Fund Finance

1⃣ Fund Finance & FFS Overview

What is the primary purpose of a Fund Finance Solutions (FFS) team?

To:

• originate

• structure

• manage

Fund-level financing solutions across the fund lifecycle

What types of clients does FFS typically serve?

• Private equity funds

• Private debt funds

• Hedge funds

• Insurers

• Asset managers

What does “asset-light model” mean for a bank?

Originate assets and distribute them to reduce balance sheet usage and regulatory capital consumption.

What is Originate-to-Distribute (OTD)?

A model where the bank originates a loan and subsequently sells down all or part of the exposure.

What is Distribute-to-Originate (DTO)?

Distribution capacity drives how much the bank can originate.

What is final hold?

The portion of a facility the bank retains post-distribution.

What is the role of Credit Portfolio Management in FFS transactions?

Monitoring:

• Portfolio risk

• Capital usage

• Ratings

• Asset rotation strategy

2⃣ Capital Call Facilities – Core Mechanics

What is a revolving credit facility?

A loan that allows a borrower to

• Draw

• Repay

• Redraw

funds up to a committed limit during an agreed period.

What is a capital call (subscription) facility?

A revolving credit facility to a fund, secured by LP uncalled capital commitments.

What is a committed limit?

The maximum amount the lender agrees to make available under the facility.

What is availability under a revolving facility?

The amount that can currently be drawn, being the lower of the committed limit and the borrowing base.

Why are capital call facilities structured as revolving facilities?

Because funds draw and repay repeatedly as investments are made and capital is called from LPs.

What is the primary collateral in a capital call facility?

The right to call capital from limited partners.

Why do sponsors use capital call facilities?

To:

• Funding Certainty

• Operational & Cash Flow Efficiency

• IRR Optimisation

How does a capital call facility provide funding certainty?

It gives the fund immediate access to committed bank financing, allowing it to close investments on fixed timelines without waiting for LP capital to be received.

How does a capital call facility improve operational and cash flow efficiency?

It reduces the number and urgency of capital calls, simplifying treasury management and lowering administrative burden for both the GP and LPs.

How does a capital call facility help optimise IRR?

By delaying capital calls, it shortens the measured investment period for LPs, which increases reported IRR without changing underlying deal performance.

What happens immediately when an LP defaults?

They are removed from the borrowing base and availability is recalculated.

Why are capital call facilities considered “self-liquidating”?

Because investments are ultimately funded by LP capital calls which repay the facility.

What is a capital call acceleration right?

The lender’s contractual right to require the fund to immediately issue capital calls to LPs upon default to repay the facility.

What is the primary covenant in a capital call facility?

Borrowing base coverage.

What is a borrowing base?

The maximum amount that can be drawn, calculated as eligible LP commitments multiplied by advance rates.

What is an advance rate in fund finance?

The percentage of eligible collateral value that can be borrowed against.

How should advance rates be thought of

“If something goes wrong, how confident are we that we can call capital, collect it, and be repaid in full and on time?”

Why are conservative advance rates distribution-friendly?

They widen the investor base willing to buy the asset.

Why are advance rates lower in NAV facilities?

Due to asset valuation and liquidity risk.

Are NAV advance rates applied to total fund NAV?

No. They are applied at the individual portfolio company level to eligible assets, then aggregated into the borrowing base.

How are advance rates typically determined?

Based on:

• LP credit quality

• Jurisdiction

• Enforceability

What is an eligible LP?

An investor who meets predefined:

• Credit

• Legal

• Concentration criteria

What are concentration criteria for eligible LPs?

Limits on how much any single LP (or group of LPs) can contribute to the borrowing base to prevent reliance on a single investor.

What is a clean-down provision?

A requirement to reduce outstanding borrowings to zero (or near zero) periodically.

Why do lenders require clean-down provisions in capital call facilities?

To prevent the facility from becoming permanent leverage and to regularly test that LP capital calls still function as the primary repayment source.

3⃣ Capital Call Facilities – Risk & Legal Concepts

What is side letter risk?

Provisions granting LPs preferential rights that may impair capital call enforceability.

Why is jurisdiction important in capital call facilities?

Enforceability of capital commitments varies by legal system.

What is a “capital call notice”?

A formal demand sent by the fund to LPs requiring payment of committed capital.

What is a defaulting LP remedy?

The contractual rights allowing a fund or lender to enforce payment or impose penalties when an LP fails to fund a capital call.

Why are defaulting LP remedies important to lenders?

They provide enforceability and recovery options if an LP does not meet its capital commitment.

Why are capital call facilities typically short-dated?

Because they must mature while the fund still has meaningful uncalled capital available to repay the loan through LP capital calls.

What key risk change occurs as a fund approaches the end of its life?

Repayment shifts from enforceable LP capital commitments to asset realisations, which materially increases credit risk.

Why does a subscription facility become riskier late in a fund’s life even if the loan size is smaller?

Because the certainty of repayment declines as future capital calls are exhausted, increasing reliance on asset performance.

Why do NAV facilities typically replace capital call facilities later in a fund’s life?

Because they are designed to lend against asset value when uncalled capital is no longer a reliable repayment source.

What is a waiver?

Temporary permission to breach a covenant.

What is an amendment?

A permanent change to facility terms.

What is a common amendment request from sponsors?

Increased facility size or extended tenor.

4⃣ NAV Facilities & Asset-Backed Lending

What is a NAV facility?

A loan secured by the net asset value of a fund’s underlying investments.

When are NAV facilities typically used?

Mid-to-late fund life, when uncalled capital is limited.

What is Loan-to-Value (LTV)?

The loan amount divided by the value of the collateral assets.

Why are NAV facilities riskier than capital call facilities?

They rely on asset performance rather than contractual LP commitments.

Why are NAV facilities priced higher than capital call facilities?

Due to higher asset risk and capital consumption.

What is a cash sweep?

Mandatory application of asset cash flows to repay debt.

5⃣ Credit Process & Execution

What is an annual review in fund finance?

A periodic reassessment of:

• Credit risk

• Structure

• Compliance

What is a credit application?

An internal document summarising transaction structure, risks, mitigants, and approval request.

What are key inputs into an internal rating review?

LP quality

Fund performance

Structure

Macro conditions.

6⃣ Modelling & Reporting

What is the purpose of transaction modelling in FFS?

To calculate:

• Borrowing base

• Covenant headroom

• Stress scenarios

What stress scenarios are commonly applied?

• LP defaults

• NAV decline

• Concentration shocks

• Delayed capital calls

Why is version control critical in credit models?

To ensure auditability, governance, and regulatory compliance.

7⃣ Distribution & Syndication

What is syndication?

Selling portions of a facility to other lenders.

Why does distribution influence deal structuring?

Investors have different risk appetites, affecting:

• Pricing

• Tenor

• Covenants

What is the role of an agent bank?

To manage documentation, cash flows, and communication between lenders and borrower.

8⃣ ESG & Transversal Topics

How does ESG impact fund finance transactions?

Through exclusions, reputational risk, and sometimes margin ratchets.

What is ESG-linked pricing?

Interest margins that adjust based on ESG performance metrics.

9⃣ Day-One “Sound Smart” Flashcards

Why are capital call facilities considered low risk?

They are secured on contractual commitments from creditworthy LPs with conservative advance rates.

What differentiates a strong fund finance structure?

• Robust eligibility criteria

• Conservative borrowing base

• Legal enforceability

• Distribution-friendly design