Increasingly, regulated funds and hedge funds are looking to enter into capital call and other debt facilities at the fund level.Traditionally, it has been private equity and real estate funds that have borrowed from banks at the fund level under capital call facilities (sometimes known as subscription line facilities) or bridge drawdowns from limited partners of the fund to make investments.
These facilities provide general liquidity to the fund, and repayment periods that the banks are agreeing to are becoming longer and longer.
Hedge funds, for example, need to make investments every day and are using the facilities to avoid numerous drawdowns from investors. By using a capital call facility the fund is able to make fewer drawdowns from investors. This reduces administration cost and time for the fund.
We are also working on an increasing number of transactions where the borrower is a regulated fund established in a European jurisdiction.
For example, Spanish FCR de Regimen Simplificado entities (which are regulated in Spain) are not prohibited from borrowing under Spanish laws. However, under FCR management regulations there are often certain restrictions on financing to the FCR provided by third-parties. For example, the maturity period of any third party financing is often restricted to between nine and 12 months and the aggregate amount of the borrowing received by the FCR entity is usually restricted to a percentage of the total commitments of the FCR entity, such as 10% to 20% of total commitments of investors of the FCR entity.
We are not yet seeing a great demand from UK regulated funds, such as Ucits, looking for debt facilities and this could be due to the fact that Ucits are restricted in the amounts that they can borrow and the term of such borrowing.
The provisions of the FCA Handbook dealing with collective investment schemes provide that borrowing must be on a temporary basis and must not be persistent, with regard to (a) the duration of any period of borrowing and (b) the number of occasions on which resort is had to borrowing in any period.
In addition, the authorised fund manager must ensure that no period of borrowing exceeds three months, whether in respect of any specific sum or at all, without the prior consent of the depository.
The FCA Handbook also provides that the authorised fund manager must ensure that the authorised fund’s borrowing does not, on any day, exceed 10% of the value of the scheme’s property.
The borrowing rules in the FCA Handbook do not apply to “back-to-back” borrowing where the fund manager borrows an amount of currency from an eligible institution or an approved bank and keeps an amount in another currency, at least equal to the borrowing for the time being on deposit with the lender or agent or nominee.
As availability of fund financing becomes greater we expect that Ucits and other regulated funds will start to make use of such facilities to meet their liquidity requirements albeit subject to the limitations stipulated by UK regulations.
Leon Stephenson is a partner at Reed Smith and leads the London’s Funds Finance practice. Jacqui Hatfield is a partner at Reed Smith and is a financial services regulatory specialist.
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