Subscription Line Finance - Irish Funds - Walkers Global
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SUMMER 2021
Subscription Line
Finance - Irish Funds
Ireland as a Leading Funds Jurisdiction
Ireland has long been a leading domicile for internationally distributed investment funds, covering the widest range of fund types. International
fund promoters are attracted to Ireland due to its open, transparent and well-regulated yet flexible investment environment, a strong emphasis
on investor protection, an efficient tax structure and its innovative business culture.
Commonly utilised Irish Funds
The fund finance market continues to expand with latest estimates placing the market in excess of $500 - $600 billion. Subscription line
financing (also known as capital call financing) can be broadly summarised as lending against capital commitments owing to a borrower.
Given the popularity of Ireland’s funds industry, it comes as little surprise that Irish funds frequently feature in the fund finance landscape,
increasingly in the context of subscription line financings.
The following table contains a brief overview and comparison of the most common regulated and unregulated Irish fund types and special
purpose vehicles (for the purposes of this article, referred to as ‘funds‘) which we see in the subscription line financing space. We have also
included an overview of the newly re-invigorated Investment Limited Partnership, given its anticipated popularity for PE managers over the
coming years.
1
Irish Funds: Key Features
ICAV Section 110 1907 Limited Investment Limited
Vehicle Partnership Partnership
Principal Irish Collective Asset- Companies Act 2014 Partnership Act 1890 The Investment Limited Partnerships
Legislation: management Vehicles Acts Limited Partnerships Act Acts 1994 and 2020.
2015 and 2020. Section 110 of Taxes 1907.
Consolidation Act 1997.
Regulated / Regulated – Central Bank of Unregulated. Unregulated. Regulated – Central Bank of Ireland.
Unregulated: Ireland.
Method of Equity (shares). Debt (notes or loans). Equity (limited partnership Equity (limited partnership interests).
Investment: interests) & Debt (interest
free loans).
Key Capital Commitment / Subscription Note Purchase Agreement. Limited Partnership Limited Partnership Agreement.
Commitment Agreement. Agreement.
Document:
Person Depending on the Instrument: Section 110 Board or General Partner or General Partner, who may delegate to
responsible for ICAV Board; Investment Manager. Investment Manager. the AIFM or Investment Manager.
making Capital AIFM; or Investment Manager (often the Administrator (often the Administrator will have an
Calls: (often the Administrator will will have an operational operational role).
have an operational role). role).
Umbrella Fund Yes – statutory segregated Yes – achieved through No. Yes – statutory segregated liability
/ Segregated liability between sub-funds. contractual ring fencing. between sub-funds.
Cells:
Borrowing Qualifying Investor AIFs: none. None. None. Qualifying Investor AIFs: none.
Limitations:
Loan Origination Qualifying Loan Origination Qualifying Investor
Investor AIFs: Must not have AIFs: Must not have gross assets of
gross assets of more than more than 200% of its net asset value.
200% o f its net asset value.
Retail Investor AIFs: borrowings may
Retail Investor AIFs: not exceed 25% of net assets.
borrowings may not exceed
25% of net assets.
Security / Cannot give guarantee in None (subject to generally None. Cannot give guarantee in respect
Guarantee respect of, be responsible for applicable financial of, be responsible for or secure the
Limitations: or secure the obligations of assistance rules). obligations of third parties.
third parties.
Security Central Bank of Ireland: at Companies Registration N/A N/A
Filings: closing and no more than 21 Office: typically at closing
days after the date of creation and no more than 21 days Where GP is an Irish Where GP is an Irish company may
of the security. after the date of creation of company may register register security against the GP acting
the security. security against the GP on behalf of the Limited Partnership
acting on behalf of the – in this scenario the GP would make
Revenue Commissioners: Limited Partnership – filings at the Companies Registration
typically at closing and no in this scenario the GP Office & Irish Revenue Commissioners
more than 21 days after the would make filings at the (see Section 110 Vehicle).
date of creation of security. Companies Registration
Office & Irish Revenue
Commissioners (see Section
110 Vehicle).
Other Material Short term borrowing A Section 110 vehicle must Limited Partners cannot Short term borrowing which is fully
Issues: which is fully covered by enter into all transactions on participate in the covered by capital commitments is not
capital commitments is not arm’s length terms or risk management of the 1907 considered leverage for the purposes
considered leverage for the prejudicing its favourable LP without losing their of AIFMD.
purposes of AIFMD. tax status. limited liability protection.
Limited Partners cannot participate in
the management of the ILP without
losing their limited liability protection.
2
Subscription Line Finance - Irish Funds
Key Due Diligence Issues to Consider
As with all financings, it is important to conduct detailed due diligence on the borrower group. Points that need to be confirmed include
confirmation of the legal structure of the borrower, capacity to borrow and create security, duration of the fund, subordination provisions and
existence of any side letters.
The paragraphs below summarise some additional key Irish-centric issues which should be considered when providing subscription line
financing to Irish domiciled funds (both regulated and unregulated). Broadly speaking, the same review points apply in both circumstances but
there are some additional considerations when lending to Irish regulated funds.
Borrowing Limits indebtedness needs to cater for additional
Unregulated fund structures (including Irish debt issued to investors. Equally, debt
limited partnerships established pursuant to owing to investors should be subordinated
the Limited Partnerships Act 1907 (“1907 to the financing.
LPs”) and Section 110 vehicles) are not
subject to any statutory borrowing limits. Capital Commitment Structure
Investors may constitute a capital
With the exception of loan origination funds, commitment via a separate Note Purchase
Qualifying Investor Alternative Investor Agreement (for debt issuers such as
Funds (“QIAIFs”) are also free from statutory Section 110 vehicles), under Subscription
borrowing limits. / Commitment Agreement (common for
ICAVs) or by accession to the fund formation
Retail Investor Alternative Investment documents (e.g. signing up to the Limited
Funds (“RIAIFs”) are subject to the Partnership Agreement of an ILP or 1907 LP).
restriction that borrowings may not exceed
25% of net assets. The duration of the capital commitment
period should survive the maturity of
Undertakings for Collective Investment in the financing.
Transferrable Securities (“UCITS”) may not
incur temporary borrowings in excess of It is critical to identify the document creating
10% of net assets and, as such, it is rare to the capital commitment so that effective
see a UCITS subscription line financing. security may be taken over it.
The capital commitment should be clearly
Debt vs Equity Commitment quantifiable and any limitations on the
Depending on the nature of the delivery of capital calls should be identified
fund, investors may fund their capital and addressed so that they do not encroach
commitments by way of debt, equity or a on the lender’s enforcement rights e.g.
combination of both. some funds may only deliver capital calls at
certain times.
Different funds will structure commitments
differently e.g. unregulated Section 110 Delegated Functions
vehicles are funded exclusively by debt (notes – Capital Calls
or loans), Irish Collective Asset-management While the right to call for additional capital
Vehicles (“ICAVs”) and Investment Limited primarily sits with the fund (and in certain
Partnerships (“ILPs”) are funded by equity cases may be delegated to the investment
(shares or partnership interests). manager / alternative investment fund
manager on its behalf), Irish funds often
1907 LPs may be funded by either debt or delegate the operational process of
equity but, due to nuances in the legislation delivering capital calls to service providers.
governing 1907 LPs, tend to structure the
funding of the commitment primarily as debt. Regulated funds most commonly delegate
the delivery of capital call notices to the
The nature of the commitment will have administrator (although the investment
a knock-on impact on covenants in the manager and/or AIFM could equally perform
financing documents e.g. permitted this role).
3
Subscription Line Finance - Irish Funds
The mechanism for delivery of capital calls being held directly by the fund outside of Notices of assignment cannot be delivered
by unregulated funds varies from transaction the depositary network. prior to closing as it must follow the creation
to transaction but capital calls are often of the security interest in order to validly
delivered by the unregulated fund itself or by Where applicable, the interplay between perfect the security interests created in
an investment manager on its behalf. the role of the depositary and the rights of favour of the lender / agent.
the lender with respect to the subscription
account in an enforcement scenario is a Notices of assignment will ideally therefore
In an enforcement scenario the lender will
need complete control over the delivery of crucial review point - the depositary’s lien will be delivered as soon as possible following
capital calls – this can be achieved by the over the subscription account (if applicable) closing to avoid any risk of a subsequent
relevant service provider(s) entering into and the ability of the lender to access holder of security over the same call rights
a side letter with the lender undertaking, capital call proceeds are amongst the points serving notice and taking priority.
amongst other things, to refrain from to be addressed.
The exact timing of delivery is however
issuing / delivering a capital call notice in an
usually a commercial matter for lender and
enforcement scenario unless instructed to do
Governing Law of Security fund to agree.
so by the lender.
Package Documentation should be reviewed to ensure
There are a limited number of deals in the Irish funds typically establish the capital that any notice provisions are complied with.
market where the fund assigns its rights commitment under Irish law (i.e. the LPA, We are observing an increasing number of
under the relevant service agreement (e.g. Note Purchase Agreement or Subscription managers utilising an online ‘investor portal’
Administration Agreement, AIFM Agreement Agreement are Irish law governed). – the service provider administering such
or IMA) but it is more common to put a side portal should give appropriate undertakings
letter in place. In this scenario we would expect the security to the lender that notices of assignment
interest over the capital commitment and capital call notices, if applicable, will be
Delegated Functions – Bank to be created pursuant to an Irish law delivered in accordance with the provisions of
Accounts security agreement. the financing documents.
Similarly, Irish funds often appoint service A typical security package also includes
providers as signatories on their accounts security over the subscription account and, Prohibition on Third Party
(including the subscription account into to the extent that this account is located Security - Cascading Pledge
which the proceeds of capital calls are paid). in Ireland, we would also expect Irish law Irish funds are not subject to general
security to be put in place (an account control restrictions on securing their own obligations.
The ability of a service provider to make
agreement does not create a security interest
transfers from the subscription account
under Irish law). Regulated Irish funds subject to the Central
in an enforcement scenario will also need
to be addressed under the financing Bank’s Alternative Investment Fund Rulebook
documents, usually by way of an account Notices of Assignment are however prohibited from acting as a
control agreement. Irish law requires notices of assignment to guarantor on behalf of third parties.
be delivered to investors in order to properly
Typically regulated funds appoint a perfect and elevate the security assignment The term “guarantor” is not defined but, in
depositary to maintain bank accounts on its from an equitable assignment to a practical terms, this is understood to mean
behalf but we do see subscription accounts legal assignment. that regulated funds can guarantee, secure
4Subscription Line Finance - Irish Funds
and/or be responsible for the obligations themselves or included in side letters at the
of themselves and their wholly owned time of the financing.
subsidiaries but they cannot guarantee, give
security for and/or be responsible for any Overcall Provisions
third party (e.g. a regulated fund cannot
Notwithstanding the contractual obligations
assume the risk of any beneficiaries under a
undertaken by an investor, it may nevertheless
letter of credit).
default in practice on its obligation to fund
capital calls.
In the context of an umbrella fund, this
prohibition will also operate to prevent a sub-
The consequences for such investor vary
fund securing the obligations of another sub-
from structure to structure but common
fund within the umbrella.
penalties include default interest and
forfeiture of investment.
This issue frequently arises where the
restriction applies to an Irish fund acting as
In such circumstances overcall provisions –
a feeder fund to a third party master fund as
where non-defaulting investors agree to make
part of a wider structure. In this scenario a
up the shortfall, subject to the maximum
‘cascading pledge’ can be put in place where
amount of their own commitment – may
the Irish feeder creates security in favour of
provide additional protection for the lender.
the master fund in respect of its own capital
commitment to the master fund and the
master fund makes an onward assignment of Security Filings
this security interest to the lender.
In addition to the requirement for notices of
assignment, Irish funds will need to register
Prohibition on Assignment security interests with either the Central
The fund will create security over its capital Bank or the Irish Companies Registration
call rights by making a security assignment Office, depending on the legal structure of
of the Note Purchase Agreement (as regards the fund.
Section 110 vehicles), the Subscription /
Commitment Agreement (for ICAVs) or the Where security is registered against an Irish
LPA (for ILPs or 1907 LPs). company the secured party should also
make a ‘section 1001’ notification to Irish
Any investor consent rights / prohibition on Revenue where there is a fixed charge over
assignment needs to be dealt with before book debts.
closing. Where a subscription line financing
is envisaged at fund formation stage, the Each of these filings are made by local
constituent and subscription documents counsel immediately post-closing and no
often expressly refer to a sub-line and a later than the 21 day statutory filing period.
consent to assignment for lending purposes Failure to make such filings results in a loss
is hardwired into the documents. of priority for the secured party and the debt
becomes immediately due and payable.
Waiver of Defences to Funding
As with other jurisdictions, it is commonplace
Limited Recourse & Segregated
for investors in Irish funds to waive any
Liability
defences they may have in respect of their
funding obligations under a capital call ICAVs and ILPs may be established as
issued by a lender following enforcement. segregated cell entities with segregated
liability between sub-funds (subject to very
In an Irish context an investor may waive any limited exceptions).This segregated liability
rights with respect to the suspension of NAV is enshrined in statute but it is standard
or failure to issue shares (as regards an ICAV) practice to also include segregated liability
or the failure to issue further notes (Section clauses in financing documents.
110 vehicles) or record contributions to the
limited partnership (ILPs or 1907 LPs). Unregulated funds such as Section 110
vehicles typically benefit from limited
Such waivers may be built into the recourse, non-petition and corporate
constituent and subscription documents obligations clauses.
5Walkers’ Global Fund Finance Offering
Walkers is the only law firm to provide full coverage in Ireland and across the Channel Islands. The European fund finance team
collaborates with the global fund finance team in the Cayman Islands, the British Virgin Islands, Bermuda and across our network of
offices in the Middle East and Asia. Our global strength and presence has enabled us to spearhead clients’ expansion into the European
market. Our team of specialist finance lawyers located in Dublin, London, Jersey and Guernsey, provide commercially focused advice
to lenders and borrowers.
Our multi-disciplinary fund finance team includes lawyers from Walkers’ top-tier fund formation practice providing for an in-depth
understanding of the structures used by investment managers and the legal and commercial issues relevant to fund finance providers. Our
clients include agents, banks, alternative lenders and investment fund managers including private equity, credit, real estate and hedge
funds. We have advised on many types of financing including capital call and subscription financing lines, management fee and GP facilities
as well as NAV and hybrid structures.
Key Contacts
If you have any questions on the information set out in this article, please connect with our senior Fund Finance team below or
your usual Walkers contact.
Nicholas Blake-Knox
Andrew Traynor Ian McNamee Partner - Asset Management
Partner - Finance & Capital Markets Partner - Finance & Capital Markets & Investment Funds
T: +353 1 470 6632 T: +353 1 470 6643 T: +353 1 470 6669
E: andrew.traynor@walkersglobal.com E: ian.mcnamee@walkersglobal.com E: nicholas.blake-knox@walkersglobal.com
Jennifer Fox Sarah Maguire Eimear Keane
Partner - Asset Management Partner - Asset Management Partner - Asset Management
& Investment Funds & Investment Funds & Investment Funds
T: +353 1 863 8531 T: +353 1 470 6691 T: +353 1 470 6622
E: jennifer.fox@walkersglobal.com E: sarah.maguire@walkersglobal.com E: eimear.keane@walkersglobal.com
Jonathan Sheehan Aisling Burke Eimear Burbridge
Partner - Tax Partner - Tax Of Counsel - Tax
T: +353 1 470 6639 T: +353 1 470 6642 T: +353 1 470 6627
E: jonathan.sheehan@walkersglobal.com E: aisling.burke@walkersglobal.com E: eimear.burbridge@walkersglobal.com
Disclaimer
The information contained in this article is necessarily brief and general in nature and does not constitute legal
or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter.
© 2021 All rights reserved. Walkers Ireland LLP
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