Funds that are permitted to by their establishment documents can make use of finance in order to enhance returns for their investors and managers and also to manage cash flow. Fund financing products have become more complex over recent years and involve increasingly sophisticated solutions for funds and, indirectly, their investors.

The typical fund finance facility is the “capital call” facility. This allows a fund to borrow from a lender based on the commitments which investors have made to the fund.  Security is granted over these “call rights”.  The bank or other lender will provide credit based on the amount of uncalled commitments available.  The fund manager will typically use these facilities to complete a deal (or series of deals) and then request that investors pay their capital commitments to repay the finance.  The main advantage to investors is that they do not need to make capital calls in a compressed timeframe to hit a deal closing target and they may also only be presented with a single draw down request at the end of a certain period (for example each quarter) rather than receiving multiple requests.  Lenders are attracted to these facilities as they are generally low risk.  Providing the fund documentation regarding capital calls is robust, there is appropriate security in place and investors are credit worthy the default risk should be minimal.

In addition to capital call facilities products such as net asset value (NAV) facilities (effectively a facility lent against the value of a fund’s portfolio) and hybrid facilities (a mixture of capital call and NAV) have become increasingly popular. There has even been an increase in unsecured funding which is subordinated to a secured lender – this first became prevalent in the US so the term “second lien” is often used as this tends to be the US description of this sort of debt.  Clearly this form of borrowing is comparatively expensive given the increased risk to the lender so will generally only be used for very short term lending where there is a commercial need for a facility of this kind.

The increasing demand for fund finance combined with the increased number of funds in the market has led to an expansion in the providers of this product. A few years ago there were a handful of global banks who dominated this space.  Now the number of providers has increased significantly with debt funds and specialist providers being especially active in the small and medium fund market.

Jersey has the enviable position of having a strong funds and banking/finance centre so is ideally placed as a location for both lenders and borrowers in the funds finance arena. It is also worth mentioning that there are a number of financial institutions, including some specialist debt funds, based in Jersey who provide these products.  With interest rates still at historically low levels and an increased awareness and provision of finance available to funds it is likely that fund finance will grow globally and locally.

First Published by Connect, June 2019.

Key Contacts

James Gaudin

Managing Partner: Jersey

T +44 (0)1534 818 337
E Email James

Andrew Weaver

Partner: Jersey

T +44 (0)1534 818 230
E Email Andrew

Share
Twitter LinkedIn Email Save as PDF
More Publications
17 Jun 2024

Leading ARC

This month sees the official launch of Appleby Regulatory Consulting, or ARC for short. Find out mor...

22 May 2024

Listing and Delisting Eurobonds on The International Stock Exchange

Find out more about the advantages of listing debt securities on TISE, including the wide internatio...

7 May 2024

The International Stock Exchange: Structures and Suitability

A summary of Appleby listing agent services in the Channel Islands, including the structures and sui...

1 May 2024

BEWARE: GREEKS RECEIVING GIFTS! REPRESENTATION OF EQUIOM TRUST (CI) LIMITED, IN RE MATTAS [2024] JRC 068

A recent Judgment on the principles applicable to charitable trusts, wills and their construction em...

30 Apr 2024

Secondary Pensions in Guernsey: Are you ready for it?

After several years of planning (and delays), The Secondary Pensions (Guernsey and Alderney) Law (La...

11 Apr 2024

Jersey: corporate re-domiciliation and tax residency changes

An analysis of how Jersey law offers flexible solutions for corporate re-domiciliation and tax resid...

9 Apr 2024

The Global – your offshore corporate law questions answered: April 2024

The Global is a quarterly collection of corporate expert insights and analysis across Appleby's glob...

26 Mar 2024

Listing high yield bonds on The International Stock Exchange (TISE)

Find out why TISE is the stock exchange of choice for High Yield Bonds

19 Mar 2024

Guernsey retains its EU adequacy – as expected

The post-Brexit regulatory landscape continues to throw up challenges and jurisdictional arbitrage, ...

18 Mar 2024

Parental Bereavement Leave: Jersey to implement further family leave rights

The UK introduced “Jack’s law” in 2020. Jersey is now following the UK’s example, and as of ...