Maples Group - FUNDed - July 2021

FUNDed AN INDUSTRY NEWSLETTER FOR THE GLOBAL FUND FINANCE MARKET | JULY 2021

CAYMAN ISLANDS

Protecting Your Position Golden Share Structures

JERSEY

Granting Security in the Channel Islands

IRELAND

Investment Limited Partnerships

LUXEMBOURG

Limitations on Distributions Covenants

What's Inside In this edition we feature:

2

US Market Review

4

European Market Review

6 8 11

Protecting Your Position – Cayman Islands Golden Share Structures Investment Limited Partnerships in Ireland A Luxembourg Perspective on Limitations on Distributions Covenants

14

Granting Security in the Channel Islands, Jersey

16

Asia Market Review

July 2021 | 1

The Maples Group is delighted to present our July 2021 edition of FUNDed.

2 | FUNDed

US Market Review 2021 has been a thriving year so far in the fund finance market and we expect the trend to continue for the remainder of the year as we are seeing no indication of slowdown in terms of deal value or volume. The fund finance market has a suite of well-respected and relied-upon financing options that have tested well over the last year and, in particular and perhaps most importantly, held up through the pandemic and the resulting market disruption. The products themselves are ever developing and we are seeing all players in the market be nimble in terms of structuring and offering new solutions when the market and investment opportunities demand.

July 2021 | 3

The fund finance borrowers in the market are primarily closed-ended private equity funds and, when we see the private equity formation numbers increase, we know that the demand for leverage will rise in the same fashion. This is exactly what we are seeing month-on-month into 2021.

Sponsors with existing bank relationships will be confident that leverage will be available for their new funds coming into the market. However, we are seeing an uptick in financing options available to sponsors with an increasing number of new banks looking to establish a presence in the market, as well as a rise in the alternative lenders playing in this space. The winning mandate for any fund has the hope of a long and fruitful relationship between the lenders and sponsors through the development and establishment of multiple funds with multiple investment strategies, so the cost and potential rewards are high for all parties involved.

Sponsors have had the opportunity over the last year to review and better understand all financing options that are now available to them, with the result being a continued upward trend in the use of the traditional subscription line loans as well as NAV-based lending, and the now more popular hybrid facilities.

As 2021 progresses, we are seeing business success be viewed ever more closely in line with the environmental, social and governance ("ESG") initiatives and standards that attach to the companies and communities in which the sponsors and banks operate. Banks are offering beneficial terms and incentives for those sponsors that focus on and operate well in terms of ESG governance and oversight, and the European markets are playing an important and leading role, setting the example for the US on how best to develop and implement a comprehensive approach to managing the legal and business risks associated with ESG-related issues.

We have also seen an increase in the use of note-issuing vehicles and derivative arrangements, and financing that structures the asset ownership and risk such that banks are able to take full advantage of netting and collateral legislative provisions to allow for maximum capital adequacy protections and value calculations.

We are seeing all players in the market be nimble in terms of structuring and offering new solutions when the market and investment opportunities demand

Finally, irrespective of the buoyancy of the market, lenders are ever cognisant of the risks and insolvency concerns relating to all funds. We have seen a huge surge in the use of bankruptcy remote, golden share investment structures with the funds utilising specific investment vehicles for their financing needs. The comprehensive and respected insolvency regime in the Cayman Islands sits well with the more conservative, risk averse credit teams in the lending banks and the full and secure security packages are highly attractive solutions for them.

As we head into the second half of the year, we are excited to see how the markets further develop and how we can help all of our clients with their financing needs.

For further details, please contact: Tina Meigh

+1 345 814 5242 tina.meigh@maples.com

4 | FUNDed

European Market Review As we enter the second half of 2021 we look forward to a likely gradual return towards normality with global vaccination programmes being rolled out and the hope of a relaxing of lockdown rules, and while we are also seeing the UK operating outside the EU, we also look forward to seeing policy develop for financial services across Europe and the level of harmonisation and equivalence that is achieved.

It is very pleasing to note that, in spite of this uncertainty, the European fund finance market in 2021 has been and remains very active into June. Optimistic 2021 forecasts made by market commentators earlier this year are being borne out in deal flow and the types of deals that we are seeing across our European offices covering Cayman Islands, Luxembourg, Irish and Jersey borrowers. In addition to a number of large subscription deals, we also continue to be very busy with ever increasing NAV transactions across our European offices. Sponsors seizing on a strong demand for better yielding wholesale debt in the capital markets and keener pricing of fund finance facilities have featured as a theme throughout the period of the pandemic.

One follow-on trend that we have seen develop from 2020 through recent months, from the downstream private equity transactions that we are involved in across our European offices, is the utilisation of conventional and hybrid fund

finance facilities to enhance a fund's internal rate of return ("IRR") with fund finance facilities also continuing to evolve to service the varied liquidity needs of sponsors.

Accelerating distributions to investors can aid IRR and can also assist strategically in the lead up to fundraising for a successor fund. It appears that the use of (in particular) NAV facilities to fund dividend recaps or bridges to an exit are now a fairly common tool considered by managers, particularly where clear distributions or exit profile for the funded assets can be presented to financiers.

2020 was an incredibly busy year for us in fund finance, with the market reacting to the COVID-19 disruption, and to date in 2021, we have again seen an increase in deal volume across all of our European offices as the fund finance market has continued to grow and evolve to solve business needs. This continued growth tallies

July 2021 | 5

new 2020 ILP Act, we expect to see ILPs play an increasingly important role in attracting fund structures and the related financing.

In 2021 we have again seen an increase in deal volume across all of our European offices as the fund finance market has continued to grow and evolve to solve business needs

with the healthy first quarter private equity fundraising numbers PEI and PitchBook have reported. Looking further forward, Prequin has forecasted that global assets under management to more than double, topping US$9 trillion in 2025, with private equity and venture capital expanding their leading position within the alternatives amid the continued low interest rate environment.

It is interesting to note from our Luxembourg office that the number of deals for the first half of 2021 is already reflecting a material increase of around 25% over the same period in 2020 which was itself an exceptional and unprecedented year in terms of deal volume. Technical amendments to facilities and facility increases and extensions are also adding to the deal volume. This reflects the Luxembourg Private Equity and Venture Capital Association (LPEA) estimate that 90% of the European private equity and venture capital funds are domiciled in Luxembourg with assets under management reaching €400 billion, and an average size per fund of €200 million.

Also worthy of note is that, following Brexit, Ireland is the only common law jurisdiction and native English speaking country in the EU. Having positioned itself as one of the major players in the creation and management of investment funds worldwide coupled with the benefit of the

It is also interesting that, continuing from 2020 into the first half of 2021, we have seen a huge resurgence of special purpose acquisition companies ("SPACs") in the US and increasingly in Europe as a 'new' tool to raise funds facilitating private equity acquisitions. While keeping our corporate departments incredibly busy, this wave of SPACs has not led to a decrease in fund finance work and multiple press reports suggest that sponsors are not seeing SPAC deals impact on European fund finance deal flow.

Another continuing development is the increasing penetration of ESG and its advantages into the fund finance market. In Europe, the importance of ESG is increasingly understood, and ESG is now firmly mainstream and will only be further strengthened by the recent meeting of the G7. With time, it is expected that the process of agreeing and documenting ESG provisions in European fund finance facilities will become more standardised with tailor-made tweaks for certain structures and borrowers as necessary. It is widely acknowledged that KPIs in the fund finance context can be set at the investment level as well as at the fund level, positively influencing the private equity fund and wider private equity community. The KPIs set at the investment level in NAV financings are seen as a powerful tool for industry-wide ESG adoption. By setting KPIs at the private equity fund level through subscription facilities with pricing linked to pre-specified ESG metrics it has the potential to serve as a helpful incentive for sponsor ESG commitments, and offers the entire private equity industry an incentive to work towards best practices. We are proud to be involved in such work and look forward to the adoption of ESG metrics in fund finance continuing to redirect investments and change attitudes towards strong ESG adoption, which eventually works through all kinds of industries, sectors and geographies.

We very much look forward to a busy second half of 2021 and assisting our clients with their continuing European fund finance needs whether it involves Luxembourg, Irish, Cayman Islands or Jersey fund structures.

For further details, please contact: Jonathan Caulton

+44 20 7466 1612 jonathan.caulton@maples.com

6 | FUNDed

Protect Your Position Cayman Islands Golden Share Structures A lender to a Cayman Islands company has a number of tools available to it to protect its position. One option is to employ a golden share structure. This structure has always been available in the Cayman Islands and it has experienced a recent surge in popularity, as lenders have become increasingly aware that a golden share structure is and remains a well-established and effective creditor protection device in the Cayman Islands, in contrast to some other jurisdictions where the viability of such a structure has recently been put into doubt.

The terms of the golden share have to be carefully considered. It may be put into place primarily to ensure that the lender controls the vote to place the company into liquidation. Under such circumstances, the golden shareholder would effectively hold a veto right in respect of a petition to wind up the company, whereby the company is not able to file a winding up petition without the consent of the golden shareholder. A golden share does not typically have the right to share in dividends and its voting rights are usually limited to specific matters.

The golden share may be given control over any amendments to the company's articles of association, to ensure that negotiated lender protections are not removed from the company's articles. The golden share may also provide the lender with the right to appoint independent directors, be notified of and to attend board meetings, to ensure the lender's access to information. In many cases,

the golden share may carry a right to appoint certain independent directors who would only have a right to vote on certain specific matters, which protects the interest of the lender, thereby allowing the company to carry on in the ordinary course of its business, without any interference from the independent directors.

In certain other jurisdictions, the courts have recently held that a golden share cannot block a bankruptcy filing. The good news for lenders is that the golden share structure continues to work in the Cayman Islands as an effective block on the power of the company's other shareholders to place the company into liquidation. The Companies Act includes express statutory recognition of the enforceability of contractual non-petition provisions, making it difficult to argue that there could be any public policy concern with respect to a golden share structure that achieves a similar purpose.

July 2021 | 7

The good news for lenders is that the golden share structure continues to work in the Cayman Islands

The surge in popularity of the golden share structure may be, in part, a result of lenders turning to the Cayman Islands to implement a structure that no longer works in other competing jurisdictions. Current economic conditions have no doubt also prompted lenders to take a closer look at how best to secure their positions. From a lender's perspective, the availability of an effective golden share structure provides yet another compelling reason to direct that a new borrower vehicle be set up in the Cayman Islands while still allowing a borrower the flexibility to operate its company on a day-to-day basis with limited involvement from the lender.

For further details, please contact: John Dykstra

+1 345 814 5530 john.dykstra@maples.com The golden share can be issued directly to the lender or its nominee, but it is common to see the golden share issued to a service provider, such as the Maples Group, which, as share trustee, holds the golden share on trust for charitable purposes pursuant to the terms of a declaration of trust.

Under the terms of the declaration of trust, the lender has to provide its consent before the share trustee may take certain actions with respect to how it votes the golden share, including with respect to a vote to place the company into voluntary liquidation.

Sherice Arman

+1 345 814 5248 sherice.arman@maples.com

8 | FUNDed

Investment Limited Partnerships in Ireland Lenders, borrowers as well as investment funds and finance professionals have been eagerly awaiting the introduction of the Investment Limited Partnership (Amendment) Act, 2020 (the "2020 Act") bringing long overdue reforms to the Investment Limited Partnership Act 1994 (the "1994 Act") which, historically, was not fit for purpose.

July 2021 | 9

The reforms align the Irish investment limited partnership ("ILP") more closely with the well-established limited partnership structures in other international investment fund domiciles such as Cayman Islands ELPs, Delaware LPs and the Luxembourg SCSp. The 2020 Act amended the 1994 Act in a number of important ways that are expected to make the Irish ILP a very compelling regulated vehicle for EU investment funds structured as partnerships.

Maples advised on the first 'new ILP' to receive authorisation from the Central Bank of Ireland (the "Central Bank") under the 2020 Act. This brought the total number of ILPs registered in Ireland at the time of writing to seven, the other six being registered under the 1994 Act, just serving to highlight the flawed nature of the 1994 Act and the importance of the reforms contained in the 2020 Act.

What is an ILP? An ILP is a regulated, tax-transparent, common law partnership structure. It is Ireland's flagship partnership vehicle for use as an investment fund and is attractive to managers availing of closed-ended strategies in real estate, private equity, credit, infrastructure, sustainable finance and related asset classes.

Similar to other partnership fund structures, an ILP is constituted pursuant to a limited partnership agreement ("LPA") entered into by one or more general partner(s) (each a "GP"), who manage the business of the partnership and any number of limited partners (each an "LP"), and is subject to authorisation by the Central Bank.

An ILP has no legal personality; it acts through its GP, which is ultimately liable for the debts and obligations of the ILP. The GP must be a body corporate which is either (a) a standalone unauthorised entity or entity authorised by the Central Bank to act as an alternative investment fund manager ("AIFM"); or (b) availing of the right to manage an Irish alternative investment fund ("AIF") on a cross-border basis under AIFMD. There are no restrictions on the number of LPs that may be admitted to an ILP. The liability of an LP for the debts and obligations of the ILP is limited to the value of its capital contributed or committed, except where an LP is involved in the management of the ILP.

All of the assets, liabilities and profits of an ILP belong jointly to the partners in the proportions agreed in the LPA. The ILP can be authorised as a Qualifying Investor AIF ("QIAIF") or Retail Investor AIF ("RIAIF") although the QIAIF has historically proven to be the more popular option with managers.

Reforms Under the 2020 Act The 2020 Act introduced a number of important reforms to the ILP structure, which it is hoped will increase the attractiveness of ILPs in Ireland to international managers and investors, including but not limited to: •

Umbrella Partnerships - ILPs can now be established as umbrella funds, with segregated liability between sub-funds accommodating different investor types or strategies.

•

Migration - The ability to migrate partnerships into and out of Ireland on a statutory basis.

•

Amending the LPA - The removal of requirement for all partners to consent in writing to amendment of the LPA.

•

LPs - Provision for the concept of a 'majority of limited partners' to align with partnership structures in competing fund domiciles.

•

GPs - Express confirmation of the ability to transfer a GP interest and provision for the liability of incoming and outgoing GPs.

•

Naming Convention - Inclusion of the ability to register an alternative foreign name.

•

Withdrawal of Capital - Relaxation of requirements on withdrawal of capital.

Benefits of an ILP over other Irish Fund Vehicles Until now, the Irish collective asset management vehicle ("ICAV") has been the vehicle of choice for private equity managers operating in Ireland due to the nature of the ICAVs structuring flexibility to accommodate many private equity strategies and private equity-centric features (such as capital commitment / drawdown mechanisms, distribution waterfalls, carried interest and 'excuse and exclude' allocation of assets).

10 | FUNDed

However, global asset managers have historically preferred the limited partnership as the legal form for a private equity fund, and we expect the ILP to replace the ICAV as the favoured vehicle for private equity managers in the future.

Investors' familiarity with limited partnership structures in other jurisdictions and the similarities between these structures are likely to be a major draw of the ILP. Another key distinction is that, unlike an ILP, an ICAV has a separate legal personality.

Other potential fund vehicles in Ireland include variable capital investment companies ("VCC") and common contractual funds ("CCF") and unit trusts ("UT"). Prior to the introduction of the ICAV, VCCs were the most common fund vehicle in Ireland. They take the form of a public limited company whose share capital does not have a par value but is equal to the net asset value of the VCC at any point in time. As such, they are subject to general company law and their popularity has diminished in comparison to the ICAV which has its own distinct legislative regime.

UTs are established pursuant to the Unit Trusts Act 1990 and constituted pursuant to a trust deed. As a result, they do not have a separate legal personality and must act via a trustee and their assets must be held by a depositary. CCFs are unincorporated bodies established by a management company under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011. CCF participants directly own a share in the property of the vehicle as co-owners rather than share in the CCF, which does not have a separate legal personality.

The above represents the regulated structures available but in addition to these, there are limited partnerships under the Limited Partnership Act 1907 and S.110 companies under the Taxes and Consolidation Act 1997, both of which are unregulated.

Financing The ILP is a flexible vehicle type and there are no restrictions on the use of financing by the ILP, its subsidiaries or its alternative investment vehicles, with a full security package available to lenders over all assets, including contractual call rights in any master / feeder structure. There is full flexibility for an ILP to utilise subscription financing, margin lending, NAV and other types of facilities including total return swaps and other derivative arrangements.

As noted above, the ILP now aligns more closely with the limited partnership structures in other international funds domiciles in which the Maples Group operates such as Cayman Islands ELPs and the Luxembourg SCSp and therefore has the advantage, from a financing perspective, of international lenders being familiar with the limited partnership structures and available security packages.

One important thing to bear in mind from a financing perspective is that the ILP is an AIF and is therefore subject to the same restrictions in terms of giving guarantees and granting 'third party' security as other Irish fund vehicles, such as the ICAV. However, similar to other Irish fund structures, structuring options should be available to allow lenders access to the ILP's capital call rights in circumstances where the ILP is not the borrower, including any 'cascading security' that we would frequently see in Irish fund financing transactions.

Outlook for 2021 We expect the numbers of new ILPs registered to increase during the year. However, we do not expect the implementation of the 2020 Act to change the financial landscape overnight. We also anticipate the overall number of ILPs will be less than ICAVs (because of the broader range of product categories and asset classes that an ICAV can accommodate), but we expect that ILPs will have a proportionally bigger impact on the market and will create much more downstream financing and corporate opportunities for lenders in the Irish market.

As noted earlier in the European Market Overview, Ireland is one of the major players in the creation and management of investment funds worldwide, and with the benefit of the 2020 Act, we expect to see ILPs play an increasingly important role in attracting revenue and creating jobs in Ireland over competing jurisdictions and featuring more regularly in fund finance transactions.

For further details, please contact:

Sarah Francis

+353 1 619 2753 sarah.francis@maples.com

Elizabeth Bradley

+353 1 619 2737 elizabeth.bradley@maples.com

Alma O'Sullivan

+353 1 619 2055 alma.osullivan@maples.com

Mark Murran

+353 1 619 2704 mark.murran@maples.com

July 2021 | 11

A Luxembourg Perspective on Limitations on Distributions Covenants When a fund seeks external financing, a 'Limitations on Distributions' covenant (the "Distributions Limitation") is typically included in the facility agreement with the aim of preventing the fund borrower being depleted of funds, which ought to be used to service its liabilities under the facility agreement. To a certain extent, the Distributions Limitation makes the payment rights of the fund borrower's investors subordinate to the rights of the finance parties.

These Distributions Limitations, which are fairly standard and in line with market practice, are rarely controversial or subject to extensive negotiation. However, since the adoption of the EU Securitisation Regulation1 ("STSR") in 2019, the incurrence of indebtedness by investment vehicles, including funds, through a variety of financing arrangements that are subject to differing level of priorities, have been a source of concern among market participants.

Together with an investment in credit risk, it is the subordination of tranches that triggers the application of the STSR. Within the meaning of the STSR, such tranches consist of any sort of 'exposure' to the underlying portfolio.

In the widest sense, such exposure may be created by any

form of funding or leverage, such as equity instruments, debt instruments (notes or bonds), or any kind of indebtedness under loan, facility or credit agreements or exposures created under guarantees or derivative contracts.

For the investment vehicle, its investors and other parties involved, the foregoing would require compliance with a stringent framework of prudential requirements, including due diligence obligations, mandatory risk retention and transparency obligations, to name just a few.

In this article, we shed light on the extent to which these Distributions Limitations create a subordination of financing exposures likely to trigger the application of the STSR.

Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012

1

12 | FUNDed

The Scope of the STSR

Credit Facilities as a Form of Statutory Tranching

Although the STSR primarily targets securitisation transactions, the legislator did not expressly carve out investment funds. This means that the STSR will apply to investment funds as well as other actively managed and loan issuing investment vehicles, which do not conform to the traditional securitisation vehicle. As a consequence, the distinction between securitisation vehicles and investment funds has become less clear, thereby increasing the risk of a concurrent application of the STSR and other fund specific legal frameworks, such as the Alternative Investment Fund Managers Directive ("AIFMD")2. This increased uncertainty surrounding the STSR is sometimes addressed by a dedicated representation from the credit parties in the facility agreement according to which they confirm they are not subject to the STSR.

With regards to a credit fund borrower, each of the indebtedness towards the finance parties as well as the equity exposure towards the investors creates a segment of the credit risk linked to the assets of the fund, since the primary source of return for both is the performance of the asset pool. Accordingly, regard must be given to whether the use of debt (for example, a single third party indebtedness under a credit facility) and equity could result in the existence of multiple tranches that would then trigger the application of the STSR regulations to the structure.

In the absence of any helpful carve-out provisions for funds, the STSR includes within its scope all schemes that fall within its definition of 'securitistation' as follows:

"a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics: (a) payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures; (b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme; (c) […]."

Given that one of the requirements for the application the STSR is the exposure to credit risk (as mentioned above), only credit funds may theoretically become subject to the STSR. Private equity funds, REITs and other vehicles investing in non-credit-risk-bearing assets should not be concerned by the analysis made in this article.

In addition to the existence of credit risk, the other requirement for an application of the STSR is the subordination of tranches. The definition of 'tranche' is laid down by article 2(6) of the STSR and rests on the following three criteria:

It is clear that the risk for the investors is generally higher than for the finance parties, since the finance parties will typically be secured (through the granting of guarantees and security interests) and the investors' rights under their equity interest will be structurally subordinated to the creditors' claims and, in the main, will be unsecured obligations.

However, the application of the STSR to credit fund borrowers is primarily ruled out if the ranking and subordination resulting from the existence of debt and equity is a result of legislative provisions and not contractual arrangements.

The Distributions Limitation as a Contractual Form of Tranching To what extent could the characterisation of the equity / debt layering then be challenged on the grounds of contractual provisions further limiting the maximum return on the equity segment, i.e. beyond the statutory subordination by operation of law?

In the context of fund finance deals, such contractual provisions will consist of a Distributions Limitation.

•

the exposure constitutes a segment of the credit risk linked to the asset pool;

•

its risk characteristics differ from those of another segment linked to the same asset pool; and

In most cases, such limitations prohibit distributions to be made to, or declared for the benefit of, investors following the occurrence of a trigger event. In some cases, the trigger event requires outstanding due but unpaid liabilities towards the finance parties. In other cases, there is a variety of trigger events that are normally condensed under the definitions of 'Event of Default' or 'Cash Control Event'.

In the latter case, the event triggering the restriction on distributions does not necessarily depend on the availability of sufficient funds.

•

the segment it creates results from a contractual arrangement, as opposed to a statutory rule.

As a matter of principle, distributions by Luxembourg companies are subject to sufficient funds being available.

2 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010

July 2021 | 13

Arguably, that would not be the case if such company defaults or is likely to default under a third-party financing agreement. Hence, any contractual limitation on distributions that is triggered by a payment default, or the risk thereof, should not contractually alter the statutorily enshrined risk profile of the equity segment and would not result in the establishment of contractual tranching as defined in the STSR. The above should not necessarily suggest, however, that the trigger event in the Distributions Limitation must be limited in all cases to a payment default to prevent the application of the STSR. It can indeed be observed that the current trend in Luxembourg among market participants is to abide by a much less conservative and restrictive interpretation of the concept of tranching.

Even where the contractually imposed limitations in the Distributions Limitation go far beyond the mere applicable statutory limitations, the equity / debt segmentation should not be construed as pure contractual construction. Indeed, a contractual limitation on the equity segment may only alter the risk profile of such segment and even in the absence of any contractual arrangement, the risk profile of both exposures will not be assimilated.

The analysis is different when two debt instruments or third party indebtedness subordinated to one another exist.

Multiple debt interests would be considered tranching as a matter of contract and, given the riskier character of the junior ranking debt instrument results exclusively from contractual provisions. In such cases, the absence of relevant, risk altering contractual provisions would lead to an assimilation of the two debt exposures. This is critical as the inclusion of a Distributions Limitation in a third-party financing arrangement should result in the disapplication of the STSR notwithstanding the existence of the applicable trigger event.

Conclusions It took some time for market participants to embrace the introduction of the STSR. The ambiguous drafting, in particular with respect to tranching, did not help. While most investment funds are not at risk of falling under the scope of the STSR, credit funds do, to the extent they resort to financing that creates subordinated tranches. While the risk is remote and can most often be excluded in the case of a single debt exposure towards finance under a single financing arrangement, one should keep an eye on the structure. Indeed, many funds that resorted to bridge / capital call facility arrangements a few years ago at the beginning of the investment period in order to serve the fund's capital needs by bridging investors’ contributions, have matured beyond such investment period. With limited remaining capital commitment left to call, we are seeing NAV and hybrid facilities becoming an increasingly popular tool.

In such context, particular attention will need to be paid to the issue, especially where the fund, which is already acting as borrower under a subscription line facility, contemplates acting as co-borrower under a complementary NAV / hybrid facility agreement, as this could be construed as contractual subordination for the purposes of the STSR.

For further details, please contact: Arnaud Arrecgros

+352 28 55 12 41 arnaud.arrecgros@maples.com

Maurice Honnen

+352 28 55 12 60 maurice.honnen@maples.com

Recent Developments This is as far as the interpretation developed by market practice goes. Despite being founded in good legal reasoning, this interpretation has not yet been confirmed through regulatory guidance. In the absence of such legislative protection, the exact scope of the concept of contractual segmentation as a trigger for the application of the STSR remains a much debated topic. Practitioners set their hope in the competent authorities that, should they at some point take a position on this, they will not take a more conservative approach than the one that has been worked out by the market to date3.

3 Interestingly, the STSR will inspire further changes to the Luxembourg legal framework. The concept of tranching in the recently published bill n°7825 (the "Bill") amending the Luxembourg law dated 22 march 2004 on securitisation. Rules of subordination between various financial instruments will, as per Article 16 of the Bill, be expressly set out in the law.

14 | FUNDed

Granting Security in the Channel Islands, Jersey Any practitioner becoming involved in a Jersey fund for the first time – either on the promoter side or involved in financing – will find a lot of familiarity in the way Jersey transactions are structured. For instance, anyone used to dealing with limited partnerships in the UK, the Cayman Islands or many other jurisdictions will have no difficulty in understanding Jersey limited partnerships, which are well tested in the market, and in Jersey we generally see the same mix of facility types (subscription line, NAV or asset based and hybrid) being offered to Jersey funds.

July 2021 | 15

However, there are some differences in how security is granted in Jersey, with Jersey having its own security regime. This note highlights a few of the key differences and similarities in the context of a general partner granting security over uncalled commitments.

Use of Jersey Law Security Agreements Local law has a clear preference for any security created over intangible moveables with Jersey situs to be created pursuant to Jersey law. Therefore, unlike certain other jurisdictions, when security is taken over limited partner commitments to a Jersey LP (contractual rights), this will involve taking Jersey law security.

ensure consistency between onshore (particularly English law) finance documents and Jersey documents, for example: i.

in the context of any changes to the finance documents, Jersey generally follows the English law on 'tipping point' to determine whether or not new security needs to be created; and

ii. Jersey law on hardening periods arising from vulnerable transactions (undervalue, preference, etc.) will feel familiar to English law practitioners.

Regulatory Regimes

Jersey law does not preclude these rights also being the collateral under any onshore security arrangements, but local counsel would not generally be able to opine on the validity of that security.

Jersey funds are structured under a number of well tested regulatory regimes. A particularly popular Jersey fund product in recent years has been the Jersey private fund ("JPF").

Perfection Requirements

Structures that satisfy the prerequisites for this product (and most funds being launched in Jersey do) enjoy lighter touch regulation. Specifically, in the context of fund finance, there are no limitations in the Jersey Financial Services Commission JPF Guide as to leverage or similar (noting that there can be additional AIFMD-related considerations regarding leverage at the fund level, which can be relevant if the fund is being marketed into Europe).

A discernible benefit of securing limited partner commitments under Jersey law is that Jersey has its own perfection and priority rules. These rules are not contingent (in the context of security over uncalled commitments) on notice being given by either a GP or the secured party to limited partners. Jersey security over contract rights, such as the right to call capital, is perfected by registration at the Jersey security interest registry (by way of an online filing), and priority is generally decided by the date of registration.

Therefore, many of the concerns arising out of the rule in Dearle v Hall (that priority is given to the party that first gives notice of its security interest) do not apply to Jersey law security. This can provide clear advantages in structuring a security package.

Notices to (and, where obtainable, acknowledgments from) limited partners still routinely feature as part of Jersey security in respect of uncalled limited partner commitments; either as a requirement under the LPA, or as a lender standard requirement or preference. However, technically they do not have the same importance to the valid creation of this type of security in Jersey.

Useful Similarities Jersey law also has certain useful similarities with other common law jurisdictions, which can make it easier to

For further details, please contact any of our Maples Jersey team, which comprises partners Mark Crichton, Paul Burton and Tim Morgan (Tim being chair of the Jersey Funds Association).

For further details, please contact: Mark Crichton

+44 1534 671 323 mark.crichton@maples.com

Paul Burton

+44 1534 671 312 paul.burton@maples.com

Tim Morgan

+44 1534 671 325 tim.morgan@maples.com

16 | FUNDed

Asia Market Review 2020 was a year of contrasts for Asia-Pacific's private equity market. Fund raising declined for the third consecutive year and launches of new funds in 2020 were delayed by the market turbulence and severe dislocation caused by COVID-19. The first quarter of 2020 was volatile and created tough investment conditions that significantly impacted deal making activity. Deal making activity slightly increased in the second and third quarter but then accelerated to a record deal value for the region by the end of the fourth quarter, mostly due to optimism over the COVID-19 vaccine, sustained performance in the equity market and demand for fixed income investments. Private equity continues to be a popular source of capital in the region, representing 19% of the Asia-Pacific M&A market, up from the previous five-year average of 17%. So far in 2021, although fund raising activities are still down (compared to 2019) and exits have been delayed, there is no shortage of unspent capital at funds and general partners ("GPs") who are coming under increasing pressure to deploy these funds across the Asia-Pacific region are actively taking steps to find more bespoke solutions for their portfolio financing requirements.

July 2021 | 17

Resilience of the Fund Finance Market in Asia-Pacific The COVID-19 crisis has tested the resilience of many asset classes and the fund finance market in Asia Pacific is no exception. Lenders have been forced to re-evaluate their internal resources, their appetite for risk and how they value assets, and re-affirm (or change) their core business models, and this has led to varying degrees of retrenchment from some lenders, particularly the newer entrants to the market. More experienced lenders have continued to provide financing solutions, albeit sometimes on different terms (for example, reduced tenors, increased pricing, smaller sizes), or with an increased focus on global, relationship clients, or those that have a long-term demonstrable track record in the Asia-Pacific market.

Generally, lenders in Asia Pacific have been fairly quick to adapt to both the challenges imposed by COVID-19 and the requirements of GPs looking to refinance and expand their investment portfolios.

Any funding gap created by COVID-19 has been swiftly filled by non-bank financing and 2020 (and this year to date) has seen the continuing emergence of non-bank financing, i.e. any form of private capital which is not advanced from traditional sources such as banks or the capital markets, across many asset classes, including the fund finance market. In exchange for higher pricing, the advantage of finance sourced from non-bank financing is flexibility generally, from the speed of transaction closing, to the terms of the financing itself. Non-bank financing is showing itself to be increasingly able and willing to take a bespoke approach tailored to the credit profile of the client and this is becoming an increasingly attractive and important source of capital in the Asia-Pacific region.

Structure of Asia-Pacific Fund Finance Transactions The structure and terms of the fund finance markets have always evolved at different speeds in Asia Pacific, Europe and the United States, based partly on the size of the funds, the lifecycle of their investments, lenders' appetite for risk, different market approaches towards innovation, liquidity constraints and the size of the funds. Traditionally, fund financings in Asia Pacific have been structured on a bilateral basis, but there has been an uptick in the demand for syndicated or 'club' deals, driven by the natural evolution of the market, and risk and liquidity constraints. We expect the number of deals to be executed on a syndicated basis to increase throughout this year and in 2022, especially as the size of funds in the Asia-Pacific market increases.

Currently only 13% of AsiaPacific GPs have fully integrated ESG considerations at investment committee level Fund financings in the Asia-Pacific market are often subscription financings (or capital call facilities), where security is taken over the GP's rights to call undrawn capital from limited partners ("LPs"). This has not fundamentally changed but these transactions are increasingly becoming more commoditised, as they have been in the US and Europe for some years, and the pricing for lenders on these transactions is relatively low (due to the competition in this area) compared to more structured or bespoke facilities, as discussed below.

There are currently a limited number of lenders in the AsiaPacific region that are able to offer large-size, structured, bespoke, fund finance facilities but this is slowly changing.

As portfolios mature and funds look for more innovative ways to finance their portfolios, we are seeing more demand for bespoke or structured facilities. One example of this would be NAV facilities, where finances are raised by the fund with security over the various cash-flows resulting from the fund's underlying investments. Another example would be 'hybrid' facilities which combine subscription financing, i.e. capital-call facilities, with a NAV facility structure that gives the lender recourse to the cash flows of the fund's underlying portfolio investments. We are also seeing an uptick in so-called management fee facilities, which typically involve a GP or management company, acting as borrower, and the lender having recourse to the management fee income.

18 | FUNDed

We expect increased interest in structured fund financings, especially hybrid facilities, to continue this year and beyond, as the market will require lenders to offer more innovative methods of fund financings to assist funds through the different stages in their lifecycle.

ESG Environmental, social and corporate governance ("ESG") issues have become a decisive factor for many investors and institutions in the last year. Asia has, on the whole, been slower to embrace ESG issues than the US and Europe. For example, according to Preqin, 55% of Asian LPs do not have an ESG investing policy for private equity, and 60% of Asian private equity funds do not require their portfolio companies to report on ESG issues or responsible investment. Furthermore, research undertaken by Bain & Company indicates that currently only 13% of Asia-Pacific GPs have fully integrated ESG considerations at investment committee level.

Notwithstanding this, there are positive and increasing signs that 2021 will be the year that Asia commits to addressing ESG challenges, as evidenced by the exponential growth in social bonds, and pledges for carbon neutrality from China, Japan and South Korea. The principle ESG drivers in Asia Pacific (although they are by no means exclusive to Asia Pacific) are climate change, renewable energy, aging population and corporate governance. As lenders, corporations and investors in Asia increasingly view ESG not simply as an ethical consideration but also a route to sustained investment performance, we expect to see private equity funds and lenders in Asia adopting ESG principles into their financing and acquisition strategies in order to stay competitive and maximise investment performance for their LPs. The Role of Cayman Islands Exempted Limited Partnerships The Cayman Islands continues to maintain its reputation as the pre-eminent, offshore jurisdiction for the establishment of Asia-Pacific focused private equity funds. The majority of Asia-Pacific private equity fund vehicles are Cayman Islands exempted limited partnerships ("ELPs") and, notwithstanding the global regulatory challenges that have

taken place over the last 12 months, these continue to be the private equity fund vehicle of choice. With a high degree of jurisprudence deriving from English law authorities, lenders trust ELPs and other Cayman Islands corporate vehicles and continue to be comfortable with, and rely on, the Cayman Islands legal framework that is creditor-friendly, tax neutral and contains statutory provisions enabling secured creditors to enforce their security, without the leave of the court of the liquidator. These legislative provisions (and others) continue to support the view that the Cayman Islands is the leading and preferred offshore jurisdiction of choice for any lending structure and will continue to play an important role in the continued evolution and development of the fund financing market.

Summary We expect 2021 to be a reasonably strong year for AsiaPacific fund finance as funds mature, confidence grows, lockdowns ease and investment funds look for increasingly tailored financing solutions for their portfolios. Capital call facilities will continue to be busy but we expect more interest in innovative fund finance products such as NAV, hybrid facilities and longer term management company loans (although it remains to be seen how much of this interest translates into transactions in 2021). We expect syndicated or 'club deals' to become more prominent, not just because of risk management considerations, but also because the size of the funds in the Asia-Pacific market are growing and will continue to do so. ESG will continue to grow in importance for lenders and GPs and we expect an increase in ESG-linked capital call facilities later this year and into 2022. The 'non-bank financing' market will continue to increase in Asia in 2021, as alternate lenders who understand the underlying asset classes and have experience in structuring these transactions will play a greater role in the Asia-Pacific fund finance market.

For further details, please contact: James Kinsley

+65 6922 8410 james.kinsley@maples.com

July 2021 | 19

Global Expertise Combining the Maples Group's leading finance and investment funds capability, our Fund Finance team has widespread experience in advising on all aspects of fund finance and related security structures for both lenders and borrowers.

We advise on issues relating to taking security over assets, including shares, limited partnership interests and other forms of securities issued by British Virgin Islands, Cayman Islands, Irish, Jersey and Luxembourg vehicles.

For further information, please speak with your usual Maples Group contact, or the following primary Fund Finance contacts:

British Virgin Islands

Dublin

London

Richard May +1 284 852 3027 richard.may@maples.com

Sarah Francis +353 1 619 2753 sarah.francis@maples.com

Jonathan Caulton +44 20 7466 1612 jonathan.caulton@maples.com

Cayman Islands

Hong Kong

Luxembourg

Tina Meigh +1 345 814 5242 tina.meigh@maples.com

Lorraine Pao +852 2971 3096 lorraine.pao@maples.com

Arnaud Arrecgros +352 28 55 1241 arnaud.arrecgros@maples.com

Dubai

Jersey

Singapore

Manuela Belmontes +971 4 360 4074 manuela.belmontes@maples.com

Paul Burton +44 1534 495 312 paul.burton@maples.com

Michael Gagie +65 6922 8402 michael.gagie@maples.com

maples.com