Subscription facilities
Security packages are tailored to the type of fund vehicles and facilities involved in fund financing transactions. The most common structure is the use of Cayman Islands exempted limited partnership (ELP) which does not possess any separate legal personality. The rights and obligations of the general partner and limited partners with respect to the ELP are governed by the limited partnership agreement (LPA) together with any relevant subscription agreements and side letters.
In particular, the ELP’s rights to (i) make capital calls on undrawn capital commitments from the investors and related rights to enforce payments; and (ii) receive proceeds from such capital calls, are held on trust as an asset of the ELP by the general partner in accordance with the terms of the LPA. When offering subscription credit facilities to the ELP, lenders typically require an assignment of these right by way of security. As the ELP has no legal personality, the assignment is expected to be executed by the general partner and the ELP (acting through the general partner). The security package would also include a charge over the bank account holding investor funds placed under the control of the lenders, and an irrevocable power of attorney in favour of the lenders to exercise capital call rights following the occurrence of an event of default.
Apart from a standard review of fund documents to ensure that the ELP and the general partner are empowered to grant security over uncalled capital commitments of the limited partners, care must be taken to ensure there are no restrictions on, among other things, the borrowing terms in the LPA or any side letter. Further, general partners may establish alternative investment vehicles or parallel funds to raise capital from investors. Lenders will, therefore, want to ensure that such arrangements are permitted under the fund documents and that security over undrawn commitments is included in the security package.
Another popular Cayman Islands vehicle in fund finance is the limited liability company (LLC), which is designed as a hybrid between a standard exempted company and an ELP. Unlike an ELP, an LLC has separate legal personality and limited liability, allowing it to own assets and have rights and obligations in its own name. The LLC also offers greater flexibility in structuring and organisation. Each member enters into a subscription agreement setting out the terms of its capital commitment to the LLC.
In subscription line financing, the LLC is vested with the title and rights to uncalled capital commitments from its members in accordance with the terms of the subscription agreements. Accordingly, security over capital call rights of the LLC may be granted by the LLC itself and/or by the manager/managing member ( who may have the power to make calls and to receive contributions from the members as provided in the subscription agreements).
NAV facilities
The use of net asset value (NAV) facilities has grown in recent years and may be structured in a number of ways. A common approach is for a new special purpose vehicle (SPV) to be established in mid-late lifecycle of a subscription line or warehouse facility, whereby assets of the fund are then transferred to the SPV. A Cayman Islands SPV is well-suited for implementing this bankruptcy-remote, ensuring that recourse of the lenders would not be extended to the fund level.
Unlike subscription line facilities which rely on capital call rights as collateral, NAV facilities focus on the value of the underlying portfolio assets of the fund. Although assets may be pledged directly by the SPV, the typical security package in NAV facilities contains security over equity interests in the SPV that holds assets of the fund, such as security over limited partnership interests where the relevant vehicle is an ELP. A limited partner would grant security over its limited partnership interests by way of an equitable charge in favour of the lenders (subject to consent of the general partner). Similarly, an equitable charge over membership interests in an LLC or shares in an exempted company may be included if the relevant structure involves such entities. Lenders also expect to take security over the bank account into which proceeds from the assets are paid.
Other facilities
Beyond subscription and NAV facilities, other types of facilities have also emerged in the fund finance market. These include hybrid facilities (combining elements of subscription and NAV facilities), general partner facilities and separately managed account (SMA) facilities.
The security package in a hybrid facility varies and is negotiated in view of the assets and receivables. It may include a mixture of the collateral typically seen in either or both types of facilities. General partner facilities or management fee facilities involve lending to the general partner or manager of the fund in order to bridge their funding gaps. Security is typically granted over the management fees payable to the general partner or manager, as well as the bank account into which such fees are deposited.
SMA facilities are used when a fund has a single investor for certain legal, regulatory or investment purposes. Since lending in such cases presents greater concentration risk for lenders, the financing terms, including the security package, are often subject to more intense negotiation.
Other factors
This article outlines the typical security packages seen in common fund finance facilities involving Cayman Islands vehicles but are by no means exhaustive. The market continues to evolve, offering a broad spectrum of fund financing products to meet the diverse needs and interests of lenders and funds. Thorough review and due diligence of fund and financing documents, consideration of regulatory status, and attention to perfection requirements are critical factors in structuring an effective security package for fund financing transactions.
Appleby’s fund finance capabilities
Our experienced fund finance team are specialists in advising banks, funds, and finance providers on the development of sophisticated financing solutions across key jurisdictions, including the British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, and Mauritius. We have advised on hundreds of subscription, NAV, hybrid, ESG, and asset-backed facilities, spanning a wide range of structures. These include multi-fund and collateral arrangements; partnerships and corporate entities acting as borrowers and guarantors; and complex multi-currency facilities with multiple loan tranches and layered collateral.
