Presenting a live 90-minute webinar with interactive Q&A Structuring Credit Facilities for Private Equity Funds: Subscription, NAV and Hybrid Loans THURSDAY, DECEMBER 7, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Zachary K. Barnett, Partner, Mayer Brown , Chicago Todd N. Bundrant, Partner, Mayer Brown , Chicago Ann Richardson Knox, Partner, Mayer Brown , New York, NY Leon Stephenson, Partner, European Head of Funds Finance, Reed Smith , London The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Financing Lifecycle of a Private Equity Fund
Financing Lifecycle of Private Equity Funds • Subscription Credit Facilities are put in place during the subscription and investment stages of a private equity fund because of the availability of uncalled capital commitments that can be used to support/repay loans NAV facilities and hybrid facilities become more useful for funds in the end of • their investment stages (or after their investment periods) as a result of diminished borrowing availability under the typical subscription facility structure A common goal is to unlock the value of private equity fund assets • • Tools are available to obtain liquidity early in the lifecycle of a private investment vehicle in order to optimize asset acquisition and fund operation • Tools are also available to maximize private investment vehicle value in later stages of the lifecycle 6
Financing Available to Various Fund Types Subscription facilities, NAV facilities and hybrid facilities have been • established for private equity funds of all types. Buyout • Power • • Energy • Infrastructure Real Estate • • Mezzanine Funds of funds – Primary and secondary • Venture • 7
Subscription Credit Facilities 8
Overview of a Subscription Credit Facility • A typically revolving credit General Investor facility to a closed end Partner s private equity or real estate fund. $ Returns Fees Management “Capital Contributions” • The defining characteristic is the Collateral Package: The Facility is secured not Private Equity Fund by the Assets of the Fund, but by the Capital Letters $ Commitments of the of Credit Investors. Lender 9
Overview of a Subscription Credit Facility Collateral • • The Investors’ Capital Commitments, Capital Contributions and the General Partner’s right to make Capital Calls on the Investors and enforce payment thereof 10
Overview of a Subscription Credit Facility Key Propositions • • The Investors are aware of the Facility, the pledge of their Capital Commitments and that the Lender can make Capital Calls directly • The Partnership Agreement of the Fund must permit the Facility and not have provisions that unduly restrict or otherwise interfere with the Lender’s rights to repayment Fundamental Premise: The Investors must fund their Capital • Contributions without set-off, counterclaim or defense ― The Lender is underwriting the credit wherewithal of the Investors ― A dispute between the Investor and the General Partner is a risk that should not be allocated to the Lender 11
Typical Fund Investors • Institutional investor commitments are what subscription lenders typically lend against. • State Pension Funds University Endowments • Foundations • • Insurance Companies Corporations • • Financial institutions Foreign Pension Funds • • Sovereign Wealth Funds Funds of Funds and Secondary Funds • • High Net Worth Individuals and Related Entities 12
Purpose of Borrowings Subscription facilities can be used for short term bridging of capital • calls or longer term bridging purposes. • Generally to bridge the time between the Fund making an investment (using proceeds under the facility towards the purchase) and the calling of capital at a later date to repay the borrowing. 13
Purpose of Borrowings Bridge to Capital Calls • • To avoid the need to call capital well in advance of closing an investment; To backstop late capital call proceeds from the fund’s limited • partners; To batch capital calls for very active funds rather than calling • capital for each investment (especially useful for funds of funds, who receive periodic capital calls from some 20-30 underlying funds); 30-120 day repayment and/or cleanup requirement is sometimes • required; Longer term repayment (up to three years) where the facility • provides or backstops construction debt during the development phase of a project before capital is typically called. 14
Purpose of Borrowings Bridge to Other Sources of Deal Financing • • To bridge other sources of capital that might not be available or ready at the time of a given investment; In lieu of calling capital to provide that other financing; • Allows the purchase of an asset outright with facility proceeds. • Permanent debt to follow upon repositioning of acquired asset (common in real estate funds). 15
Typical Financing Structure Subscription facilities are generally structured as senior, secured • revolving credit facilities. • Committed vs. Uncommitted ― Both types are available in the market; Facility size • ― $US10million to $US1billion; Tenor • ― 1-3 year revolving facilities (typically extended as needed); Availability • ― Loans and/or letters of credit, FX, interest rate or commodity hedging; 16
Typical Financing Structure Security • • Pledge of uncalled capital commitments / capital call bank account; Power of attorney to exercise managers rights to call capital, • etc.; Investor letters may be required; • • Advances 50-100% of unfunded capital commitments (depending on • financial strength of investors). 17
Short Term Bridge Example The following example shows a short term bridge of the equity in a • buyout / acquisition. • $100MM Buyout / Acquisition Sources • ― $40MM Subscription Debt ― $60MM LevFin/ABL Debt ― $100MM Total Uses • $100MM Purchase Price • $100MM Total • 18
Short Term Bridge Flowchart Fund Entities General Partner Limited Partners Subscription Management ABC Fund, LP Credit Facility Company $40 Equity (from Subscription Credit Facility ($40) Deal Entities Portfolio Company Portfolio Company Portfolio Company A B C ($100) Debt ($60) LevFin or ABL Credit Facility 19
Net Asset Value Credit Facilities 20
NAV Facilities: Overview NAV Facility Characteristics • • Tend to be term loans but revolvers are possible Borrowing Base is based off of the NAV of underlying investments • Collateral consists of an equity pledge of the Borrower or Holding Vehicles • who own the investments Collateral typically also includes the bank account into which distributions • from such investments are held Additional contractual rights may be provided to permit Lenders to direct • the Borrower’s disposition of investments after a default Can live alongside a traditional subscription facility • 21
NAV Facilities: Typical Structure Fund Equity Commitment Holding $ Loans Vehicle Lender (Borrower) PE PE PE Investment Investment Investment 22
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