The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Financing Facilities

  • From Vol. 11 No.34 (Aug. 30, 2018)

    The Ins and Outs of GIPS Compliance: What Hedge Fund Managers Need to Know About the Voluntary Standards and Pending Revisions

    Although not legally required, more than 80 percent of the top 100 asset managers claimed compliance with the Global Investment Performance Standards (GIPS) for their assets under management as of June 30, 2017, and there is a growing interest in GIPS from Asia-Pacific and Africa, according to panelists at a recent webinar hosted by Ascendant Compliance Management. The webinar speakers included Adam DiPaolo, associate general counsel and senior consultant at Ascendant; Michael W. McGrath, partner at K&L Gates; and Antonella Puca, director at the CFA Institute. This article summarizes Puca’s discussion of GIPS and pending changes to the standards that may affect how fund managers who claim GIPS compliance must present their performance results. For coverage of the portions of this webinar that addressed adviser advertising generally, see “How Investment Advisers Can Mitigate Common Advertising Risks” (Jul. 19, 2018).

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  • From Vol. 11 No.30 (Jul. 26, 2018)

    Ropes & Gray Survey and Forum Consider Credit Fund Structures, Leverage, Conflicts of Interest and Challenging Environment (Part Two of Two)

    Credit fund managers must be keenly aware of the conflicts of interest that often go hand-in-hand with their strategies. This was one of the principal findings of a recent report issued by Ropes & Gray, which surveyed 100 credit fund managers in cooperation with Debtwire. In a recent webinar, Ropes & Gray partners James R. Brown, Eva Ciko Carman, Alyson Brooke Gal and Jessica Taylor O’Mary explained the survey results and key takeaways from the Ropes & Gray Credit Funds Forum. Our two-part series summarizes the report’s findings and the webinar speakers’ insights. This second article examines a variety of conflicts of interest that frequently arise for credit managers, the forms of leverage these managers are using, the types of issues that investors subject to the Employee Retirement Income Security Act of 1974 raise for credit managers and specific issues that arise for these managers when being examined by the SEC. The first article discussed the types of credit strategies offered by the survey participants, challenges currently facing credit funds and the types of fund structures adopted by credit fund managers – including “season and sell” structures, treaty funds, business development companies and blockers – when engaging in a direct lending strategy. See our three-part series on conflicts arising out of simultaneous management of hedge funds and private equity funds: “Investment Conflicts” (May 7, 2015); “Operational Conflicts” (May 14, 2015); and “How to Mitigate Conflicts” (May 21, 2015).

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  • From Vol. 11 No.29 (Jul. 19, 2018)

    Ropes & Gray Survey and Forum Consider Credit Fund Structures, Leverage, Conflicts of Interest and Challenging Environment (Part One of Two)

    Ropes & Gray recently hosted a program presenting the results of a survey of 100 credit fund managers that it conducted in cooperation with Debtwire. In addition to discussing the results of the survey, the webinar, featuring Ropes & Gray partners James R. Brown, Eva Ciko Carman, Alyson Brooke Gal and Jessica Taylor O’Mary, presented key takeaways from the Ropes & Gray Credit Funds Forum, which took place on May 16, 2018. This two-part series summarizes the report’s findings and the speakers’ insights. This first article discusses the types of credit strategies offered by the survey participants, challenges currently facing credit funds and the types of fund structures adopted by credit fund managers – including “season and sell” structures, treaty funds, business development companies and blockers – when engaging in a direct lending strategy. The second article will examine a variety of conflicts of interest that frequently arise for credit managers, the forms of leverage these managers are using, the types of issues that investors subject to the Employee Retirement Income Security Act of 1974 raise for credit managers and specific issues that arise for these managers when being examined by the SEC. See our three-part series on private funds as direct lenders: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016).

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  • From Vol. 11 No.28 (Jul. 12, 2018)

    HFLR Program Provides Overview of Five Financing Options Available to Private Funds (Part Two of Two)

    As some private fund managers have looked to finance illiquid and esoteric assets, lenders have developed financing structures that go beyond the more traditional forms of prime broker (PB) financing and secured loans. A recent webinar presented by The Hedge Fund Law Report provided an overview of the following types of financing arrangements used by private funds: total return swap (TRS) financing, structured repurchase agreements (repos), PB financing, special purpose vehicle (SPV) financing and subscription credit facilities. The program was moderated by Kara Bingham, Associate Editor of The Hedge Fund Law Report, and featured Fabien Carruzzo, partner at Kramer Levin; Matthew K. Kerfoot, partner at Dechert; and Jeff Johnston, managing director at Wells Fargo Securities, LLC. This article, the second in a two-part series, provides an in-depth discussion of structured repos, SPV financing and subscription credit facilities. The first article explored basic principles of financing arrangements and provided an overview of PB financing and TRS financing. For more on structured repos and SPV financing, see “Three Asset-Based Financing Options for Private Funds: Total Return Swaps, Structured Repos and SPV Financing (Part Two of Two)” (Apr. 12, 2018). See also our three-part series on understanding subscription credit facilities: “Popularity and Usage Soar Despite Concerns” (Mar. 1, 2018); “Principal Advantages and Key Points to Negotiate” (Mar. 8, 2018); and “Key Concerns Raised by Investors and the SEC” (Mar. 15, 2018).

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  • From Vol. 11 No.26 (Jun. 28, 2018)

    HFLR Program Provides Overview of Five Financing Options Available to Private Funds (Part One of Two)

    Depending on the nature of their operations, strategies and investments, private fund managers have access to a number of different sources of financing. A recent webinar presented by The Hedge Fund Law Report provided an overview of the following types of financing arrangements used by private funds: total return swap (TRS) financing, structured repurchase agreements (repos), prime broker (PB) financing, special purpose vehicle (SPV) financing and subscription credit facilities. The program was moderated by Kara Bingham, Associate Editor of The Hedge Fund Law Report, and featured Fabien Carruzzo, partner at Kramer Levin; Matthew K. Kerfoot, partner at Dechert; and Jeff Johnston, managing director at Wells Fargo Securities, LLC. This article, the first in a two-part series, explores basic principles of financing arrangements and provides an overview of PB financing and TRS financing. The second article will provide an in-depth discussion of structured repos, SPV financing and subscription credit facilities. See “Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers” (Mar. 16, 2017).

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  • From Vol. 11 No.18 (May 3, 2018)

    Ten Risk Areas for Private Funds in 2018

    A recent program presented by Proskauer Rose examined the key regulatory and litigation risks currently facing private fund managers. Unsurprisingly, near the top of the list were prominent issues on the regulatory radar, including cryptocurrency and blockchain; data privacy; and performance claims. A common theme among many of the risks covered in the presentation is that the law has not yet sufficiently developed to address current business practices. The program featured Proskauer partners Timothy W. Mungovan and Joshua M. Newville; counsel Anthony M. Drenzek; and associate Michael R. Hackett. This article explores the speakers’ insights. For coverage of the 2017 Proskauer presentation, see “Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017).

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  • From Vol. 11 No.15 (Apr. 12, 2018)

    Three Asset-Based Financing Options for Private Funds: Total Return Swaps, Structured Repos and SPV Financing (Part Two of Two)

    In the ongoing pursuit to generate alpha, some hedge fund managers have increased allocations to more illiquid assets. Many of these assets, however, are not suitable for traditional forms of financing, including short-term margin and repurchase agreement (repo) financing, and can only be financed through bespoke financing arrangements, including total return swap (TRS) financing, structured repo financing and special purpose vehicle/entity (SPV) financing. In this guest article, the second in a two-part series, Fabien Carruzzo and Daniel King, partner and associate, respectively, at Kramer Levin, review the main features of structured repo financing and SPV financing, and highlight the comparative advantages and disadvantages to private funds of using these structures, taking into consideration the flexibility of the structures, the complexity of the legal documentation of each structure and the level of asset protection afforded by each structure. The first article provided an in-depth discussion of TRS financing. For analysis of another type of lending facility, see our three-part series on understanding subscription credit facilities: “Their Popularity and Usage Soar Despite Concerns Raised by Certain Members of the Private Funds Industry” (Mar. 1, 2018); “Principal Advantages and Key Points to Negotiate in the Credit Agreement” (Mar. 8, 2018); and “Key Concerns Raised by Investors and the SEC” (Mar. 15, 2018). For additional insight from Carruzzo, see “New York Appellate Court Affirms Broad Rights of Parties in CDS Transactions to Pursue Their Economic Self-Interests, Despite Adverse Effect on Counterparties” (Mar. 30, 2017).

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  • From Vol. 11 No.14 (Apr. 5, 2018)

    Three Asset-Based Financing Options for Private Funds: Total Return Swaps, Structured Repos and SPV Financing (Part One of Two)

    Traditional forms of financing – such as cash prime brokerage, securities lending and plain-vanilla repurchase agreements – continue to account for a large portion of the financing available to private funds and asset managers. These financing arrangements, however, tend to be available only for more liquid assets and are generally either callable on demand or committed for six months or less. As funds seek to use greater leverage; finance esoteric, illiquid assets; and obtain financing on a more committed and longer-term basis, bespoke financing arrangements have become increasingly popular, most of which can be categorized into three buckets: (1) total return swap (TRS) financing; (2) structured repo financing; and (3) special purpose vehicle/entity (SPV) financing. In this guest article, the first in a two-part series, Fabien Carruzzo and Daniel King, partner and associate, respectively, at Kramer Levin, review the main features of TRS financing, and highlight the comparative advantages and disadvantages to private funds of using this structure, taking into consideration the flexibility, the complexity of the legal documentation and the level of asset protection afforded by the structure. The second article will provide a comparative overview of structured repo financing and SPV financing transactions. For further discussion of financing available to private funds, see “Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers” (Mar. 16, 2017); and “How Fund Managers Can Mitigate Prime Broker Risk: Preliminary Considerations When Selecting Firms and Brokerage Arrangements (Part One of Three)” (Dec. 1, 2016). For additional commentary from Carruzzo, see “OTC Derivatives Clearing: How Does It Work and What Will Change?” (Jul. 14, 2011).

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  • From Vol. 11 No.11 (Mar. 15, 2018)

    Understanding Subscription Credit Facilities: Key Concerns Raised by Investors and the SEC (Part Three of Three)

    One of 2017’s most hotly debated topics in the world of private equity involved the use of subscription credit facilities by private funds that employ a capital call structure. This grew into a debate in which seemingly everyone – including bloggers, reporters, investment consultants and even one of the co-founders of Oaktree Capital Management, Howard Marks – wanted to participate. In June 2017, the Institutional Limited Partners Association (ILPA) issued guidance articulating its own views on several issues that comprise this debate, which shined an even brighter spotlight on a topic that was already receiving significant attention. This final article of our three-part series on subscription credit facilities reviews the ILPA guidance and its corresponding effect on these credit facilities, as well as two of the most controversial aspects of these facilities: the impact a subscription credit facility has on a fund’s internal rate of return and the use of these facilities by investment managers for longer-term financing. The first article provided background on the types of funds that frequently use these facilities, recent trends that have emerged regarding this form of financing, basic mechanics of these facilities’ structures and the types of lenders that routinely offer these products. The second article discussed the primary advantages to funds, sponsors and investors of using these facilities and explored the legal documents that govern them. For coverage of ILPA guidance on other issues affecting the private funds industry, see “How Managers May Address Increasing Demands of Limited Partners for Standardized Reporting of Fund Fees and Expenses” (Sep. 1, 2016).

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  • From Vol. 11 No.10 (Mar. 8, 2018)

    Understanding Subscription Credit Facilities: Principal Advantages and Key Points to Negotiate in the Credit Agreement (Part Two of Three)

    Negotiating a subscription credit facility on behalf of a private fund can be a daunting task for attorneys practicing outside the world of fund finance. While members of a sponsor’s business team may negotiate the economic terms of the facility, the two main agreements that govern a subscription credit facility – the credit agreement and security agreement – are replete with representations, warranties, covenants and event of default provisions. These provisions must be carefully scrutinized to confirm their accuracy; ensure that the fund’s existing business model is adequately designed to fulfill future obligations under the agreements; and evaluate the likelihood that the fund will avoid any potential event of default scenario. This second article of our three-part series discusses the primary advantages to funds, sponsors and investors of using these facilities and explores the legal documents that govern them. The first article provided background on the types of funds that frequently use these facilities, recent trends that have emerged regarding this form of financing, basic mechanics of these facilities’ structures and the types of lenders that routinely offer these products. The third article will evaluate concerns raised by members of the private equity industry regarding these facilities, including whether they should be used for longer-term financing and how they impact a fund’s internal rate of return. See “Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers” (Mar. 16, 2017).

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  • From Vol. 11 No.9 (Mar. 1, 2018)

    Understanding Subscription Credit Facilities: Their Popularity and Usage Soar Despite Concerns Raised by Certain Members of the Private Funds Industry (Part One of Three)

    With estimates that dry powder in private equity now exceeds $1 trillion, there can be no doubt that managers are fiercely competing for the best investment opportunities and that a manager’s inability to close quickly on investment deals may put it at a competitive disadvantage. Although many private funds have sizeable amounts of uncalled capital from their limited partners, that capital may only be accessible following a notice period of 10 business days or more. Subscription credit facility products were created as a form of bridge financing for private funds that employ a capital call structure. Credit lines of this nature have, however, come under intense scrutiny over the past 24 months, with one economist even calling these facilities a “con” used to artificially boost funds’ internal rates of return (IRRs). In this three-part series, The Hedge Fund Law Report examines these lending facilities and the controversies surrounding their use. This first article provides background on the types of funds that frequently use these facilities, recent trends that have emerged regarding this form of financing, basic mechanics of how these facilities are structured and the types of lenders that routinely offer these products. The second article will discuss the primary advantages to funds and their sponsors, as well as investors, of using these facilities and explore the legal documents that govern these facilities. The third article will evaluate some of the concerns raised by members of the private equity industry regarding these facilities, including the debate as to whether these facilities should be used for longer-term financing and how they impact a fund’s IRR. For more on subscription credit facilities, see “Subscription Facilities Provide Funds With Needed Liquidity but Require Advance Planning by Managers (Part One of Three)” (Jun. 2, 2016).

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  • From Vol. 10 No.42 (Oct. 26, 2017)

    Subscription and Other Financing Facilities Provide Liquidity and Flexibility to Private Funds but Require Advance Planning by Managers

    In order to quickly act on investments, instead of waiting for investors to fund capital calls, private equity and other private funds are turning to subscription credit facilities for necessary liquidity. Along with other types of fund financing facilities, subscription credit facilities are becoming more prevalent in the asset management industry. To facilitate the execution of a subscription facility, however, a manager must make certain preparations, particularly at the outset of the fund. In an interview with The Hedge Fund Law Report, Zac Barnett and Liz Soutter, partners at Mayer Brown, discussed subscription and other financing facilities used by funds. In the first article of this three-part series, Barnett and Soutter examine the prevalence of subscription facilities in the asset management industry, investor response to these structures and primary considerations for managers anticipating entering into such a facility. The second article reviews the evolution of other types of financing facilities in the current market, including fund-of-fund facilities, portfolio acquisition facilities and general partner support facilities. The third article focuses on market, structuring and operational considerations for managers when establishing financing facilities. For more on financing options for private funds, see “How Can Private Fund Managers Use Subscription Credit Facilities to Enhance Fund Liquidity?” (Apr. 4, 2013).

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  • From Vol. 10 No.11 (Mar. 16, 2017)

    Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers 

    As hedge funds move into relatively illiquid assets in an effort to improve returns, traditional short-term margin and repurchase agreement financing may no longer be appropriate or available. Instead, hedge fund managers are pursuing short- and long-term financing through prime brokers, private-equity-style capital call facilities, term facilities and special purpose vehicles. See “Can a Capital on Call Funding Structure Fit the Hedge Fund Business Model?” (Nov. 5, 2009). A recent presentation by Dechert partner Matthew K. Kerfoot provided an overview of these types of financing arrangements and some of their key negotiating points. This article summarizes his insights. For additional commentary from Kerfoot, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016); and “Dechert Panel Discusses Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jun. 14, 2016).

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  • From Vol. 9 No.42 (Oct. 27, 2016)

    The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options

    A decrease in bank lending to small- and middle-market companies has created opportunities for private fund managers that wish to engage in direct lending. A recent program presented by Dechert explored the current growth in direct lending, focusing on fund structures and strategies, tax implications and debt financing for direct lending funds. The program featured Dechert partners Matthew K. Kerfoot and Russel G. Perkins. This article summarizes the speakers’ key insights. See our three-part series on hedge fund direct lending: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016). For additional insight from Kerfoot, see “Dechert Panel Discusses Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jun. 14, 2016); and “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations Between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements” (Apr. 18, 2013). 

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  • From Vol. 9 No.33 (Aug. 25, 2016)

    Perspectives From In-House and Private Practice: Cadwalader Special Counsel Garret Filler Discusses Family Offices, Broker-Dealer Registration Issues and Impact of Capital, Liquidity and Margin Requirements (Part Two of Two)

    The Hedge Fund Law Report recently interviewed Garret Filler in connection with his recent return to Cadwalader, Wickersham & Taft. As special counsel in the firm’s New York office, Filler represents both start-up and established hedge funds and private equity funds, as well as family offices, banks and broker-dealers. This article, the second in a two-part series, sets forth Filler’s thoughts on family offices transitioning to asset managers; broker-dealer registration issues for fund managers; considerations when negotiating counterparty agreements; the implications to hedge funds of increased capital and liquidity requirements for banks and broker-dealers; and the impact of new margin requirements for uncleared derivatives. In the first installment, Filler discussed the cultures of private fund managers; selection of outside counsel, including law firm relationships with regulators and their willingness to enter into alternative fee arrangements; and counterparty risk. For additional insight from Cadwalader partners, see “Practical Guidance for Hedge Fund Managers on Preparing for and Handling NFA Audits” (Oct. 17, 2014).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    Operational Challenges for Private Fund Managers Considering Subscription Credit and Other Financing Facilities (Part Three of Three)

    As subscription credit facilities and other financing facilities become more prevalent in the industry, hedge fund and other private fund managers seeking to use them on their funds’ behalf must be mindful of the operational complexities that attend those structures. In addition to finding the right geographical market, managers must negotiate favorable provisions in facility documents and be wary of such a facility’s risks, including consequences of default. In a recent interview with The Hedge Fund Law Report, Zac Barnett and Liz Soutter, partners at Mayer Brown, discussed subscription financing facilities and other debt facilities used by funds. In this final article in a three-part series, the partners outline geographical, structuring and operational considerations managers should bear in mind when establishing financing facilities. The first article examined subscription facilities, including their prevalence in the asset management industry, investor response to these structures and primary considerations for managers anticipating entering into a facility. The second article explored other types of financing facilities, such as fund-of-fund facilities, portfolio acquisition facilities and general partner support facilities, and their evolution in the current market. For insight from other Mayer Brown attorneys, see “Private Equity FCPA Enforcement: High Risk or Hype?” (Feb. 19, 2015).

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    Financing Facilities Offer Hedge Funds and Managers Greater Flexibility (Part Two of Three)

    Along with subscription credit facilities, other forms of fund financing are becoming more prevalent in the asset management industry. In the hedge fund space, fund-of-funds managers are employing financing structures, and portfolio acquisition facilities and general partner support facilities are growing in use. However, along with increasing popularity, these structures have also experienced a surge in complexity. In a recent interview with The Hedge Fund Law Report, Zac Barnett and Liz Soutter, partners at Mayer Brown, discussed subscription financing facilities and other debt facilities used by funds. In this second article in a three-part series, Barnett and Soutter discuss financing facilities employed by hedge funds and other private funds, their evolution in the current market and the costs of these facilities. The first article examined subscription facilities, including their prevalence in the asset management industry, investor response to these structures and primary considerations for managers anticipating entering into such a facility. The third article will outline market, structuring and operational considerations for managers when establishing financing facilities. For more on hedge fund financing, see “Barclays Predicts Increased Financing Costs for Hedge Funds Due to Regulatory Changes Affecting Prime Broker Financing” (Oct. 18, 2012).

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  • From Vol. 9 No.22 (Jun. 2, 2016)

    Subscription Facilities Provide Funds With Needed Liquidity But Require Advance Planning by Managers (Part One of Three)

    In order to quickly act on investments, instead of waiting for investors to fund capital calls, private equity and other private funds are turning to subscription credit facilities for necessary liquidity. Along with other types of fund financing facilities, subscription credit facilities are becoming more prevalent in the asset management industry. However, to facilitate the execution of a subscription facility, a manager must make certain preparations, particularly at the outset of the fund. In a recent interview with The Hedge Fund Law Report, Zac Barnett and Liz Soutter, partners at Mayer Brown, discussed subscription and other financing facilities used by funds. In this first article of a three-part series, Barnett and Soutter examine the prevalence of subscription facilities in the asset management industry, investor response to these structures and primary considerations for managers anticipating entering into such a facility. The second article will review the evolution of other types of financing facilities in the current market, including fund-of-fund facilities, portfolio acquisition facilities and general partner support facilities. The third article will focus on market, structuring and operational considerations for managers when establishing financing facilities. For more on subscription financing, see “How Can Private Fund Managers Use Subscription Credit Facilities to Enhance Fund Liquidity?” (Apr. 4, 2013). 

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  • From Vol. 6 No.14 (Apr. 4, 2013)

    How Can Private Fund Managers Use Subscription Credit Facilities to Enhance Fund Liquidity?

    Private fund managers, particularly private equity and real estate fund managers, desire enhanced fund liquidity for various reasons, notably including the ability to act on attractive investments that require immediate action.  However, the time lag involved in having to wait for investors to fund capital calls can potentially close the door on a prospective investment opportunity.  See “Can a Capital On Call Funding Structure Fit the Hedge Fund Business Model?,” The Hedge Fund Law Report, Vol. 2, No. 44 (Nov. 5, 2009).  To plug such funding gaps, some lenders offer subscription credit facilities, which provide revolving lines of credit – which are typically secured by investors’ capital commitments – to fund a private fund’s investment activities.  To help private fund managers understand the subscription credit facility landscape, law firms Mayer Brown LLP and Appleby recently hosted the Third Annual Subscription Credit Facilities Symposium.  Participants at the Symposium discussed the mechanics of subscription credit facilities; why subscription credit facilities are attractive; the market for terms of subscription credit facilities; and what documentation is required for a subscription credit facility.  This article highlights the salient takeaways from the Symposium.

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  • From Vol. 3 No.48 (Dec. 10, 2010)

    Peak Ridge Hedge Fund Alleges that Morgan Stanley Breached its Prime Brokerage Agreement with the Fund by, Among Other Things, Tripling Margin Requirements over Ten Months

    On November 8, 2010, Morgan Stanley & Co. Incorporated (Morgan Stanley) filed suit against commodities hedge fund Peak Ridge Master SPC LTD, claiming $40.6 million in damages resulting from losses stemming from bad bets on natural gas.  See “Morgan Stanley Sues Commodities Hedge Fund Peak Ridge for Alleged Failure to Satisfy Margin Calls,” The Hedge Fund Law Report, Vol. 3, No. 45 (Nov. 19, 2010).  On November 29, 2010, Peak Ridge Master SPC Ltd. (obo The Peak Ridge Commodities Volatility Master Fund Segregated Portfolio (CVF)), brought counterclaims against Morgan Stanley, alleging that Morgan Stanley acted in a commercially unreasonable manner by, among other things: (1) tripling CVF’s margin requirements over a period of ten months; (2) giving notice of default and seizing the account without making a margin call or allowing any opportunity to cure; (3) assigning the fund’s management to a conflicted trader who mismanaged the fund, causing significant losses; and (4) selling its remaining open positions to a competitor, a Morgan Stanley affiliate, that recognized an immediate $23 million gain from the acquisition.  Morgan Stanley’s suit claimed $40.6 million in damages for losses caused by CVF’s failure to meet contractually required margin calls.  CVF’s Counterclaim seeks at least $30 million in damages.  In its Counterclaim, CVF accuses Morgan Stanley of terminating the fund's account to further Morgan Stanley’s own interests.  This article reviews CVF’s presentation of the sequence of events from the inception of the relationship between the parties through the disputed seizure and subsequent liquidation, and details CVF’s breach of contract counterclaim.

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  • From Vol. 2 No.44 (Nov. 5, 2009)

    Can a Capital On Call Funding Structure Fit the Hedge Fund Business Model?

    For institutional investors in hedge funds, the most objectionable aspect of the recent crisis – even worse than the poor performance – was the evaporation of liquidity, the inability to get one’s money back upon request.  See, e.g., “How Can Hedge Fund of Funds Managers Manage a ‘Liquidity Mismatch’ Between Their Funds and Underlying Hedge Funds?,” The Hedge Fund Law Report, Vol. 2, No. 40 (Oct. 7, 2009); “Investors Demand More Specificity in Hedge Fund Governing Documents Regarding Circumstances in which Liquidity Management Tools may be Used,” The Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).  In the still-difficult fundraising environment following the crisis, hedge fund managers have been offering variations on the traditional hedge fund structure, all in the interest of accommodating investors’ liquidity concerns and thereby growing or replenishing assets under management.  See “Structuring Managed Accounts Key Focus of GlobeOp’s ‘Managed Accounts Insights for Investors’ Event,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009); “Steel Partners’ Restructuring and Redemption Plan: Precedent or Anomaly?,” The Hedge Fund Law Report, Vol. 2, No. 34 (Aug. 27, 2009); “How Are Hedge Fund Managers with Funds Under their High Water Marks Renegotiating Performance Fees or Allocations?,” The Hedge Fund Law Report, Vol. 2, No. 33 (Aug. 19, 2009); “What Happens to High Water Marks When Managers Restructure Hedge Funds?,” The Hedge Fund Law Report, Vol. 2, No. 43 (Oct. 29, 2009).  One provocative alternative being explored by certain managers would involve importing the traditional “capital on call” funding approach of the private equity world into the hedge fund structure.  According to sources polled by The Hedge Fund Law Report, this approach remains unprecedented.  Nonetheless, in light of the heightened concern with liquidity on the part of hedge fund investors, any technique to enhance liquidity merits a serious look.  Therefore, this article details the different funding mechanisms historically used by private equity and hedge funds, then explores the benefits and burdens to hedge funds of using a capital on call mechanism.

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  • From Vol. 2 No.24 (Jun. 17, 2009)

    Update on the Federal Reserve Bank of New York Term Asset-Backed Securities Loan Facility

    In November 2008, the Federal Reserve Board established the Term Asset-Backed Securities Loan Facility (TALF) to provide $200 billion in non-recourse financing by the Federal Reserve Bank of New York (FRBNY) to eligible borrowers owning eligible asset-backed securities (ABS).  On February 10, 2009, the Treasury announced that, under the Financial Stability Plan, the TALF would be expanded to provide up to $1 trillion in financing.  On May 1, 2009, the FRBNY announced that, beginning in June 2009, certain commercial mortgage-backed securities (CMBS) would be eligible for TALF funding; eligible CMBS will be highly-rated and of recent origin.  The FRBNY will cease making TALF loans on December 31, 2009, unless the program is extended by the Board of Governors.  In guest article, Alyson B. Stewart and Lawrence D. Bragg, III, Associate and Partner, respectively, at Ropes & Gray LLP, provide a comprehensive summary of terms of the TALF based on publications of the FRBNY and their experience representing borrowers in the TALF subscriptions to date.

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  • From Vol. 2 No.23 (Jun. 10, 2009)

    Treasury, Fed and FDIC Officials Discuss Suspension of Legacy Loans Program, Status of Legacy Securities Program and Future of the TALF at SIFMA and PREA’s Public-Private Investment Program Summit

    On June 4, 2009, the Securities Industry and Financial Markets Association (SIFMA) and the Pension Real Estate Association (PREA) hosted the Public-Private Investment Program (PPIP) Summit, which featured key speakers from the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC).  The day-long event highlighted some of the key changes to the PPIP, including the recent FDIC announcement that the program for loans was being put on indefinite hold.  In addition, speakers addressed the prospects for the Term Asset-Backed Securities Loan Facility (TALF), and the potential evolution of the securitization market in light of the credit crisis.  We discuss the FDIC’s decision to put the Legacy Loans Program on hold, why banks have been reluctant to sell troubled assets, the structure of and prospects for participation in the Legacy Securities Program and the TALF and concerns with the government as a partner.

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  • From Vol. 2 No.12 (Mar. 25, 2009)

    United States Treasury Department Announces Public-Private Investment Program – In Effect, Becomes the World’s Largest Prime Broker

    On March 23, 2009, the Treasury Department announced a new Public-Private Investment Program (PPIP), a collaborative initiative among the Treasury Department, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and private investors to create $500 billion to $1 trillion in buying power for the purchase from financial institutions of “legacy” or “toxic” assets.  The idea of the PIPP is that purchasing such assets – primarily real-estate and corporate loans and securities backed by such loans – from financial institutions will fortify the institutions’ balance sheets, thus enabling them to raise new capital and make new loans, and thereby re-opening the spigots of credit in the U.S. economy.  The PPIP seeks to address the challenge of valuation of legacy assets largely by outsourcing valuation to private investment firms and allocating some of the risk of distressed asset purchases to such firms.  Broadly, under the terms of the PPIP, the government will act as a lender to private investors and, to a lesser degree, as a co-investor.  In theory, private investors will determine how best to allocate government capital, and will enjoy some of any upside, with limited downside.  In this sense, the government appears to have become, in effect, the world’s largest prime broker.  We explain the details of the PPIP in a long-form analysis.

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  • From Vol. 2 No.12 (Mar. 25, 2009)

    Onerous Customer Agreements Undermine Investor Interest in the TALF, but TALF Trusts Offer a Creative Solution for Hedge Funds Interested in Participating

    The first round of the Federal Reserve Bank of New York and the United States Treasury Department’s Term Asset-Backed Securities Loan Facility (TALF) program has launched to a lukewarm reception among investor-borrowers.  According to a statement issued by the Federal Reserve on March 18, 2009, in its first round of funding, the TALF program received only $4.7 billion in requests for loans out of $200 billion in available loan capacity.  Only 19 hedge funds applied for funding.  Market participants attribute the relative lack of interest in part to resistance on the part of investors to the terms of customer agreements that investors are required to enter into with dealers.  According to lawyers who have negotiated such customer agreements, the customer agreements are more restrictive than the Master Loan and Securities Agreement (MLSA) that primary dealers must enter into with the Federal Reserve to participate in the TALF.  The customer agreements are generally dealer-friendly, including unilateral set off rights that favor dealers and broad rights for dealers to inspect investors’ books and records.  We explain the concerns among hedge funds and their advisers relating to the customer agreements.  We also describe TALF Trusts, a creative solution that some hedge fund are employing to circumvent the customer agreements, along with a review of some of the shortcomings of TALF Trusts.

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  • From Vol. 2 No.7 (Feb. 19, 2009)

    As Prime Brokers Tighten Lending to Hedge Funds, the Federal Reserve Increases Hedge Fund Financing Capacity with Expansion of the TALF

    The Federal Reserve Bank of New York and the United States Treasury have announced that financing available under the Term Asset-Backed Securities Loan Facility (TALF) program will be substantially increased, from a previously announced $200 billion up to $1 trillion, and that eligible collateral for loans under the TALF could be expanded (although such an expansion is not yet certain) to include newly and recently issued AAA-rated commercial mortgage-backed securities (MBS) and private-label residential MBS.  As originally envisaged, eligible collateral was limited to AAA-rated asset backed securities (ABS) backed by newly and recently originated auto loans, credit card loans, student loans and Small Business Administration-guaranteed small business loans.  The expansion of the TALF would be supported by a commitment from the Treasury of additional funds from the Troubled Asset Relief Program.  Hedge funds, who historically have not been eligible to borrow from the Fed, will become eligible to do so under the TALF with respect to investments in certain ABS.  We explain the background and mechanics of the revised TALF and the related Public-Private Investment Fund, and enumerate the benefits and burdens to hedge funds of participating in the program.

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  • From Vol. 2 No.1 (Jan. 8, 2009)

    Hedge Funds Gain Access to Government Loans as Fed Expands the TALF

    Hedge funds find themselves in new territory under a plan by the Federal Reserve to boost lender liquidity.  The Fed created a new $200 billion lending facility, called the Term Asset-Backed Securities Loan Facility (TALF), which offers low-cost, three-year financing to a wide range of US banks and investors for the purchase of securities backed by consumer loans, beginning in February 2009.  Notably, domestic (though probably not offshore) hedge funds would be eligible to participate in the program, allowing them to borrow from the Federal Reserve, something hedge funds have not been able to do in the past.  We describe the mechanics of the program and how hedge funds may be able to participate, and explore the benefits and burdens of participation.

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  • From Vol. 1 No.25 (Nov. 26, 2008)

    Responses to Challenges Facing Credit Opportunities Hedge Funds: How to Stay Above Water in Tough Times

    A significant number of credit opportunities hedge funds, which typically invest primarily in leveraged loans and other credit, were launched in the past year or so, hoping to take advantage of market volatility and decreased liquidity.  However, these funds are running into trouble as expectations have failed to keep pace with economic reality.  Banks have tightened credit and collateral standards for hedge funds that invest in risky assets, and fund investors have been redeeming fund investments in record amounts.  This article details specific strategies that funds have used to stay above water when faced with the prospect of violating covenants in their loan documents – lessons that can be applied to hedge funds facing challenges across various investment strategies.

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