Model Responses to ILPA’s Subscription Credit Facility Due Diligence Questionnaire KielBowen JohnNoell,Jr. ChristopherEllis In June 2017, the Institutional Limited Partners Whatisthestatedpurposeandintentionof Association ( ILPA ) published Subscription Lines of usingtheSubscriptionFacility? Credit and Alignment of Interests: Considerations and The Subscription Facility can be used for working Best Practices for Limited and General Partners (the Guidelines ). 1 The Guidelines noted the increased capital purposes, including: usage of subscription credit facilities ( Subscription 1. To bridge capital calls, which will (a) enable the Fund to Facilities ) and outlined the advantages of such act quickly for time-sensitive investments, (b) permit facilities to investors ( Investors ) in private equity the Fund to smooth out capital calls in terms of size and funds ( Funds ). A key part of the Guidelines set forth a frequency (which lowers expenses of the Fund and list of due diligence questions regarding Subscription expenses for Investors associated with the capital call Facilities that Investors should consider asking fund process), and (c) eliminate or minimize the managers and general partners ( General Partners ) administratively burdensome and costly “true-up” prior to investing. Given ILPA’s influence in the process between initial Investors and later close market, General Partners should be prepared to Investors. answer these questions in their negotiations with 2. To provide access to letters of credit (by including this potential Investors. So too, Subscription Facility in a Subscription Facility, the Fund will avoid the time lenders should consider tailoring their structures, and expense of negotiating multiple letters of credit pitches and negotiations with these questions in mind. facilities). Below, we explore the model questions, set forth 3. To provide quick and economical access to foreign practice notes market participants should consider currencies. and offer suggested responses (with different options bracketed) that they can tailor to suit their specific 4. To secure interest rate and foreign exchange hedging business strategies and operating procedures. exposures without calling or reserving capital or incurring added borrowing expenses (the Subscription [Preliminary note to include with responses for Facility allows the Fund to allocate a part of the Subscription Facilities that have not yet been borrowing base to secure hedging exposure without fully negotiated: The questions below have been actually making any draw on the Subscription Facility). answered based on the General Partner’s 5. To permit the Fund to bridge permanent asset-level expectations as of the date of this response. The final financing so the Fund will have time to arrange asset- terms of any Subscription Facility may differ from level financing on more favorable terms and the terms described below, and certain variations conditions. 2 may be material.] MAYER BROWN19
ModelResponsestoILPA’sSubscriptionCreditFacilityDueDiligenceQuestionnaire………………………………………. Practice Note: The loan documentation for 2. Restrictions on making distributions to Investors Subscription Facilities will likely contain a “Use of during a pending default scenario. Proceeds” provision which is usually structured 3. Certain limitations on Fund-level indebtedness, very broadly to offer the Fund maximum flexibility. [which will largely mirror the corresponding Due to Liquidity Coverage Ratio concerns, lenders provisions in the Fund’s governing documents]. should consult counsel before narrowing the scope 4. Change of control, key man and removal events of this section. 3 [which will largely mirror the corresponding provisions in the Fund’s governing documents]. WhenisuseoftheSubscriptionFacility Generally speaking, the General Partner believes the expectedtoend?Whenisitcontractually terms of the Subscription Facility are less restrictive requiredtoend,i.e.,itsexpiration? than asset-level financings and are aimed at The Subscription Facility will have an initial [X] year preserving the availability of the Investors’ capital term, which the Fund can extend [with][without] commitments to the Fund, the related call rights and lender consent for an additional [Y] years. the related mechanics. [Each Loan under the Subscription Facility will be WhatwastheinitialsizeoftheSubscription repaid within [X] days [in accordance with the Fund’s governing documents].] Facilityandbyhowmuchcoulditbeincreased? The Subscription Facility is currently sized at $[X]. As The Fund expects to use the Subscription Facility the Fund completes subsequent Investor closings, the primarily during the investment period. After the Fund will have the option to increase the Subscription investment period, the Fund [does not plan to use a Facility [with][without] lender consent. If the target Subscription Facility] [plans to only use the commitment level of $[X] is achieved, the Fund Subscription Facility on a limited basis to bridge expects to have a $[X] Subscription Facility. capital calls and support follow-on expenses and investments]. [The Fund’s leverage limitations cap indebtedness at [X] percent of the uncalled commitments, which [The Subscription Facility will be “committed,” [includes] [does not include] indebtedness under any which offers the Fund reliable access to capital at Subscription Facility.] attractive pricing.] [The Subscription Facility will be payable “on HowmanycurrentInvestorscoverthe demand” but includes a [X]-day grace period prior to SubscriptionFacility,i.e.,“IncludedInvestors?” any call that would permit the Fund to either The entire Investor base factors into the lender’s refinance or call capital prior to its expiration.] underwrite of the Subscription Facility and, barring very special circumstances, all Investors are WhatarethetermsfortheSubscription responsible to fund capital contributions to repay Facility?Covenants,coverage,reset, the Subscription Facility. The Subscription Facility negativeprovisions? structure uses a “borrowing base” that must cover Standard Subscription Facility material covenants and the amount outstanding under the Subscription terms include: Facility. The borrowing base is calculated by applying [a flat [__] percent advance rate against 1. Restrictions on fundamental changes to the Fund’s the uncalled capital commitments of all Investors.] organizational structure or documents without lender consent. 20FundFinanceMarketReview|Fall2017
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