Structuring Credit Facilities for Private Equity Funds: Subscription, NAV, and Hybrid Loans

Description

Private equity funds often use subscription-backed credit facilities as a bridge to capital calls or to other permanent or asset-level financing. As funds mature beyond their investment or commitment periods, they then seek NAV credit facilities with availability based on the underlying portfolio investments of the fund.

These two phases of financing have historically been distinct transactions, but borrowers and lenders are now exploring hybrid facilities which provide lenders with recourse to both uncalled capital commitments (the typical collateral under subscription facilities) and underlying investment assets (the traditional credit support under NAV facilities). Counsel must have a thorough understanding of subscription and NAV credit facilities, and how each may figure into a hybrid structure.

Hybrid facility lenders need to underwrite the investors providing collateral support and a pool of known and potentially unknown portfolio assets. The collateral package for the hybrid facility might include pledges of a general partner's rights to unfunded capital commitments; deposit accounts into which the fund's investors are required to fund their contributions; equity interests in the holding companies through which the fund holds its underlying investments; and equity interests relating to the underlying investments.

Listen as our authoritative panel discusses the different objectives of subscription and NAV credit facilities, and the nuances of combining the two into a hybrid credit facility. The panel will also address UCC perfection issues concerning the various interests pledged.