Contributed By Travers Smith LLP
The fund finance market in the UK is sophisticated and well-developed, particularly for closed-ended private funds. The market includes a range of lenders, from banks to specialist debt funds, who offer finance solutions to funds and their GPs/managers. The most common product is a capital call facility, allowing the fund to draw money from the lender in anticipation of making a capital call from the fund's investors. The main advantage of this type of facility is that it will allow quick and efficient access to capital. The fund documents (eg, the limited partnership agreement) will normally require that at least ten business days' notice must be given to the investors prior to the date of any capital call, whereas the lender under a capital call facility will allow the money to be drawn on shorter notice. This type of arrangement therefore gives the GP/manager greater certainty of funding, particularly when the fund needs capital for investment purposes. It also allows the GP/manager to smooth out when capital calls are made to investors because the fund is able to make use of the facility for irregular cash requirements, such as fees and expenses. In addition to capital call facilities, other types of fund finance have been developed, including NAV facilities secured on the underlying assets of the fund, fund finance arrangements to unlock liquidity for investors and facilities targeted at GPs/managers to assist team members to participate in any “GP commitment” requirements.
As regards open-ended funds, UCITS funds are subject to prescriptive rules on borrowings, as prescribed under the UCITS Directive. A UCITS is permitted to borrow money for use by the fund, provided it will be repaid out of the scheme property and does not conflict with any restrictions on borrowing that may have been included in the fund’s Instrument of Incorporation. This borrowing is permitted purely on a temporary and infrequent basis and must not exceed 10% of the total value of the fund’s assets on any day. Prior consent for any borrowing must be obtained from the Depositary, or for periods of borrowing that may exceed three months. For NURS, the same 10% borrowing limit applies. However, there is no restriction on the length of time for which a NURS may borrow.