As investment funds approach the end of their investment period, they may require ongoing liquidity to support follow-on investments, fund maintenance needs, and portfolio liquidation costs. While there are various financing options for these maturing funds to consider, including net asset value (NAV) and hybrid credit facilities, subscription line facilities remain an efficient and familiar option for most funds. However, lenders must take several important threshold factors into account when prolonging an existing subscription line facility, including the purpose for which the general partner may call capital, which is usually limited, and whether the limited partnership agreement permits the fund to incur and repay post-investment period from the proceeds of a capital call, including recallable capital if permitted by the limited partnership agreement.
In addition, structural changes may be required to the subscription line loan agreement, such as implementing NAV-style covenants, including a loan-to-value (LTV) ratio, a minimum net asset value, NAV to portfolio cost, and a mandatory loan repayment feature from fund distributions.
NAV-based credit facilities are particularly attractive to funds approaching or at the end of their investment period with little to no remaining uncalled capital. While collateral for a subscription credit facility is supported by the unfunded capital commitments of the fund's investors, collateral for NAV-based credit facilities typically include distributions and liquidation proceeds from the fund's portfolio investments and the rights to receive such amounts and a pledge of equity interests of the companies holding the investments. NAV facilities will usually consist of a term loan facility with varying tenor lengths depending on the underlying investments and at least LTV covenants that vary based on the diversification of the portfolio assets and a mandatory repayment feature that requires the fund to use all or a significant portion of distributions received from the portfolio investment to prepay outstanding obligations of the NAV credit facility.
As with NAV-based credit facilities, there has been a corresponding increase in hybrid credit facilities or subscription facilities structured with NAV covenants. Hybrid credit facilities are useful for funds that are dependent on recallable capital for follow-on investments and fund expenses. The collateral pledged to secure hybrid credit facilities typically includes a blend of fund assets from looking "upward" to any remaining uncalled commitments and recallable capital if permitted by the limited partnership agreement and "downward" to the value of the fund's portfolio investments. Similarly, a hybrid credit facility will include a combination of both subscription and NAV-style covenants. Pricing for hybrid facilities tends to be higher than subscription facilities but lower than NAV facilities.
For funds with ongoing liquidity needs after the expiration of their investment period, and if NAV or hybrid facilities are not a great fit, some lenders will agree to extend a fund's existing subscription line facility subject to certain supplemental credit enhancements, including adjustments to the borrowing base and the implementation of NAV-style covenants. An extension of a traditional subscription facility, even with these adjustments, may be more beneficial to a fund than restructuring into a NAV or hybrid facility.
In conclusion, maturing funds have various financing options, but the most efficient and familiar option is often a subscription line facility. However, it is crucial for lenders to consider important threshold factors and implement structural changes to the subscription line loan agreement to support the extension of the loan past a fund's investment period. While NAV-based and hybrid credit facilities are alternatives, lenders must weigh the costs and complexity of these structures against the benefits they offer. Ultimately, the best option depends on the specific needs and circumstances of each fund.
