20th June 2024

Fund Finance – Equity Bridge Facilities @ Spuerkeess

Private asset funds in general and their ancillary entities have gained a strategic importance within Luxembourg's financial ecosystem and lending to the fund industry is playing a growing role on the financial place. In the context of these market dynamics, Spuerkeess completes its product offering to the Luxembourg fund industry with two main lending products: Equity bridge financing (EBF) to Luxembourg alternative funds and other liquidity credit facilities to mainstream / alternative funds. In setting up a new Luxembourg fund or in driving growth for existing ones, why not taking advantage of such facilities, should the structuring and risk profile match the risk appetite of the bank? In this first article, Paolo RADAELLI, Team Manager Lending-Fund Finance and Yves WAMPACH, IRM – Lending-Fund Finance at Spuerkeess introduce the EBF product offered by the bank.

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1. The Lending – Fund Finance division

For over two decades, Spuerkeess has continuously increased its capabilities and service offerings, positioning itself as a strategic partner for private asset vehicles, funds, and their initiators. Among these services, EBF and other liquidity credit facilities have gained in importance up to becoming part of the strategic development plan of Spuerkeess. In this context, the Lending Fund Finance Division was created at end 2022 being part of the “front” IRM Unit and Institutional Clients Department.

2. The EBF product offered by Spuerkeess

As a short introduction, equity bridge facilities, also known as ’subscription facilities’ or ‘capital call facilities’ are credit lines used in the context of private equity, infrastructure, private debt and real estate funds. They are short-term credit facilities to pre-finance (‘bridge’) the limited partners’ commitments into the fund. EBFs serve various purposes, such as financing fund investments and other general funding requirements (e.g., expenses, advisory fees). The maximum available credit limit is commonly a function of total and undrawn commitments from “eligible investors”, subject to a haircut (loan-to-value or loan-to-uncalled-capital).

The advantages for fund managers (and also investors) in using such facilities may be material: EBFs allow to delay capital calls and reduce their frequency, thus facilitating the investment process, simplifying daily management, and improving the IRR substantially by reducing the time between capital calls and asset liquidation / distributions.

In summary, EBFs provide a strategic financing tool for fund managers, enhancing flexibility and optimizing fund performance for the ultimate benefit of investors.

Talking more specifically, Spuerkeess typically provides committed senior secured EBFs to Luxembourg domiciled funds with a material institutional investor base over total commitments. The credit limits granted depend on the fund’s specific regulations and risk appetite and are determined after a comprehensive analysis of the risks and legal documents ruling the Fund and investor commitments.

The standard security package consists of (i) a pledge of the unfunded capital commitments of investors, (ii) a floating pledge of the bank accounts where investors transfer their capital contributions to and from which distributions are paid to the investors and (iii) a direct right to issue and deliver capital call notices to investors in the event of default on the credit facility.

Final maturity can be up to three years (depending on risk analysis) with at least an annual clean-down requirement. This also reflects the short-term nature of this type of facility. Typically, the credit documentation already includes options for consecutive annual extensions, subject to lender approval.

The basic precondition for granting an EBF to a fund is that the depositary bank services (strongly recommended, or even a must in some cases) and/or exclusive banking relationship at fund level are with Spuerkeess. Other clauses / covenants for this type of facility are required according to the Luxembourg market standard. All the above always remains subject to formal approval of the onboarding and credit committees of Spuerkeess based on satisfactory documentation and risk analysis.

In more general terms, the EBF offered by Spuerkeess is structured according to its client-centric approach and service model build on a holistic perspective on its clients and a frequent contact with the dedicated relationship managers / lending specialists.

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