Reed Smith Client Alerts

It is widely known that since the onset of the COVID-19 crisis, private equity, real estate, and infrastructure funds have been aggressively utilising their credit facilities at the portfolio level in order manage cashflow issues. Many sponsors have fully drawn their revolving credit facilities, upsized any accordion and facility increases that were available, switched uncommitted credit lines to committed ones and sought financial help where available from governmental schemes. As the impact of the crisis continues, cashflow available at underlying portfolio companies is getting tighter and the possibility of raising more capital from investors is becoming further delayed. Furthermore, decreased valuations of underlying investments and lower income and profits will inevitably result in portfolio companies breaching their financial covenants and needing urgent liquidity solutions to avoid senior banks accelerating their debt and ultimately placing the businesses into insolvency.
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Fund finance

Fund finance originally developed as a means of assisting the administration of funds in terms of deployment of their investors’ commitments. Almost every private equity, real estate and infrastructure fund has a subscription-line facility, which allows the fund to invest in opportunities at short notice by bridging the investors’ commitments. Some funds also package up drawdowns from investors by only drawing quarterly, semi-annually or annually and rely on their subscription-line facilities in the intervening periods for all their cash needs. However, the range of funds finance products that is now available is much wider and can effectively be used to solve the liquidity issues that currently face funds across the private equity, real estate, infrastructure and other asset classes.

The solutions

There are three funds finance products in particular that have exploded in popularity very recently and that we predict will continue to be in demand.

‘Qualified Borrowers’ mechanism under subscription-line facilities

Under a traditional subscription-line facility, the fund is usually the borrower. The fund draws down from the lender and then on-lends the cash to the relevant portfolio companies. A number of our lender clients can provide these subscription-line facilities directly to a portfolio company (a so-called ‘qualified borrower’) backed by a guarantee from the fund. The portfolio companies have direct access to additional liquidity, and the provision of a fund guarantee (or sometimes an equity commitment letter from the fund) to the lender to support this borrowing leaves the lender in pretty much the same position as if it had lent directly to the fund. Subscription-line facilities are typically short-term revolving credit facilities and so this short-term liquidity line can supplement portfolio companies’ revolving credit facilities at the asset level. However, a number of our funds finance lender clients can also provide subscription facilities of two or three years’ duration, which makes this type of available liquidity highly attractive to a portfolio company.