FREDERICK C. FISHER IV Partner, Mayer Brown
Frederick C. Fisher IV
Mayer Brown
Zachary K. Barnett Partner/Finance Practice Leader, Mayer Brown
Zachary K. Barnett
Partner/Finance Practice Leader, Mayer Brown
Christopher M. Chubb Associate, Mayer Brown
Christopher M. Chubb
Mayer Brown
Anastasia N. Kaup Associate, Mayer Brown
Anastasia N. Kaup
Mayer Brown








Private equity and other investment funds have traditionally utilized portfolio company-level financing to finance acquisitions. These types of financings depend on the portfolio company for the debt underwriting and the collateral package. These include asset-based loans, cash flow financings and real property mortgages, among other traditional lending products.

Fund-level debt can provide alternative financing or complement secured financing at the portfolio company level. Fund-level debt can include net asset value (NAV) credit facilities, subscription credit facilities and facilities combining characteristics of both NAV and subscription credit facilities (hybrid facilities). This article focuses on the relative benefits of using fund-level credit facilities to finance acquisitions of portfolio companies and/or their assets as compared to traditional acquisition finance.

NAV, Subscription & Hybrid Credit Facilities

NAV facilities are fund-level facilities relying on fund investments as the primary source of repayment. Although a lender may consider the strength of a fund in its underwriting process by comparing the credit evaluation for providing financing to a successful $1 billion fund VI versus an untested $50 million fund I, for example, the fund’s assets are typically the primary basis for underwriting and, in the case of a secured facility, the sole collateral. In a secured NAV facility, the lender can obtain liens on, among other things, 1) the equity interests in portfolio companies (or holding companies that ultimately own the portfolio companies); 2) distributions and liquidation proceeds from the portfolio companies or other investments; 3) in the case of debt funds, loans extended by the fund to its borrowers and 4) fund-level collection accounts. In other cases, borrowers with creditworthy assets are able to access credit based on borrowing base formulas but without granting liens on their assets.

Loan availability under a NAV credit facility is typically limited to a sum equal to an agreed advance rate for a given category of assets (potentially subject to concentration limitations for each category) multiplied by the NAV of certain agreed eligible investments. NAV credit facilities are often subject to unique covenants and other terms in financing agreements such as the requirement to maintain a minimum NAV or loan-to-value ratio, or rights with respect to asset replacement.

While NAV credit facilities look downward to the underlying portfolio investments or other fund assets and their value as collateral and/or source for repayment, subscription credit facilities look upward to the unfunded capital commitments of the investors in the fund.

Subscription (also known as “capital call” or “capital commitment”) credit facilities are used by private equity funds of all stripes. For years, such facilities have offered funds numerous benefits, including quick access to capital; flexibility and nimbleness to rapidly access and deploy capital; the means to borrow smaller amounts as needed to reduce administrative burdens, maximize efficiency and bolster positive investor relations; access to letters of credit and the ability to borrow in multiple currencies; the ability to secure hedges, swaps and other derivatives transactions and the means to bridge capital needs in connection with an asset-level financing.

Hybrid credit facilities blend NAV and subscription facilities. Collateral for hybrid credit facilities is negotiated on a deal-by-deal basis, but can provide lenders with recourse to the underlying investment assets that typically support a NAV, as well as the uncalled capital commitments of investors that typically support a subscription credit facility. For hybrid facilities with a blended borrowing base, the proportion of the base made up of capital commitments versus NAV assets often changes over time. As capital commitments are called and those funds are deployed to make investments, the value of those investments builds up the borrowing base through the NAV asset prong. The blended borrowing base of the hybrid credit facility helps fulfill the financing needs of the fund at multiple stages in its lifecycle and obviates the need to refinance as capital commitments are called.

Relative Benefits of Fund-Level Financing

The benefits of fund-level financing, particularly to facilitate acquisitions, include:

  • Decreased transaction costs due to having only one credit facility per fund rather than multiple asset level or portfolio company-level credit facilities, resulting in lower overall costs and low to no commitment or broken deal costs.
  • Timing benefits due to not having to arrange, structure, coordinate and close multiple asset-level or portfolio company-level credit facilities contemporaneously to facilitate acquisitions.
  • The ability to focus fund financial and personnel resources on acquisitions, without the need to run a simultaneous process to secure asset-level or portfolio company-level financing.
  • Lower relative cost of debt and increased fund profitability. Lenders’ greater comfort in the fund’s overall performances; multiple income streams from multiple portfolio companies and assets to support repayment; reputational risk of non-repayment; decreased diligence costs and better pricing on fund-level debt secured across a diversified pool of collateral contribute to this.
  • Multiple high-quality sources of repayment supporting a single-credit facility.
  • Potentially increased deal flow for lenders positioned to provide financing for the fund through its investment cycle across various platforms.
  • A single, top-level credit facility lends to high levels of cooperation between funds and their lenders, increasing transparency into a fund’s ultimate business goals and strategy and promoting partnerships.
  • Lenders at the fund-level facility have a larger hold percentage of the fund’s overall debt, with greater diversity of assets.
  • Potential pricing breaks and beneficial borrowing base adjustments depending on the assets and concentrations thereof comprising the borrowing base.

Fund-level financing is not an ideal fit for every fund and situation. Potential challenges include accounting and tax issues, the risk of insolvency at the portfolio company level (although this risk is likely limited for well-diversified and properly structured funds) and unique portfolio goals and challenges.

In many cases, these concerns can be mitigated or resolved by consulting experienced counsel early in the fund formation stage and/or financing processes, or with other creative approaches such as placing what would otherwise be mezzanine or junior-level debt in a senior position at the portfolio company level, which may be obtained at a much lower all-in rate than usual given its senior position in the capital structure.

Depending on the type, goals and characteristics of the fund, it is possible to employ each of the aforementioned types of financing and to call on uncalled capital commitments, as well as underlying assets and investments, to fulfill varying capital and liquidity needs throughout the entire life cycle of a fund.

Market Trajectory & Conclusion

Given the relative benefits of fund-level credit facilities over traditional asset-level and portfolio company-level financing, as well as the overlap in collateral and sources of repayment, we see funds enjoying numerous benefits in obtaining fund-level facilities on a stand-alone basis and/or as a jumping-off point to the financing of the capital structure over the life of the fund at multiple levels. As a fund’s capital demands, needs and goals evolve, fund-level facilities can provide unique advantages in terms of flexibility. As funds continue to mature and lenders shift their underwriting focus from individual investments to the strengths of funds themselves, we expect funds will utilize, and lenders will offer, additional fund-level facilities and financing options.

This risk can be further mitigated by negotiating a cross-default provision to only certain investments. Funds can also negotiate the ability to substitute non-performing assets for better performing assets in the borrowing base.