Umbrella Academy: A Guide to Umbrella’s Fundraising Facilities | Cadwalader, Wickersham & Taft LLP
The fundraising practice Cadwalader closed 13 umbrella facilities in 2020. The average transaction size was $ 135.4 million, which is not far from the average transaction size for subscription facilities. ” vanilla “. While the number of transactions has increased, we haven’t seen as many installations with maximum commitments of over $ 1 billion as in 2017-2019. This trend is consistent with the appearance of a greater variety of umbrella installations on the market.
How to structure an umbrella installation
An umbrella facility is a credit facility with multiple borrowing bases. As a general rule, given the separate borrowing bases, representations and warranties, covenants, and events of default only apply to all of the borrowers who make up a particular borrowing base. Fees and expenses are also limited to borrowers who make up a particular borrowing base, and generally the obligations of each borrowing base will not be covered by cross-guarantees with the obligations of borrowers in other borrowing bases.
The key to structuring any umbrella facility is a “Group of Funds” concept. Once the concept is implemented in all loan documents, the credit facility can then operate with separate borrowing bases, covenants, and events of default. Although conceptually simple, groups of funds and associated defined terms touch on almost every aspect of the credit agreement and collateral documents. Essentially, wherever a borrower or loan is mentioned, the lawyers drafting the documents must incorporate the appropriate umbrella mechanisms of the fund group. At the same time, bankers and their respective operational teams must consider multiple groups of funds and borrowing bases, which can impose additional administrative burdens on the lender. The cost of setting up and operating umbrella facilities can therefore be considerably higher than a “vanilla” subscription credit facility. However, in certain situations, the flexibility of the multiple borrowing bases of an umbrella facility justifies the additional cost.
Many possibilities under an umbrella
It turns out that the simplicity of the fund group concept is robust enough to accommodate a number of different fund structures. Recently we have seen several innovative solutions designed by sponsors and lenders when there is a business reason for multiple borrowing bases – out of necessity due to the structure of the fund or for the convenience of the sponsor.
The traditional umbrella: fund group borrowers
The “traditional” umbrella is simply made up of several linked borrowers in each fund group. The borrowers of such a group of funds share a common borrowing base with cross-guarantees with each other borrowers of this group of funds. Fund groups are often composed of a main fund and its alternative investment vehicles and parallel funds, and may also include surplus funds and co-investment vehicles, to the extent that such cross-collateralization is permitted. with respect to all borrowers in the fund group. New fund groups can be added as new funds are raised and older fund groups can be deleted without terminating the facility. Although each group of funds is generally governed by the same terms, covenants relating to net asset value and other provisions may only apply to late-stage funds that have canceled most of their capital commitments.
The single investor umbrella: several single investor funds
If a sponsor has or intends to have multiple funds with a single investor, the sponsor may wish to join these funds in an umbrella facility. Ideally, each single-investor fund would be based on a similar set of governing documents so that the primary objective in structuring the credit arrangement is to assign a borrowing base to each single-investor fund.
The Pool Umbrella: several capital groups in the PLA
If a fund’s constituting document, typically a limited partnership agreement, is structured so that capital commitments are in separate series or pools that cannot be cross-guaranteed, a facility with umbrella mechanisms can be a relatively simple solution to the problem. While the structuring of the credit facility will depend on the precise terms of the LPA, the multiple borrowing bases of an umbrella facility should, with some modifications, be able to accommodate the multiple pools of capital set out in an umbrella facility. such LPA.
The Luxembourg umbrella: several RAIF compartments
A more exotic umbrella is based on the Luxembourg Reserved Alternative Investment Fund (RAIF). It is possible to structure the RAIF as a multiple compartment borrower, each compartment being essentially a separate borrower under the RAIF. In an umbrella facility based on such a RAIF, each RAIF sub-fund would have its own separate borrowing base, and any tests or commitments would be assessed for each sub-fund. (The constituting document of a Luxembourg RAIF may be supplemented or amended to reflect the addition of a new RAIF compartment, which could then be attached to the umbrella facility as a borrower in accordance with specialized joining mechanisms.) Ne does not correspond precisely to the traditional concept of group of funds, the Luxembourg umbrella RAIF gives rise to more complicated loan documents and is less widespread on the market.
Conclusion: when to open an umbrella?
As bankers and lawyers alike know, the rabbit slopes of a discussion over a mod sheet can quickly turn into a double black diamond when it comes to drafting ease papers. To take an extreme example, an umbrella installation of the Luxembourg RAIF included amalgamated hybrid compartments / SMA with feeders dedicated to Cayman and Delaware above each compartment in a cascade of local and New York law commitments.
As noted above, the initial costs and administrative burden of an umbrella facility initially composed of one or two groups of funds may exceed what a promoter would expect if they entered into an independent credit facility for each fund group. However, as more and more fund groups are added, the umbrella should become a relatively more efficient vehicle, assuming these fund groups share key structural characteristics.
Additionally, an umbrella facility can be attractive to a primary lender because it increases the likelihood that they will also be the primary lender for the next year of the fund. For sponsors, some umbrella facilities also provide an aggregate maximum commitment that borrowers can allocate and reallocate between fund groups (with availability limited by each fund group’s borrowing base), potentially reducing unused charges incurred by the fund group. the sponsor and the total amount of capital that the lender must allocate to the promoter’s credit facilities. Of course, the alternative to umbrellas sets a solid precedent between a sponsor and a lender that can be the basis for future installations. It is up to the lender, sponsor and their respective boards to decide when an umbrella is the most desirable option for a given fund set.