party (workaround via cascading pledge)
• Wide borrowing powers
• Companies Act of Ireland, 2004 (as amended) and Section 110 of the Taxes Consolidation Act, 1997
• Unregulated
• Memorandum and Articles of Association
• Deed Poll
• Subscription Agreement
• Profitparticipating note
• Directors of the S110
• Can secure its own obligations
• Prohibited from securing or guaranteeing obligations of a third party (workaround via cascading pledge)
• Wide borrowing powers
• No limitations, subject to corporate benefit
Security filings
Other key points/ features
• Particulars of security assignments granted by the ICAV over its capital call rights must be filed at the Central Bank of Ireland within 21 days of the date of the security agreement
• Particulars of security assignments granted by the GP over its capital call rights must be filed at the CRO within 21 days of the date of the security agreement
• Particulars of security assignments granted by the S110 over its capital call rights must be filed at the CRO within 21 days of the date of the security agreement
• It has a distinct and separate legal personality, i.e. it may enter into contracts itself and can own property itself
• Can be structured as open-ended, limited liquidity or closedended schemes
• Redemption gates, deferred redemptions, holdbacks, in-kind redemptions and side-pockets can all be facilitated
• No material investment restrictions and no borrowing or leverage limits
• Ability to establish umbrella fund with segregated liability between sub-funds
• It has no legal personality, it acts through its GP, which is ultimately liable for the debts and obligations of the ILP to the extent that the ILP has insufficient assets
• Can be structured as open-ended, limited liquidity or closedended schemes
• Redemption gates, deferred redemptions, holdbacks, in-kind redemptions and side-pockets can all be facilitated
• No material investment restrictions and no borrowing or leverage limits
• Ability to establish umbrella fund with segregated liability between sub-funds
• It is a single-cell entity. Where a multi-series or multi-portfolio entity is required, it achieves this through contractual segregation rather than statutory segregation or multi-cell legislation
• Where a S110 sits under an Irish regulated fund, certain aspects of the fund’s regulatory regime need to be considered and applied to the S110 e.g. common directors, regulatory prohibition on guarantee
Our Global Group’s Expertise
Combining the Maples Group’s leading finance and investment funds capability, our global Fund Finance team has widespread experience in advising on all aspects of fund finance and related security structures for both lenders and borrowers in each of our offices around the world.
We also advise on issues and provide solutions to taking security over assets, including shares, limited partnership interests and other forms of security and guarantees provided by British Virgin Islands, Cayman Islands, Irish, Jersey and Luxembourg vehicles.
Our expertise includes advising lenders and borrowers on the full spectrum of fund finance, including:
• Subscription credit facilities
• Secured lending transactions
• Fund margin lending
• Liquidity line facilities
• Gp and other management fee credit lines
• Mezzanine financing
• NAV facilities
• Private placements
• Repo transactions
• Total return swaps and other derivative arrangements
• Variable funding note arrangements
Our global Fund Finance team is a dedicated, multi-disciplinary team drawn from experts across our Funds & Investment Management, Finance and other practices, including the Tax practice in Ireland.
Notable Fund Finance Deals
• Advising an international bank in connection with a subscription line financing to an ILP borrower.
• Acting for an alternate lender on a subscription line financing into a complicated fund structure established by a Dutch private equity firm involving fund vehicles across multiple jurisdictions, including two ILPs and an ICAV, and required bespoke cascading pledge arrangements over capital calls and bank accounts.
• Advising a global private equity firm on a subscription line financing with a Canadian bank. The fund structure consisted of two ICAVs and two S110 companies feeding into a Cayman LP borrower and involved cascading pledge arrangements.
• Acting for an international bank on a subscription line financing to a private credit fund which included an ICAV feeder fund into a Luxembourg LP.
• Advising a global private equity firm on subscription line financings and NAV facilities from multiple international banks for a number of their sub-funds across separate ICAVs.
Global Fund Finance Team
For further information on our services, please contact:
DUBLIN
Finance
Sarah Francis +353 1 619 2753 sarah.francis@maples.com
Vanessa Lawlor +353 1 619 7005 vanessa.lawlor@maples.com
Alma O’Sullivan +353 1 619 2753 alma.o’sullivan@maples.com
Funds
John Gallagher +353 1 619 2073 john.gallagher@maples.com
Aaron Mulcahy +353 1 619 2104 aaron.mulcahy@maples.com
Richard O’Donoghue +353 1 619 2793 richard.o’donoghue@maples.com
Tax
Lynn Cramer +353 1 619 2066 lynn.cramer@maples.com
CAYMAN ISLANDS
Finance
Tina Meigh +1 345 814 5242 tina.meigh@maples.com
Jonathon Meloy +1 345 814 5412 jonathon.meloy@maples.com
James Reeve +1 345 814 4667 james.reeve@maples.com
Amanda Lazier +1 345 814 557 amanda.lazier@maples.com
Anthony Philp +1 345 814 5547 anthony.philp@maples.com
Matthew St-Amour +1 345 814 4468 matthew.st-amour@maples.com
Robin Harding +1 345 814 4404 robin.harding@maples.com
Lucy Sleep +1 345 814 5224 lucy.sleep@maples.com
DUBAI
Finance
Manuela Belmontes +971 4 360 4074 manuela.belmontes@maples.com
HONG KONG
Finance
Lorraine Pao +852 2522 9333 lorraine.pao@maples.com
JERSEY
Finance
Paul Burton +44 1534 495 312 paul.burton@maples.com
Mark Crichton +44 1534 671 323 mark.crichton@maples.com
Dan Perkins +44 1534 671 330 dan.perkins@maples.com
LONDON
Finance
Jonathan Caulton +44 20 7466 1612 jonathan.caulton@maples.com
Matthew Gilbert +44 20 7466 1608 matthew.gilbert@maples.com
Julia Cornett +44 20 7466 1610 julia.cornett@maples.com
Joanna Russell +44 20 7466 1678 joanna.russell@maples.com
LUXEMBOURG
Finance
Arnaud Arrecgros +352 28 55 1241 arnaud.arrecgros@maples.com
Yann Hilpert +352 28 55 1258 yann.hilpert@maples.com
SINGAPORE
Finance
Michael Gagie +65 6922 8402 michael.gagie@maples.com