The ABCs of fund finance: credit facilities for secondaries funds and funds of funds

Abstract

PurposeTo review and analyze the key structural considerations secondaries funds and funds of funds must consider when negotiating credit facilities secured by limited partnership (LP) interests.Design/methodology/approachThis article provides an overview of the primary issues that arise with credit facilities secured by LP interests. These issues include the ability to provide a perfected security interest in LP interests, understanding a credit facility’s borrowing base and advance rates, and the potential impact of certain types of events of default.FindingsSecondaries funds and funds of funds have raised significant amounts of equity capital in recent years. These funds acquire portfolios of LP interests and are increasingly deploying leverage to amplify the returns of these portfolios and provide these funds with a limited degree of liquidity. The leverage is secured by the LP interests. The credit facilities that the funds are structuring and negotiating present a host of issues unique to this type of fund finance. Provided the facilities are properly structured and negotiated, secondaries funds and funds-of-funds borrowers will be able to use these facilities to help meet investment-return objectives and address important portfolio-management needs.Practical implicationsSecondaries funds and funds of funds can benefit from leverage secured by their portfolios of LP interests. This article provides a road map for borrowers when structuring and negotiating these credit facilities.Originality/valuePractical analysis from a premier corporate law firm on the issues presented by the increasing use of credit facilities by secondaries funds and funds of funds.