Download pdf - January 15, 2013 - Mayer Brown · Tab Program Agenda ... Ann Richardson Knox, Partner, Mayer Brown LLP (Moderator) John Janicik, Partner, Mayer Brown LLP Wes Misson, Associate, Mayer

January 15, 2013

Table of ContentsTab

Program Agenda……………………………………………………………………………………… A

Presentation Materials…………………………………………………………………………… B

Fund Formation Market and Structuring Updates…………………………. 1

Investor Issues and Side Letter Update…………………………………………. 2

The Basics of Subscription Credit Facilities……………………………………. 3

European and Asian Market Update……………………………………………… 4

Related Fund Financing Products…………………………………………………. 5

The DBRS Rating Methodology……………………………………………………. 6

Working Session on Overcall Limitations………………………………………. 7

Regulatory and Legal Updates………………………………………………………. 8

Industry Panel………………………………………………………………………………. 9

Speaker Biographies……………………………………………………………………………… C

Recent Mayer Brown and Appleby Legal Alerts…………………………………….. D

“Sovereign Immunity Analysis in Subscription Credit Facilities,”November 27, 2012 1

“Addressing UBTI Concerns in Capital Call Subscription CreditFacilities,” November 12, 2012 2

“DBRS Publishes Updated Methodology for Capital Call SubscriptionCredit Facilities,” July 12, 2012

“Subscription Financing – Are Side Letters Binding?” October 2011

“Enforceability of Capital Commitments in a Subscription CreditFacility,” July 7, 2011

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4

5

DBRS Rating Methodology – Global Subscription Loan (Capital Call)

Mayer Brown Subscription Credit Facility Practice……………………………………

E

F

Mayer Brown Banking & Finance Practice……………………………………………… G

Mayer Brown Private Investment Funds Practice…………………………………… H

3rd Annual Subscription Credit Facility Symposium |1

Program AgendaJanuary 15, 2013

1:30 – 2:00 Registration

2:00 – 2:15 Welcome and Introduction (Wharton Ballroom)

Mike Mascia, Partner, Mayer Brown LLPJulian Black, Global Head of Structured Finance and Partner, Appleby LLP

2:25 – 3:20 Break-Out Panels – Session I

Panel A: Fund Formation Market and Structuring Updates (Soho) Current Issues in the Fund Formation Market

Investor Reporting Requests

Fundraising and Investment Environment

UBTI and other Tax Structuring Issues

Zachary Barnett, Partner, Mayer Brown LLP (Moderator)Ian Gobin, Partner, Appleby LLPAnne Marie Konopack, Partner, Mayer Brown LLPMatt Posthuma, Partner, Mayer Brown LLPRichard Wheelahan, Director, CapitalSouth Partners

Panel B: Investor Issues and Side Letter Update (Wharton Ballroom) Credit Linkage between Pensions and their Corporate and Municipal Sponsors

Municipal Bankruptcies

Proliferation of SPV and Pooled Vehicle Investors

Placement Agent Withdrawal Rights Update

Sovereign Immunity Updates

Unique Side Letter Provisions

Ann Richardson Knox, Partner, Mayer Brown LLP (Moderator)John Janicik, Partner, Mayer Brown LLPWes Misson, Associate, Mayer Brown LLPSimon Raftopoulos, Global Partner, Corporate & Commercial, Appleby LLP


Victor Rutenberg, Director, Citibank, N.A.

Panel C: The Basics of Subscription Credit Facilities (Tribeca)

Designed for those new to the asset class or seeking a refresher

A condensed version of our popular “Nuts & Bolts of Subscription CreditFacilities” Presentation

Kristin Rylko, Partner, Mayer Brown LLP (Moderator)Mark Dempsey, Associate, Mayer Brown LLPJeremy Grubb, Vice President, Bank of America, N.A.Benjamin Woolf, Senior Associate, Appleby LLP

3:30 – 4:25 Break-Out Panels – Session II

Panel A: European and Asian Market Updates (Tribeca)

Market Analysis and Comparison to the United States

Facility Structural Evolutions

Challenges and Opportunities for 2013

Barney Lee, Partner, Appleby LLP (Moderator)Tim Nosworthy, Partner, Mayer Brown International LLPThomas Rapp, London Branch, Director, Wells Fargo Bank, N.A.Gavin Rees, Director, Barclays plcDavid Wasserman, Executive Director, Sumitomo Mitsui Banking Corporation

Panel B: Related Fund Financing Products (Wharton Ballroom)

Hybrid Facilities

SCF Credit Default Insurance Options

Fund of Fund Facilities

Unsecured Facilities

Fund Sponsor/General Partner Facilities

Open-End Fund Facilities

Zachary Barnett, Partner, Mayer Brown LLP (Moderator)Lawrence Beller, Director, PNCDavid Goldman, Chief Product Officer, Awbury Insurance Ltd.Perry Hicks, Partner, Mayer Brown LLPRam Rao, Managing Director, Macquarie Bank LimitedRobert Wieser, Vice President, Goldman Sachs Bank USA


Panel C: (Soho)

Panel C- 1 (3:30-3:55) The DBRS Rating Methodology

Understanding DBRS’s Updated SCF Rating Methodology

Q & A with DBRS and Natixis

Mike Mascia, Partner, Mayer Brown LLP (Moderator)Matt LaCapra, Managing Director, DBRS, Inc.Nick Mitra, Director, Natixis

Panel C-2 (3:55-4:25) Working Session on Overcall Limitations

Mathematical Examples of Overcall Limitations

Mathematical Examples

Stress Testing and Underwriting Analysis

Potential Mitigating Covenant Protections

Mike Mascia, Partner, Mayer Brown LLP (Moderator)Brad Boland, Director, Wells Fargo Securities, LLCAna Hudson, Director, SunTrust Robinson Humphrey, Inc.

Panel D: Regulatory and Legal Updates (Nolita)

Regulatory Capital Updates

Volcker Rule

Regulatory Updates Impacting Fund Sponsors

FATCA Update

LIBOR Uncertainty

Julian Black, Partner, Appleby LLP (Moderator)Jason Bazar, Partner, Mayer Brown LLPRory Cohen, Partner, Mayer Brown LLPCarol Hitselberger, Partner, Mayer Brown LLPDavid Sahr, Partner, Mayer Brown LLP

4.35 – 5:35 Industry Panel (Wharton Ballroom)

2012 Market Review and Performance Update

Fundraising Trends and Investment Environment

Beneficial Facility Features from the Fund Perspective


Key Issues Impacting the Facility Market

Challenges and Opportunities for 2013

Mike Mascia, Partner, Mayer Brown LLP (Moderator)John Gilb, Principal, Member of the Investment Committee, CBRE GlobalInvestorsJim Hutchinson, Managing Director, President of the Income and GrowthFund Series, LaSalle Asset Management, Inc.Charles Purse, Managing Principal, Park Hill Real Estate GroupMike Robin, Managing Director, Citibank, N.A.Dee Dee Sklar, Managing Director, Wells Fargo Securities, LLCJoshua R. Weiner, Managing Director, First Reserve Corporation

5:35 – 7:00 Cocktail Reception Sponsored by Wells Fargo Securities, LLC (Atrium)

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Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: MayerBrown LLP and Mayer Brown Europe-Brussels LLP both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnershipincorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown,a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnershipwith which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

3rd AnnualSubscription Credit Facility andFund Finance Symposium

January 15, 2012

3RD ANNUAL SYMPOSIUM

Subscription Credit Facilities

2012

• Despite challenges in the fundraising market, again a positive year for theasset class.

• Limited Partner Capital Commitments:

– In the U.S., private equity firms raised $130+ Billion in the 1st threequarters of 2012, up 36% from 2011.

– In Europe, private equity firms raised $47.8 Billion in the 1st threequarters of 2012, up 20%.

– Prospects look good: Preqin and Deloitte both released surveys andopinions recently indicative of increased Investor appetite for privateequity.

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What did we see at Mayer Brown:

• Mayer Brown closed 46 subscription credit facilities.

• Larger volume of smaller transactions.

• Continued interest from new fund sponsors and new entrants on thelender side.

• Increased activity in the 2nd half of 2012 compared to the first.

• Mild tightening of spreads and pricing generally.

• No reported transaction defaults or institutional investor exclusion events.

• The SCF product and its market recognition are maturing.

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1. Cayman Islands

• Active Partnerships in the Cayman Islands

Source: Cayman GeneralRegistry, 2012

Year Total

2009 9,397

2010 10,222

2011 11,501

2012 12,622

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2. Guernsey

• Active Partnerships in Guernsey

Source: Guernsey Registry,2012

Year Total

2011 1,293

2012 1,402

3. Jersey

• Active Partnerships in Jersey

Source: Jersey FSC, 2012

Year Total

2009 735

2010 831

2011 953

2012 1,097

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Agenda

2:00 – 2:15 Welcome and Introduction (Wharton Ballroom)

2:25 – 3:20 Session I Break-Out Panels

• Panel A: Fund Formation Market and Structuring Updates(Soho)

• Panel B: Investor Issues and Side Letter Update (WhartonBallroom)

• Panel C: The Basics of Subscription Credit FacilitiesSubscription Facility Market (Tribeca Room)

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Agenda

3:30 – 4:25 Session II Break-Out Panels

• Panel A: European and Asian Market Updates (Tribeca)• Panel B: Related Fund Financing Products (Wharton

Ballroom)• Panel C: (Soho)

3:30 – 3:55 The DBRS Rating Methodology

3:55 – 4:25 Working Session on OvercallLimitations

• Panel D: Regulatory and Legal Updates (Nolita)

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Agenda

4:35 – 5:35 Industry Panel (Wharton Ballroom)

5:35 – 7:00 Cocktail Reception Sponsored by Wells FargoSecurities

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Panel A: Fund Formation Marketand Structuring Updates

[Month Year]



Panel A: Fund Formation Market and StructuringUpdates - Speakers

• Zachary Barnett, Partner, Mayer Brown LLP (Moderator)

• Ian Gobin, Partner, Appleby LLP

• Anne-Marie Konopack, Partner, Mayer Brown LLP

• Matt Posthuma, Partner, Mayer Brown LLP

• Richard Wheelahan, Director, CapitalSouth Partners

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Session I/Panel B: InvestorIssues and Side Letter Update

Presented by: John Janicik, Wes Misson, SimonRaftopoulos, Ann Richardson Knox and Victor Rutenberg

January 15, 2013



Investor Issues and Side Letter Update

Agenda

• Market Impacts on Investors

• Updates on Investor Credit Linkage

• Municipal Sponsors and Bankruptcy

• Side Letters and Related Issues

• Questions and Closing

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Market Impacts on Investors

• Historical 2011 and 2012 activity

– Number of funds in market

– Size of capital raise

– Timing of investor closings

• What does it look like for 2013?

– Number of funds in market

– Commitments to new sponsor relationships

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Market Impacts on Investors

• Investor/Fund Trends and Lender Response

– Rolling closings of investors

– Lender flexibility on deal terms in response

– No investor letter transactions

– Increased scrutiny of LPA and side letters

– Investor Mix (included/designated/HNW)

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Updates on Investor Credit Linkage

• Credit Linkage Overview

– Many investors must be linked to a parent, sponsor, relatedentity or government that has a credit rating.

– Lenders need to be satisfied that the investor has the financialwherewithal to be included in the borrowing base.

– Examples include linking an endowment or an investmentsubsidiary to its rated parent entity.

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• Credit Link Documents

– Financials and organizational documents

– Guarantees

– Comfort Letters

– Keepwell Agreements

– Statement of Facts

– Signature of Investor Letter

Such documents will be a condition to an investor’s inclusion inthe borrowing base.

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• SPV Investors

• Pooled Vehicle Investors

– Generally HNW Pools

– Concentration Limits

– Look through rights/ Remedies in Default

– Exclusion Events/ Default Triggers

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Credit Linkage between Pensions and theirGovernment Sponsors

• Background on Governmental Sponsors

– Nature of Government Entities

– Types of Public Pension Systems

– Relationships to Government Employers

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• Credit Linkage between Pensions and their Corporate andMunicipal Sponsors

– Source of Funds

– Funding Ratio

– Credit of State/Municipal Employer

– Other Statutory and Policy Limitations

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• Municipal Bankruptcies

– Recent Examples

– Governmental Bankruptcy Generally

– Effect of Bankrupt Employers

– Other Considerations in Enforcement

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Sovereign Immunity

• Sovereign Immunity In General

– See Mayer Brown Legal Update

– Practical implication – despite legal risk is it likely that Investorwould not fund?

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Sovereign Immunity

• Sovereign Immunity Updates

– Jurisdictional Updates

• Texas

• Michigan

• California Counties

– Sovereign Wealth Funds

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Sovereign Immunity

• Sovereign Wealth Funds

– Sections 1605-1607 of the Foreign Sovereign Immunities Actgenerally deny immunity if such immunity has been waived andfor commercial acts

– US Supreme Court – “when a foreign government acts, not as aregulator of a market, but in the manner of a private playerwithin that market, the foreign sovereign’s actions are‘commercial’” (Scalia – Republic of Argentina v. Weltover, 504US 607 (1992))

– Many sovereign nations and immune non-governmentalentities (i.e. the United Nations) will agree to bindingarbitration

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Side Letter Update

• Side Letters

– What are they?

• An Investor’s separate agreement with the Fund that alters the terms ofthe partnership agreement with respect to such investor.

– Common Issues

• Express retention of sovereign immunity

• Rights to transfer/assign interests

• Obligation to deliver Investor Letters/Opinions

• Investor excuse rights/exclusions for violating investment policy

• Borrowing Opt-outs

• MFN clauses and elections/ enforceability

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Enforceability of Side Letters in Cayman Funds

Valid and Binding?

• Correct parties – Medley Case – 21 June 2012

• Actual power to enter into side letter.

• Common Law Fiduciary duty.

Unenforceable

GP liable to fund

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Enforceability of Side Letters in Cayman Funds

Potential Terms Issues

• Material amendment

• Economic Rights / Fee Concessions.

• Undertaking to control discretion.

• MFN Clause – best practice.

• Transparency – Matador Case 23 August 2012

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Side Letter Updates

• Placement Agent Withdrawal Rights

– Originates from “Pay for Play” concerns

– May impact ability to call capital to repay debt during thecourse of the facility

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Side Letter Updates

• Placement Agent Regulations

– Side Letter Provision

• Investor has the unilateral right to cease making capital contributions orwithdraw from the Fund if the Fund/GP breaches Placement Agentdisclosure representations and warranties

• Certain governmental Investors only

– Common Placement Agent Policy Disclosure Provisions

• Fund/GP did not use a Placement Agent to obtain investment fromInvestor

• Disclosure as to the names, services performed by, and compensation of,any Placement Agent

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Side Letter Updates

• Examples of Placement Agent Withdrawal Right:

“The General Partner further acknowledges and agreesthat any material omission or inaccuracy in informationsubmitted by the General Partner under this paragraphmay result in the following: [ ]…The Investor shall have thediscretion to cease making Capital Contributions for newinvestments (and paying fees on Unfunded Commitments)to the Partnership.”

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Side Letter Updates

• Example 2:

“The General Partner hereby agrees that in the event thatthe General Partner is determined by a governmentalauthority of competent jurisdiction to have violated theRule with respect to Investor, Investor will be entitled tocease making further capital contributions to thePartnership and to withdraw from the Partnership [ ] …,without being deemed to be a Defaulting Partner orincurring any other penalties under the PartnershipAgreement.”

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Side Letter Updates

– Ways to Address Placement Agent Disclosure Requirements

• Concentration Limit

• “Savings” language

– Termination of Investor’s obligation to fund further capitalcontributions does not apply to indebtedness or liabilities underSubscription Facility incurred prior to the date of termination orwithdrawal¹

• Exclusion from Borrowing Base

¹Note: all relevant regulations and other materials must be reviewed to confirm “savings” language isenforceable against the specific Investor and does not conflict with applicable law.

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Side Letter Updates

– Other Considerations

• Equitable arguments weigh in favor of requiring Investor to honorcapital call(s) to repay Fund’s liabilities under Subscription Facilityincurred prior to exercise of termination or withdrawal right -- no“test case”

• Timing is important

• Most Favored Nations clauses likely inapplicable

• No clear market trend has emerged, but most investors seemreceptive

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Side Letter Updates

• Other Emerging Issues:

– Arbitration Clauses in LPA’s

• Typically in the context of certain types of funds

• Usually found in the LPA, but may be in side letters

• May be broadly drafted such that enforcement of right to call capital froman investor by a lender would be subject to arbitration

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The Basics of Subscription CreditFacilities

Presented by

Mark DempseyMayer Brown LLPAssociate, Chicago

Jeremy GrubbBank of America, N.A.Vice President

Kristin RylkoMayer Brown, LLPPartner, Chicago

Benjamin WoolfAppleby LLPSenior Associate



Agenda

• Basic Overview of a Subscription Credit Facility

• Key Facility Features

• Fund Documentation

• The Credit Facility and its Documentation

• Security Structures/Documentation

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Subscription Credit FacilityOverview

Subscription Credit Facility Overview

• Typically a revolving creditfacility to a closed end privateequity or real estate fund.

• The defining characteristic isthe Collateral Package: TheFacility is secured not by theAssets of the Fund, but by theCapital Commitments of theInvestors.

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Management

GeneralPartner

Investors

Private Equity Fund

Lender

Lettersof

Credit

$

$“Capital

Contributions”

ReturnsFees

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• Collateral

– The Investors’ Capital Commitments, Capital Contributions andthe General Partner’s right to make Capital Calls on theInvestors and enforce payment thereof

• Related Credit Arrangements

– Unsecured Facilities

– Secured Guaranties

– Hybrid Facilities

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• Key Propositions

– The Investors are aware of the Facility, the pledge of theirCapital Commitments and that the Lender can make CapitalCalls directly

– The Partnership Agreement of the Fund must permit the Facilityand not have provisions that unduly restrict or otherwiseinterfere with the Lender’s rights to repayment

– Fundamental Premise: The Investors must fund their CapitalContributions without set-off, counterclaim or defense

• The Lender is underwriting the credit wherewithal of the Investors

• A dispute between the Investor and the General Partner is a risk thatshould not be allocated to the Lender

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Key Facility Features



Available to Various Fund Types

• Subscription facilities have been established for privateequity funds of all types

– Buyout

– Power

– Energy

– Infrastructure

– Real Estate

– Mezzanine

– Funds of Funds – Primary and Secondary

– Venture8

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Purpose of Borrowings

• Subscription facilities can be used for short term bridgingof capital calls or longer term bridging purposes

– Generally to bridge the time between the Fund making aninvestment (using proceeds under the facility towards thepurchase) and the calling of capital at a later date to repay theborrowing

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• Bridge to Capital Calls

– To avoid the need to call capital well in advance of closing aninvestment

– To backstop late capital call proceeds from the fund’s limited partners

– To batch capital calls for very active funds rather than calling capitalfor each investment (especially useful for funds of funds, who receiveperiodic capital calls from some 20-30 underlying funds)

– 30-120 day repayment and/or cleanup requirement is sometimesrequired

– Longer term repayment (up to three years) where the facility providesor backstops construction debt during the development phase of aproject before capital is typically called

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• Bridge to Other Sources of Deal Financing

– To bridge other sources of capital that might not be available orready at the time of a given investment

– In lieu of calling capital to provide that other financing

– Aligns the capital called with the long term capital needed,enhancing the IRR/MOI

– Allows the purchase of an asset outright with facility proceeds.Permanent debt to follow upon repositioning of acquired asset(common in real estate funds)

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Typical Financing Structure

• Subscription facilities are generally structured as senior,secured revolving credit facilities

– Committed vs. Uncommitted

• Both types are available in the market

– Facility size

• $10 million to $1 billion

– Tenor

• 1-3 year revolving facilities (typically extended as needed)

– Availability

• Loans and/or letters of credit, FX, interest rate or commodity hedging

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Typical Financing Structure

• Security

– Pledge of uncalled capital commitments / capital call bankaccount

– Power of attorney to exercise managers rights to call capital,etc.

– Investor letters may be required if commitments are > 364 days

• Advances

– 50-100% of unfunded capital commitments (depending onfinancial strength of Investors)

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Typical Fund Investors

• Institutional investor commitments are what subscription lenders typicallylend against

– State Pension Funds

– University Endowments

– Foundations

– Insurance Companies

– Corporations

– Financial Institutions

– Foreign Pension Funds

– Sovereign Wealth Funds

– Funds of Funds and Secondary Funds

– High Net Worth Individuals and Related Entities

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Fund Documentation



Fund Documentation

• Primary Documents

– Limited Partnership Agreement

– Subscription Agreements

– Investor Letters

– Investor Opinions/Authority Certificates

– Side Letters

– Credit Link Documents

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Fund Documentation – Limited Partnership Agreements

• Five Areas of Focus

– Subscription Facility Provisions

– Commitment Period

– Debt Limitations

– Transfers of Interest

– General LPA Don’t’s

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• Subscription Facility Provisions

– Language should try to mirror Investor Letter as much as possible (ERISA Investorscannot have separate agreements with bank)

• Permit indebtedness in connection with Facility as either borrower or guarantor –ideally language should be as broad as possible; authorizing cross collateralization,joint and several borrowings with other funds, etc.

• Acknowledgments of pledge and Agent’s right to call capital

• Agreement to fund without setoff, counterclaim or defense

• Limitations on how long loans can be outstanding

• GP and Investors agree capital calls to be funded only to subscription/collateralaccount

• Delivery of financials from Investors

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• Commitment Period

– Ability to call capital to repay borrowings during and after(often permitted in definition of Fund Expenses or Follow-onContributions)

– Termination and/or Suspension – problematic if you can’t callcapital after the end of the Commitment Period or during asuspension thereof. Commitment Period can often beterminated by the Investors or acts outside of GPs control suchas Key-Person Events or GP fault/no-fault removal provisions

– Capital Call Mechanics (timing for and permitted uses)

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• Debt Limitations

– Credit agreement limitations often mirror the LPA limitations.Check to see when limitations kick-in and whether they can beadjusted by Advisory Committee approval

• Transfers of Interest

– General Partner removal (fault and no-fault)

– Limited Partner – ideally includes sub line lender consent and ata minimum GP consent

• Partial transfers

• Transferee not appearing on OFAC

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• LPA Don’t’s

– Restrictions on amount or percentage of capital that can becalled as a result of a default of another Investor

– No Third Party Beneficiary clauses

– Withdrawal/Excuse Provisions: Ideally, any withdrawal underthe LPA indicates that a payment to repay subscription facility isa pre-condition

– Investors not responsible for amounts owed under subscriptionfacility that are incurred after expiration of Commitment Period

– Note needed link between provisions in the LPA and negativecovenants in the Credit Agreement

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Fund Documentation

• Subscription Agreements

– Between each Investor and the Fund

– Along with the LPA, governs Investor’s agreement to fund itscommitment

– Must be delivered by each Investor

– Reviewed for acceptability

• Commitment amounts match borrowing base

• Properly executed and accepted by GP countersignature

• Information complete and no changes to the form that are materiallyadverse to the Lender

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Fund Documentation

• Investor Letters

– Agreement/Acknowledgment between Investor and Agent

• Key agreements/acknowledgments

– The Fund’s pledge to the Agent of Investor’s commitment, contributionsand right to call capital

– Make contributions when called without setoff, counterclaim or defense(including fraud, mistake, Section 365 of the Bankruptcy Code)

– Make all contributions into a deposit account controlled by Agent

– Subordination of claims

– Limitation on transfers and collateral assignment

– Will provide financial statements/certify commitment amount

– Special provisions for ERISA, governmental and foreign investors

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Fund Documentation

• Investor Letters

– Who must deliver?

• Included/Eligible Investors only v. all Investors

• Obligation to obtain: Commercially reasonable efforts/good faith efforts

– No Investor Letter Deals

• Clear market practice in Europe

• Major sponsors are obtaining in the United States

• Does not change the Lenders’ legal position materially if the LPAincorporates the same concepts. Certainly is some practical benefit inobtaining them.

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Fund Documentation

• Investor Opinions/Authority Certificates

– From Included Investors only

– Opinion covers

• Valid existence/corporate power and authority

• Due Authorization/execution and enforceability

• No violation of law or conflict with organizational docs

• Sovereign immunity (governmental investors)

• Choice of law/submission to jurisdiction (foreign investors)

– Authority Certificate in lieu of opinion

– Opinions/Certificates provide comfort but not necessary for enforceability

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Fund Documentation

• Side Letters

– What are they?

• An Investor’s separate agreement with the Fund that alters the terms ofits subscription agreement

– Key things to watch out for

• Express retention of sovereign immunity

• Rights to transfer/assign interests

• Obligation to deliver Investor Letters/Opinions

• Investor excuse rights/exclusions for violating investment policy

• MFN clauses and elections

• Placement agent issues

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Fund Documentation

• Credit Link Documents

– Many Investors must be linked to a parent, sponsor or relatedentity or government that has a credit rating

– Relevant documents include

• Financials and organizational documents

• Guarantees

• Comfort Letters/Keepwell Agreements

• Statement of Facts

– These documents will be a condition to such Investor’s inclusionin the borrowing base

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The Credit Facility:Documentation

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The Credit Facility

• Documentation

– Credit Agreement

– Security Agreement

– Pledge of Collateral Account

– Account Control Agreement

– Filings, Opinions, Certificates, etc.

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The Credit Facility: Key Negative Covenants

• Linked to the Limited Partnership Agreement—must restrict what the Fund can doto impair the Collateral

• Standard Negative Covenants Provisions

– Negative Pledge

– Limitations on use of proceeds

– Existence/Fundamental Changes

– Limitation on distributions to Investors during an Event of Default

– Restrictions on withdrawals from the Collateral Account

– Restrictions on Amendments to the Limited Partnership Agreement

– Formation of AIV’s

– Deemed Contributions

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The Credit Facility: Key Negative Covenants

• Contested Negative Covenant Issues

– Limitation on Transfers/Admission of Investors

– Financial Covenants are rare – some leverage limitations areentering deals if the LPA restrictions are loose

– Partnership Agreement Defaults (GP/Investors)

– Restrictions on GP exercising rights or remedies

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The Credit Facility: Events of Default

• Standard Events of Default (“EODs”)

– Breach of Representations, Warranties and Covenants

– Bankruptcy

– Judgment

– Cross-default

– GP defaults and change of control issues

– Commitment period terminations

– ERISA events

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The Credit Facility: Events of Default

• Contested EODs

– Material Adverse Effect

– Change in Investment Advisor

– Key-Person Event

– Investor payment defaults – aggregate defaults

• Commitment Modifications Challenges

– Battleground: GP/Sponsor bankruptcy

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The Credit Facility: Remedies

• Administrative Agent can issue capital calls to investors (cooperative GP would likely makeinitial call after Event of Default)

– Certificates of LPs confirming unfunded capital commitment

– Capital Calls must be in compliance with LPA

• Typically requires all Investors/pro rata

– This is the reason why it is imperative that all parallel funds pledge right tocall

• Use of proceeds

– Other LPA rights and remedies pertaining to capital calls such as investor dilution,adjustment in percentage interest, etc.

• Sale of Collateral pursuant to UCC

• Application of cash in Collateral Account

• Claims against fund and Investors for breach

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The Security Structure




• The Security Agreement

• Collateral Description

– All of the Borrower’s and General Partner’s rights, titles, interests andprivileges in and to (i) the Capital Commitments and Capital Contributions; (ii)the Borrower’s and General Partner’s rights to make Capital Calls; (iii) all ofthe Borrower’s and General Partner’s rights, titles, interests, remedies, andprivileges under the Partnership Documents (a) to issue and enforce CapitalCalls, (b) to receive and enforce Capital Contributions, (c) relating to CapitalCalls, Capital Commitments and/or Capital Contributions; and (iv) all proceedsof any and all of the foregoing

• Note: Choice of law of the grant

– If the Fund is not a Delaware entity, local counsel should confirm they arecomfortable with the security grant being under New York law

– Caymans, Canada are OK with US law grant, Luxembourg advises a parallelgrant under Lux law

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• The Collateral Account

– The Fund covenants that all Capital Contributions will be fundedinto the Collateral Account

– Often held by the Agent; if not always subject to a ControlAgreement

– When can the Agent take control of the Account?

• Event of Default

• Default

• Borrowing Base Deficiency

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• Perfection

– General Intangibles under the UCC-Perfect by Filing

– Location of debtor: We typically file in both D.C. and [New York]for non-Delaware entities

38

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20




• Cayman Issues

– Consult local counsel

– Notice to Investors

39



The Security Structure: Impact of a Guarantor Structure

40

• Accommodatestructure, so long asit’s credit neutral tothe Lenders

• The Fund guaranteesLoans to Borrower,secures the guarantywith a pledge of itsCapital Commitments

Investors

Fund

Borrower Lenders$

Loans

$ Commitments

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21



The Security Structure: Impact of a Guarantor Structure

41

Investors

Feeder Fund

UBTI Blocker

Lenders$

Loans

Investors

Borrower

$ Commitments

$ Commitments

• Understand the FundStructure

• Both the Feeder Fund(the Guarantor) andthe Borrower andtheir respectiveGeneral Partnersmust pledge.



The Security Structure: Cascading Pledges

42

• The Fund’s tax counsel objectsto the Feeder Fund being aGuarantor, but the Lendersmust be able to make CapitalCalls.

• The Feeder Fund grants asecurity interest in its CapitalCommitments to the UBTIBlocker.

• The UBTI Blocker grants aSecurity Interest to theBorrower in all its rights underthe Security Agreement fromthe Feeder Fund.

• The Borrower grants a securityinterest to the Agent includingall its rights under the SecurityAgreement from the UBTIBlocker.

Investors

Feeder Fund

UBTI Blocker

Lenders$

Loans

Borrower

Pledge

Pledge

Pledge

$ Commitments

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Common VehiclesMain Fund, Parallel Fund, Feeder Fund, AIV, Co-Invest Fund, Sidecar Fund, Subsidiary REIT

B-5

Asset Asset

TRS

AssetAsset

Non-REITLLC

Sponsor

PrincipalsLimitedPartners

GeneralPartner

Fund

Mgm’tCo.

100Shareholders

ParallelFund

Non USBlocker

Asset Asset

SidecarFund

PoolingLLC

AssetAsset

LimitedPartners

LimitedPartners

REIT LLC

Feeder

LimitedPartners

Co-Invest

AIV

43



The Security Structure: Cascading Pledges

• Considerations

– Complicated structures create maximum optionality forInvestors

– But they create a lot of complication

• Each entity often has its own Collateral Account

• Each entity is often formed under different jurisdictions

• If an AIV is formed for a Feeder Fund, the entire security structure can need to bere-done

• $

44

1/9/2013

1


Panel A: European and AsianMarket Updates



Panel A: European and Asian Market Updates -Speakers

• Barney Lee, Partner, Appleby LLP (Moderator)

• Tim Nosworthy, Partner, Mayer Brown International LLP

• Thomas Rapp, London Branch, Director, Wells Fargo Bank,N.A.

• Gavin Rees, Director, Barclays plc

• David Wasserman, Executive Director, Sumitomo MitsuiBanking Corporation

2

1/9/2013

1


Panel B: Related Fund FinancingProducts



Panel B: Related Fund Financing Products -Speakers

• Zachary Barnett, Partner, Mayer Brown LLP (Moderator)

• Lawrence Beller, Director, PNC

• David Goldman, Chief Product Officer, Awbury InsuranceLtd.

• Perry Hicks, Partner, Mayer Brown LLP

• Ram Rao, Managing Director, Macquarie Bank Limited

• Robert Wieser, Vice President, Goldman Sachs Bank USA

2

1/9/2013

1


Panel C- 1 The DBRS Rating Methodology



Panel C- 1 The DBRS Rating Methodology -Speakers

• Mike Mascia, Partner, Mayer Brown LLP (Moderator)

• Matt LaCapra, Managing Director, DBRS, Inc.

• Nick Mitra, Director, Natixis

2

1/9/2013

1


Working Session on OvercallLimitations in a PartnershipAgreement

Overview of Overcall Limitations

• A Lender’s general expectation,as in any ABL loan orsecuritization, is that 100% ofeach Investor’s uncalled capitalcommitment is available tosupport repayment and overcollateralize any defaults byanother Investor.

• That’s the entire point of aBorrowing Base.

• Overcall limitations cut againstthat expectation.

2

CapitalCommitments

Investor 1

Private Equity Fund

Investor 2 Investor 3 Investor 4

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2




• Primary Forms:

– Percentage of Prior Capital Call

– Percentage of Capital Commitment

– Not to Exceed Fund’s Investment Concentration Limits

– Note: Different Partnership Agreements Structure Differently

3




• Percentage of Prior Capital Call

– Example: If any Limited Partner defaults on its obligations to fund anyCapital Call hereunder, the General Partner shall be authorized to make asubsequent Capital Call on the non-defaulting Limited Partners for theresulting deficit, provided that no such non-defaulting Limited Partnershall be obligated to fund such a subsequent Capital Call in an amount inexcess of [50]% of the amount it initially funded pursuant to the originalCapital Call.

4

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• Percentage of Capital Commitment

– Example: If any Limited Partner defaults on its obligations to fund anyCapital Call hereunder, the General Partner shall be authorized to make asubsequent Capital Call on the non-defaulting Limited Partners for theresulting deficit, provided that no such non-defaulting Limited Partnershall be obligated to fund any such subsequent Capital Call in an amountin excess of 15% of its Capital Commitment.

5




• Not to Exceed the Fund’s Investment Concentration Limits

– Example: If any Limited Partner defaults on its obligations to fund anyCapital Call hereunder, the General Partner shall be authorized to make asubsequent Capital Call on the non-defaulting Limited Partners for theresulting deficit, provided that no such non-defaulting Limited Partnershall be obligated to fund any such subsequent Capital Call if it wouldresult in such Limited Partner exceeding the concentration limits set forthin Section [X] as to its individual Capital Commitment.

– So, if a Fund has a per Investment concentration limit of 15%, no Investorever has to fund into a single Investment as a result of defaults beyond15% of its own Capital Commitment.

6

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Overcall limitationsConsiderations

• A mathematical analysis should be done on any overcall provision to establish the break-evenLP default point

• Lenders should be comfortable with the level of the break-even default

• The Lenders’ first right of defense is the LPs’ legal obligation to fund on the initial capital call.As such Lenders are allowed to pursue legal remedies against defaulting LPs

• Look for substantial penalties in the partnership agreement against the defaulting LPs

• In the event of a massive investor default, Lenders have an ability to seek repayment fromasset disposition

• History of the Sponsor should be considered in so far as:

– Successful investment track record

– LP performance history

• Look for a good argument for why investors need an overcall limitation (i.e. trying to avoidbeing over concentrated in any one asset)

7



Percentage of Prior Capital Call

8

No Overcall 150% Overcall 125% Overcall

Investor

Original

Commitments

Remaining

Commitments

% of

Fund

Advance

Rate

Borrowing

Base Call to Repay

Excess

Available

Excess

Available

Excess

Available

1 100,000,000 75,000,000 10% 90% 67,500,000 33,750,000 41,250,000 16,875,000 8,437,500

2 100,000,000 75,000,000 10% 90% 67,500,000 33,750,000 41,250,000 16,875,000 8,437,500

3 100,000,000 75,000,000 10% 90% 67,500,000 33,750,000 41,250,000 16,875,000 8,437,500

4 100,000,000 75,000,000 10% 90% 67,500,000 33,750,000 41,250,000 16,875,000 8,437,500

5 100,000,000 75,000,000 10% 90% 67,500,000 33,750,000 41,250,000 16,875,000 8,437,500

6 100,000,000 75,000,000 10% 0% - 33,750,000 41,250,000 16,875,000 8,437,500

7 100,000,000 75,000,000 10% 0% - 33,750,000 41,250,000 16,875,000 8,437,500

8 100,000,000 75,000,000 10% 0% - 33,750,000 41,250,000 16,875,000 8,437,500

9 100,000,000 75,000,000 10% 0% - 33,750,000 41,250,000 16,875,000 8,437,500

10 100,000,000 75,000,000 10% 0% - 33,750,000 41,250,000 16,875,000 8,437,500

1,000,000,000 750,000,000 337,500,000 337,500,000 412,500,000 168,750,000 84,375,000

Total Available Commitments 750,000,000 506,250,000 421,875,000

Implied Advance Rate 45% 67% 80%

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5



Percentage of Capital CommitmentMathematical Illustration

9

Breakeven Default % (with 15% Overcall Limit)

Capital Call % 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 95.0% 98.0% 100.0%

Breakeven Default % 88.2% 78.9% 71.4% 65.2% 60.0% 55.5% 51.7% 48.4% 45.5% 44.1% 43.4% 42.9%



Overcall LimitationsMitigants

• Mitigants include:

– History of the Sponsor

– Levels of penalties on defaulting LPs

– Diversity of the investor base; proportion of large highly capitalizedand/or rated institutional LPs

– Periodic capital call requirements to ensure that LPs have “skin in thegame”

– NAV tests/leverage limitations related to fund investment value

– The cumulative LP default threshold should be set inside of the LPbreakeven point

10

1/9/2013

1


Panel D: Regulatory and LegalUpdates



Panel D: Regulatory and Legal Updates - Speakers

• Julian Black, Partner, Appleby LLP (Moderator)

• Jason Bazar, Partner, Mayer Brown LLP

• Rory Cohen, Partner, Mayer Brown LLP

• Carol Hitselberger, Partner, Mayer Brown LLP

• David Sahr, Partner, Mayer Brown LLP

2

1/9/2013

1


Industry Panel



Industry Panel - Speakers

• Mike Mascia, Partner, Mayer Brown LLP (Moderator)

• John Gilb, Principal, Member of the Investment Committee, CBRE GlobalInvestors

• Jim Hutchinson, Managing Director, President of the Income and GrowthFund Series, LaSalle Asset Management, Inc.

• Charles Purse, Managing Principal, Park Hill Real Estate Group

• Mike Robin, Managing Director, Citibank, N.A.

• Dee Dee Sklar, Managing Director, Wells Fargo Securities, LLC

• Joshua R. Weiner, Managing Director, First Reserve Corporation

2

Michael Mascia – Mayer Brown, New York PartnerE-Mail: [email protected] Phone: +1 212 506 2655

Mike Mascia is a partner in Mayer Brown’s Banking and Finance practice groupbased in New York. He leads the firm’s Capital Call Subscription Credit Facilityteam and has a globally recognized practice in the space. He has represented thelead arrangers and lenders in several of the largest subscription credit facilitiesever consummated, including facilities across from funds sponsored by many ofthe world’s preeminent sponsors such as Blackstone, Goldman Sachs, MorganStanley, Fortress and First Reserve. In 2011, he represented lender groups in 29distinct transactions with collective lender commitments in excess of $16 billion.He is a frequent speaker and author on fund finance issues and is a member ofMayer Brown’s Global Securitization practice group. Mike has an MBA from theSloan School of Management at the Massachusetts Institute of Technology and aBA and JD from the University of North Carolina.

Julian Black – Appleby, Global Head of Structured FinanceE-mail: [email protected] Phone: +1 345 814 2717

Julian Black is the Global Head of Structured Finance at Appleby, and previouslyat Goldman Sachs, Clifford Chance and Freshfields in London.

Julian’s main practice is acting for lenders in relation to subscription creditfacilities, and has acted on some 15 transactions in 2012. He is proud to countamongst his clients Wells Fargo, SMBC, Natixis, Deutsche Bank, Citi, Bank ofAmerica and Macquarie Bank .

Julian’s other major focus is the New York CLO market, in relation to which heacts for many of the lead arrangers. In 2012, Julian’s team closed over 35 CLO’sfor all of the major Arrangers.

Chambers Global praises Julian for his advice on corporate and finance law,emphasizing his excellent marketing capabilities. PLC Which Lawyer, he ranks asHighly Recommended, and is described as “the go-to specialist for Securitisation”.

Zachary Barnett – Mayer Brown, Chicago PartnerE-mail: [email protected] Phone: +1 312 701 8841

Zac Barnett is a partner in Mayer Brown’s Banking & Finance and PrivateInvestment Fund practice groups. Zac primarily represents real estate, privateequity, debt, energy and infrastructure funds. His deep understanding of thesevehicles has led to the development of creative fund financing structuresincluding fund-of-fund and fund-of hedge fund facilities, open-end fund lendingas well as several different variations of aftercare facilities. Zac has extensiveexperience representing both borrowers and lenders in connection withsubscription facilities and is particularly adept at increasing borrowing baseavailability via limited partner negotiation. He was recognized in Chambers USA2010 and Chambers USA 2011. Zac has a JD from Northwestern University Schoolof Law.

Ian Gobin - Partner, ApplebyE-mail: [email protected] Phone: +44 (0)1481 755 607

Ian Gobin is a partner in the Corporate & Commercial department and a memberof the global Funds and Investment Services team in Guernsey. He specializes inthe formation and operation of offshore funds, private equity funds andmanagement companies. He also provides advice on a wide range of offshorecorporate, financial and commercial legal matters. Ian’s practice has a dedicatedfocus on fund managers, their clients and their service providers. He advises onthe legal and regulatory treatment of investment funds, private equity funds andmanagement companies established in the Cayman Islands and the British VirginIslands. He also advises institutional and private clients throughout Europe andNorth America on funds matters.

Anne Marie Konapack - Partner, Mayer Brown LLPE-mail: [email protected] Phone: +1 312 701 8467

Anne Marie Konopack has substantial experience structuring real estate, venturecapital and private equity funds on behalf of fund sponsors, as well as structuringinvestments in such funds in a tax efficient manner for taxable, U.S. tax-exempt,foreign governmental investors and other non-U.S. investors. In addition, AnneMarie emphasizes structuring and tax planning for REITs, partnerships, andlimited liability companies investing in real estate and real estate-flavored assets.Anne Marie is a recommended lawyer in the Legal 500 USA 2012 rankings forInvestment Fund Formation and Management – Private Equity Funds, whereclients described her as “head and shoulders above her peer set.”

Matt Posthuma - Partner, Mayer Brown LLPE-mail: [email protected] Phone: +1 312 701 8437

Matt Posthuma is a corporate partner who focuses on the formation of privateinvestment funds and other transactions involving real estate companies, assetmanagers and financial institutions worldwide. Matt handles open- and closed-end funds with a wide range of investment strategies, such as real estate(including core, value-added and opportunistic), private equity, infrastructure,debt, hedge, global and foreign country funds. He also has expertise in jointventures, mergers and acquisitions, venture capital and other corporate andsecurities transactions.

Richard Wheelahan - Director, CapitalSouth PartnersE-mail: [email protected] Phone: +1 704 936 4928

Richard Wheelahan is a vice president for the registered investment adviser toCapitalSouth and Capitala Investment Group (together, "Capitala"). Capitala,founded in 1998, currently manages over $700 million in assets for public andprivate pension funds, financial institutions, endowments and family offices, andinvests junior capital in lower middle market companies. Capitala seeks to investbetween $5 million and $30 million in leveraged and management buyouts,typically as a subordinated debt provider, but occasionally as a control equitysponsor; growth capital financings; leveraged recapitalizations; strategicacquisitions and other transactions. At the end of 2012, Capitala closed on itsfourth SBIC (and is in the final stage of licensure) and is currently in the market,raising additional funds. Prior to joining Capitala, Richard principally worked onnon-financial, strategic (M&A, divestiture and JV) transactions as an associateattorney at Moore & Van Allen PLLC in Charlotte. Prior to Moore & Van Allen,Richard was an associate attorney in Mayer Brown LLP's leveraged financepractice group in Charlotte. Richard has a JD from the University of NorthCarolina School of Law in Chapel Hill, NC.

Ann Richardson Knox - Partner, Mayer Brown LLPE-mail: [email protected] Phone: +1 212 506 2682

Ann Richardson Knox is a Banking & Finance partner in Mayer Brown’s New Yorkoffice. She negotiates and documents complex secured loans and financings onbehalf of major financial institutions and non-traditional lenders such as privateequity funds, hedge funds, venture capital funds and project finance lenders.

Ann represents major US and foreign banks as lead agent and arranger insyndicated credit facilities, mezzanine financings and commercial loans toopportunity funds, energy funds and other entities seeking liquidity. She workswith funds and corporations seeking to leverage their portfolios, with real estatefunds secured by their real estate portfolios—including pools of commercial realestate and hospitality properties—and with corporations and other entities incapital market and high-yield transactions.

Additionally, Ann represents alternative lenders, including private equity funds,hedge funds, venture capital funds and project finance lenders, in secured firstand second lien credit facilities and note purchases, workouts and exit financings.She also negotiates and helps structure acquisition and portfolio companyfinancing in both friendly and hostile acquisitions.

Wesley Misson – Mayer Brown, Charlotte AssociateEmail: [email protected] Phone: +1 704 444 3673

Wes is an associate in the Banking & Finance practice group. He concentrates hispractice on securitization and other structured financial products with a specialfocus on lender representation in complex financings for private equity and realestate funds. Wes has represented major US and foreign banks and their relatedcommercial paper conduits as lead lender, arranger, structuring agent,administrative agent, lender or issuer in the negotiation and documentation ofmore than 40 financings for strategic private equity funds and related entitieswhere the loans are secured by the capital commitments of the funds’ investors.Wes is well versed on syndicated and cross-border fund financings. He also has

vast experience working with fund-related borrowers and negotiating third-partyinvestor documentation with institutional, high net worth and sovereign wealthinvestors. His experience also includes advising financial institutions in assettransfers related to private equity funds, supply-chain finance programs andsecuritization transactions with asset classes including middle-market corporateloans, student loans, equipment leases and trade receivables.

Simon Raftopoulos – Appleby Global Partner, Corporate &CommercialEmail: [email protected] Phone: +1 345 814 2748

Simon Raftopoulos is a partner and a member of the Corporate Finance andStructured Finance teams. Simon joined Appleby in 2006 and was made partnerin 2009. Prior to joining Appleby in 2006, Simon was an associate in the Bankingand Financial Services Group of Matheson Ormsby Prentice Solicitors in Dublin.

Simon is a recognised banking and finance law expert in the Cayman Islands.

Simon has structured, negotiated and assisted banks and financial institutions indocumenting a wide range of facilities including multiple fund structures,offshore funds and AIV and feeder funds. Simon has deep specific experience asCayman counsel in structuring collateral packages for a number of financialinstitutions.

In 2010, Legal 500 described Simon as a 'rising young star' for private equity andstructured finance, M&A and general banking. In 2012, the directory alsorecommended Simon for his insurance and corporate and commercial work.

PLC Which Lawyer? (2010, 2011 and 2012) and IFLR1000 (2010 and 2011)recognized Simon as a leading lawyer in the field of Capital Markets andCorporate Finance.

In the 2012 Caribbean rankings, Legal 500 listed Simon as an ‘experiencedpractitioner’.

Victor Rutenberg - Director, Citibank, N.A.E-mail: [email protected] Phone: +1 212 559 2335

Victor Rutenberg is a director at Citi Private Bank Financial Sponsors Group. He isresponsible for origination and structuring of Private Equity Capital Call (“PECC”)credit facilities, management company and GP financing lines, as well as othercredit products relevant to PE funds. Financial Sponsors Group is a leadingprovider of lending products to PE firms on a global basis and the team’sexpertise is widely recognized among the clients and the lending communityalike.

Victor has over 12 years of banking experience originating and structuring assetbacked commercial paper liquidity facilities, originating and executing structuredmunicipal finance credit products, and researching, analyzing and modelingcorporate finance transactions for large US corporates. Prior to joining CitiPrivate Bank, Victor was a director at Sumitomo Mitsui Banking Corporation, anexecutive director at WestLB AG, a vice president at Lloyds TSB’s Bank, and anassociate at Commerzbank AG.

Victor started his career at Ernst & Young and is a Certified Public Accountant. Hereceived an MBA degree from New York University’s Stern School of Business anda BBA degree in Accounting from Pace University’s Lubin School of Business.

John Janicik - Partner, Mayer Brown LLPE-mail: [email protected] Phone: 1 312 701 7323

John Janicik’s law practice is primarily dedicated to two key areas of law: publiclaw and finance, and corporate law and finance. John counsels clients inregulatory, government relations, public law and municipal finance areas. Herepresents participants in municipal finance transactions as bond counsel,underwriters' counsel, issuer's counsel and credit enhancer's counsel andrepresents private-sector clients before state and local governments. Johnadvises various casino industry interests on regulatory, financing and corporatematters and counsels a variety of private-sector and government clients. Johnalso advises clients across a broad variety of corporate issues, includingfinancings, acquisitions and general counsel.

Mark Dempsey – Mayer Brown, Chicago AssociateEmail: [email protected] Phone: +1 312 701 7484

Mark is an associate in Mayer Brown’s Banking & Finance practice. He primarilyrepresents private equity funds and REITS in subscription loan and other securedand unsecured real estate and energy financings. Mark provides representationand counsel to commercial lending institutions, insurance companies, funds andborrowers in negotiating and documenting syndicated and leveraged financetransactions (ranging from investment grade, leveraged and middle market dealsto highly leveraged acquisition financings), bridge loans, bilateral loans and creditfacilities, secured and unsecured lending agreements, debt restructurings andother financing transactions. He also advises commercial banking clients engagedin international financing transactions. Mark has a BS and JD from the Universityof Illinois.

Jeremy Grubb - Vice President, Bank of America, N.A.E-mail: [email protected] Phone: +1 980 386 7261

Jeremy Grubb currently serves as a Vice President in the Securitization FinanceGroup within Bank of America Merrill Lynch. In this capacity, he is primarilyresponsible for originating subscription lines and managing asset backedsecuritization facilities across a wide variety of both consumer and commercialasset classes. Prior to joining the Securitization Finance Group in 2006, he servedas a Senior Operational Risk Officer in Bank of America’s Consumer Real Estatedivision.

Prior to joining the bank, Mr. Grubb worked for Wendover Financial ServicesCorporation, a loan service provider, in their non-performing RMBS division. Intotal, Mr. Grubb has nearly fifteen years of experience in mortgage and assetbacked finance.

Mr. Grubb received his Bachelor of Science in Business from East CarolinaUniversity.

Kristin Rylko – Mayer Brown, Chicago PartnerEmail: [email protected] Phone: +1 312 701 7613

Kristin Rylko is a partner in Mayer Brown’s Banking & Finance practice and a

member of its Private Investment Fund group. Kristin represents commercial

lending institutions, insurance companies, funds, REITs and corporate borrowers

in a variety of secured and unsecured finance transactions, including investment

grade and leveraged lending deals, fund financings and subscription facilities,

acquisition financings, syndicated and bilateral loans and credit facilities, first lien

/second lien transactions, bridge loans, debt restructurings and other domestic

and cross-border financing transactions. Kristin received her bachelor’s degree in

economics from the University of Illinois and a juris doctor from Chicago-Kent

College of Law.

Benjamin Woolf – Senior Associate, ApplebyE-mail: [email protected] Phone: +1 345 814 2006

Benjamin Woolf is a senior associate in Appleby's Corporate and StructuredFinance teams. Based in the Cayman Islands, Benjamin joined Appleby fromMayer Brown's London office and continues to specialise in subscription financefacilities, structured finance and other asset backed financings. Benjamin hasconsiderable experience representing lenders on a variety of subscription financetransactions.

Legal 500 (2010) describes Benjamin as having a 'strong legal mind withcommercial awareness'.

Barney Lee – Partner, Appleby LLPE-mail: [email protected] Phone: +44 (0)1481

Barney Lee is a group partner in the Corporate & Commercial department atAppleby. Barney advises on all areas of offshore corporate, finance, andrestructuring work with particular expertise in the establishment, listing,restructuring of investment funds and asset managers, including in respect ofpublic and private capital raising. He advises on mergers and acquisitions,including those pertaining to financial services businesses, and on variousinsolvency and restructuring matters.

Barney regularly contributes to various publications as well as presenting atconferences, seminars and to clients. He is actively involved in industry steeringand consultation groups in respect of the introduction and amendment ofGuernsey’s corporate legislation and financial services regulation.

Barney is recognized by PLC Which Lawyer? for his advice in the area ofCorporate/M&A work in Guernsey. Chambers UK 2013 praised Barney for his‘commerciality and focus on detail’ and described him as ‘being in demand.’

Tim Nosworthy - Partner, Mayer Brown International LLPE-mail: [email protected] Phone: +44 20 3130 3829

Tim Nosworthy is a partner in the London Investment Funds group. He advises ona wide range of investment fund, regulatory and asset management matters,with a particular focus on the structuring and formation of real estate, privateequity and infrastructure funds. He also advises prospective fund investors and inconnection with secondary transactions in fund interests.

Consistently ranked as a key individual by the legal directories, Tim possesses a"calm and efficient" style and clients appreciate his willingness to explore all theoptions available (Chambers UK 2013) and is "attentive, responsive andcommercial" (Chambers UK 2012). According to Chambers UK 2011, he has afantastic grasp of his clients' needs: "He understands that not every productneeds to come off the shelf and not every product needs to be bespoke; he getsthat balance between standard practice and customisation."

Thomas Rapp - Wells Fargo Bank N.A., London Branch, DirectorE-mail: [email protected] Phone:

Thomas Rapp is a Director in Wells Fargo’s Asset Backed Finance unit in Londonwhere he is responsible for originating and structuring subscription creditfacilities in Europe. Joining Wells Fargo in June 2012, the focus lies on FinancialSponsors and Asset Managers who manage private equity funds, joint venturesand separate accounts across varying strategies including buyout, real estate,energy, infrastructure, secondaries, debt strategies and transportation.

Prior to joining Wells Fargo, Thomas was part of WestLB’s London fund financeteam where he has originated and structured client and product initiatives since2008 with the primary focus on Europe. Prior to this position, Thomas was theSenior Risk Officer for Leveraged Finance and Media/Entertainment and Telecomstructured finance in WestLB’s NY branch for 4 years. He previously held variouspositions at WestLB in Germany and started his career with a 2-year Traineeshipat Deutsche Bank. Thomas received a Diplom Kaufmann degree in Economicsfrom the University of Kiel (Germany).

Gavin Rees - Director, Barclays plcE-mail: [email protected] Phone: + 44 777 555 1147

Gavin Rees has 20 years of experience in banking, encompassing a variety of rolesin corporate banking and structured finance, both in New York and London. Forthe last 7 years he has focussed on debt, derivatives and liquidity solutions forprivate equity clients in the buy-out, real estate, energy and infrastructuresectors. Gavin has received an honours degree in Philosophy, Politics &Economics from Oxford University and an MBA from Columbia Business School.

David Wasserman – Sumitomo Mitsui Banking Corporation, SeniorVice President and Team Leader ExecutiveEmail: [email protected] Phone: +1 212 224 4147

David Wasserman is Senior Vice President and Team Leader Executive, inSumitomo Mitsui Banking Corporation's Institutional Real Estate Group -Americas Division. David is currently involved in originating, structuring, arrangingand executing on a portfolio of real estate and subscription secured creditfacilities in excess of US$4 billion globally, primarily as lead arranger andbookrunner. Subscription clients include fund managers in North America, Europeand Asia across the Real Estate, Infrastructure, Energy, and traditional PrivateEquity industries. David is a Vice President and Senior Client Executive at SMBC inits Real Estate department. In his current role, David is responsible for theorigination, structuring and portfolio management of real estate and subscriptionbased loans to clients on a global basis. David, as part of the Real Estatedepartment, transacts a significant part of his business as a lead arranger onsenior credit facilities to worldwide private equity firms in North America, Europeand Asia. Prior to his role in the Real Estate department, David was responsiblefor the client management and marketing of SMBC’s debt, banking, and capitalmarket products to large corporate relationships headquartered in the Mid-Westand Northeast United States.

Before joining SMBC in 2004, David worked at Bank Of America and Fleet Bankin a variety of portfolio management roles in the leveraged/sponsor finance,middle market, and trade finance lending departments. David began his careeras an associate at PriceWaterhouseCoopers in the Pension Consultingdepartment (previously known as Kwasha Lipton) where he worked on theconversion and implementation of defined benefit and health & welfare plansof private and public companies. Dave holds a BS in Applied MathematicalEconomics from SUNY Oswego and a MBA in Finance from Rutgers University.

No Photo Lawrence Beller - Director, PNCE-mail: [email protected] Phone: +1 212 339 5734

Lawrence Beller is an originator of structured financings for PNC's FinancialServices ABF team. Lawrence joined PNC Financial Services in 2011. Prior tojoining PNC, he was employed by Bear Stearns, JP Morgan and Fifth StreetCapital. He has more than 15 years experience in the fixed income capitalmarkets. Lawrence has extensive experience originating, structuring anddocumenting CLOs and other securitization asset classes. He has additionalexperience in municipal finance and credit underwriting of loans to middlemarket companies. Lawrence graduated cum laude from Harvard University.

David Goldman - Chief Product Officer, Awbury Insurance Ltd.E-mail: [email protected] Phone: +1 203 992 1414

David Goldman is the Chief Product Officer at Awbury Insurance Ltd, responsiblefor new product development, implementation and execution. Prior to joiningAwbury David spent 11 years at Credit Suisse where he built a career designingsolutions for clients in the insurance and reinsurance markets, as well as assetmanagers with a focus on structured credit and longevity risk. David’s years ofexperience in structuring, risk analysis, and relationship management, togetherwith his intimate knowledge of the drivers of value in both the banking andinsurance sectors, allow Awbury to design products that meet the needs ofinsureds while ensuring strict alignment of interests between all parties.

David has served on the boards of multiple regulated insurance financing entities,and has extensive experience in cross-border transactions, including theestablishment of offshore debt issuance vehicles and the launch of severalinternational specialized investment funds.

David graduated cum laude with a B.S. in economics from the Wharton School atthe University of Pennsylvania.

Perry Hicks - Partner, Mayer Brown LLPE-mail: [email protected] Phone: +1 704 444 3568

Perry Hicks is a partner in the Charlotte office of Mayer Brown's Banking &Finance practice. He represents financial institutions and borrowers in securedfinancing transactions in a variety of industries, including energy distribution,hedge funds, commodities, food distribution and real estate development. Perryhas also represented lenders and debtors in connection with restructuring andrefinancing existing credit facilities.

Ram Rao - Managing Director, Macquarie Bank LimitedE-mail: [email protected] Phone: +1 212 231 0724

Based in New York, Ram is a Managing Director with Macquarie’s Fund Linked

Products Group (FLP). FLP does structured transactions that give institutional

investors a levered, principal protected, regulatory efficient or tax efficient

exposure to funds such as private equity funds, hedge funds or mutual funds.

The transactions are typically structured as credit facilities, swaps, options or

structured notes. Ram joined Macquarie in 2011. Prior to Macquarie, Ram held

senior positions with Barclays Capital, Merrill Lynch, UBS, Oliver Wyman and Booz

& Co. Ram has a bachelor’s degree from Ohio Wesleyan University and masters

degrees from University of Pennsylvania and Massachusetts Institute of

Technology.

Robert Wieser - Vice President Goldman Sachs Bank USAE-mail: [email protected] Phone: +1 212 357 2512

Robert heads GS Bank’s Private Equity Fund lending team, a team that provides a

broad range of lending products to private equity funds and their principals.

Robert joined Goldman Sachs in June 2012, from WestLB AG’s Fund Finance

Team, where he originated clients and structured product initiatives, since the

Team’s inception in 2005. Prior to joining the Funds Finance Team, Robert was

WestLB AG’s Head of Credit for Financial Institutions and Asset Backed

Securitization for the Americas.

Robert’s 25 years of banking experience, include eight years in fixed-income

origination, twelve years in credit, and five years in equity research (Lehman

Brothers). Robert’s background encompasses most components of corporate

capital structure both on- and off-balance sheet, including equity, secured and

unsecured debt, asset-backed securitization and financial derivatives, for

borrowers and counterparties, across a wide variety of industries, in developed

and emerging markets.

Robert received a MBA in International Finance from New York University’s Stern

School of Business and BA Degrees in Finance and Quantitative Economics from

the California Polytechnic State University at San Luis Obispo. He is also a

Chartered Financial Analyst.

No Photo Matt LaCapra - Managing Director, DBRS, Inc.E-mail: [email protected] Phone:+1 212 806 3259

Matt is a Senior Vice President who heads up the US and European ABCP group

for DBRS. Also in Matt’s charge are Subscription Loans and Trade Receivable

Securitizations for the US and Europe. Matt has written the DBRS methodologies

for all three of these asset classes. Matt has been with DBRS since 2005 and prior

to that, was in Standard & Poors’ ABCP group since 1998. Matt has an

Accounting Degree from St John’s University and has a CPA. Matt worked in

Accounting/Controller positions for the ten years prior to joining Structured

Finance.

Nick Mitra - Director, NatixisE-mail: [email protected] Phone: +1 212 891-6218

Nick joined Natixis in 2003 as a credit analyst covering the financial sector. Since

2004, Nick has been structuring subscription facilities as well as facilities for other

ABS asset classes. Prior to joining Natixis, Nick worked in various roles at

Goldman Sachs and Lehman Brothers. Nick is a Chartered Financial Analyst and

holds a BS in Finance from Lehigh University and an MBA in Finance from New

York University’s Stern School of Business.

No Photo Brad Boland - Director, Wells Fargo Securities, LLCE-mail: [email protected] Phone:+1 704 388 1547

Brad Boland is a Director in Wells Fargo’s Asset-Backed Finance unit where he

focuses on originating and structuring subscription credit facilities. Brad joined

Wells Fargo in 2010 in conjunction with the bank’s efforts to centralize

subscription finance originations. Over the past seven years, Brad has arranged

transactions ranging from bilateral facilities to multi-billion dollar, multi-bank

transactions for funds across most major strategies. Prior to joining Wells Fargo,

Brad spent five years working in Bank of America’s Global Structured Products

division, originating and structuring products including traditional and esoteric

securitizations as well as subscription facilities. Prior to this position, Brad worked

in Bank of America’s Sports Finance and Healthcare Portfolio Management units

for a combined five years. Brad has a BA in Economics from Davidson College.

Ana Hudson - Director, SunTrust Robinson Humphrey, Inc.E-mail: [email protected] Phone: +1 404 439 7644

Ana Hudson is Director and Originator in the Asset Finance Group at SunTrust

Robinson Humphrey. Ana is responsible for originating new transactions across

multiple asset classes in coordination with corporate and investment banking and

commercial real estate coverage groups. Ana has over 13 years of experience in

the financial services industry. During her tenure in the Asset Finance Group, Ana

has originated and structured a variety of conduit and term ABS transactions for

such asset classes as capital calls, equipment loans and leases, healthcare

receivables, trade receivables, credit card receivables, structured settlements,

student loans, auto loans and leases, timeshare loans, residential mortgages, and

market value CDOs, among others. Prior to joining the Asset Finance Group, Ana

was responsible for Value at Risk analysis for the SunTrust Capital Markets Credit

Group. Ana earned a Bachelor’s Degree from Georgia State University in 1998

and a Master’s Degree in Business Administration from Georgia State University’s

J. Mack Robinson College of Business in 2007.

Jason Bazar - Partner, Mayer Brown LLPE-mail: [email protected] Phone: +1 212 506 2323

As a partner in Mayer Brown’s New York office and Co-Chair of the firm wide TaxTransactions and Consulting practice, Jason Bazar advises corporate and bankingclients on the tax aspects of financing and business combination transactions. Hisguidance to domestic and foreign clients includes planning the tax aspects ofmergers, acquisitions, divestitures, and restructurings as well as generalcorporate and international tax matters. In addition, Jason counsels clients on thestructuring of inbound and outbound operations, including branches andsubsidiaries, as well as the tax aspects of cross-border and domestic financings,leasing transactions, securities offerings, and other capital markets transactions.

Rory Cohen - Partner, Mayer Brown LLPE-mail: [email protected] Phone: +1 212 506 2500

Rory M. Cohen is a partner in the New York office and a member of MayerBrown's Corporate & Securities practice. Rory focuses his practice on advisingprivate investment funds, including hedge funds, private equity funds and realestate funds, in matters relating to fund formation, the distribution of fundinterests, broker-dealer and investment adviser registration and compliance and

private equity transactions. He also provides counsel in response to regulatoryinquiries and other issues arising under the Investment Advisers Act, theInvestment Company Act and FINRA rules and on the structuring of seedinvestments, revenue-sharing arrangements, portfolio manager lift-outs, spin-outs, mergers and acquisitions and other transactions involving investmentmanagement entities. Rory represents clients including private fund sponsors,separate account managers, broker-dealers and institutional investors andmanagers.

Carol Hitselberger – Mayer Brown, Charlotte PartnerEmail: [email protected] Phone: +1 704 444 3522

Carol Hitselberger serves on Mayer Brown's Partnership Board and focuses herpractice on financing matters. Her experience encompasses securitization andother structured financial products, including structuring domestic and cross-border commercial paper-funded securitization vehicles and securitizing tradereceivables, credit card receivables, aircraft, leases, franchise portfolios,government contracts, trademark licenses, and various other financial assets. Shehas experience with synthetic leases and synthetic securitizations. Her work alsoincludes representation of program sponsors, underwriters, placement agents,advisors, liquidity providers, credit enhancers and issuers in private placements,public offerings, and Rule 144A/Regulation S executions. According to ChambersUSA, Carol is “an absolutely brilliant lawyer” (2011) and is “at the cutting edge onsecuritization issues” (2010).

David Sahr- Partner, Mayer Brown LLPE-mail: [email protected] Phone: +1 202 263 3332

David Sahr advises domestic and foreign financial institutions on establishing andexpanding their operations in the United States as well as on related regulatory,enforcement and compliance matters. He represents banks and their affiliatesbefore federal and state agencies, including the Federal Reserve Board, the Officeof the Comptroller of the Currency, the Federal Deposit Insurance Corporationand the Securities and Exchange Commission. He assists financial institutions inthe development and sale of new products including compliance with state andfederal banking, securities and commodities laws. David also advises andrepresents foreign banks on federal legislative developments affecting their USbanking and non-banking operations.

David has worked closely with banks and trade associations on the Dodd-FrankWall Street Reform and Consumer Protection Act (Dodd-Frank). He has advisednumerous clients on their response to the regulatory implementation of Dodd-Frank, including drafting comment letters on new capital rules, the Volcker Rule

and new derivatives regulations.

David is also advising several foreign and US banks on their implementation ofthe full gamut of the requirements of Dodd-Frank. Chambers USA 2011 notedDavid’s work “advising a number of foreign lenders and other financial servicesentities on Dodd-Frank compliance, ” and according to Chambers USA 2012, “[h]eis widely admired by peers and clients alike, who highlight him as being ‘veryresponsive and extremely well informed.’”

John Gilb - Principal - Member of the Investment Committee, CBREGlobal InvestorsE-mail: [email protected] Phone: +1 213 683 4243

John Gilb, who joined CB Richard Ellis Investors in 1984, is responsible fororiginating, underwriting, structuring and managing investments for StrategicPartners US with an emphasis on finance, development-oriented joint ventureand debt transactions. He has experience across all phases of the real estateinvestment cycle, having served in portfolio management, acquisitions, debtrestructuring, recapitalization and operations roles with the firm, and has beendirectly involved in the acquisition, closing or commitment of over $7.0 billion ofinvestments and other related transactions. John is a member of the AmericasOperating Board and the Americas Investment Committee where he serves as theRisk Chair.

Prior to joining the Strategic Partners Team, John was responsible for the firm’srelationships with multiple separate account clients, overseeing and providingstrategic direction for all investment and management activity, includingnegotiating and structuring core equity investments, participating constructionloans and joint venture development agreements.

John earned a B.A. degree in Business Administration with an emphasis inFinance from Loyola Marymount University.

Jim HutchinsonGrowth Fund Series, LaSalle Asset Management, Inc.E-mail:

President, LaSalle Income & Growth Fund Series

North American Investment Committee

Previous Responsibilities

Deloitte & Touche

Jim Hutchinson - Managing Director, President of the Income andGrowth Fund Series, LaSalle Asset Management, Inc.

mail: [email protected] Phone: +1 312 228 2396

President, LaSalle Income & Growth Fund Series

Raising Fund VI

Series begun in 1996

Closed end, limited life, institutional funds

Structured as private REITs

North American Investment Committee

Member (since 2004) of four-person committee that approvestransactions, valuations, major investment policies and procedures forLaSalle Investment Management in North America

Previous Responsibilities

Joined the acquisition group of LaSalle Advisors, a predecessor, in 1985

Completed over $1 billion of acquisitions over 13 years, many as localoperating partner for institutional and HNW investors

Deloitte & Touche – 1976 - 1985

Left as Senior Manager in the Audit group in 1985

Major audit clients – Sears, American Hospital Supply

Managing Director, President of the Income andGrowth Fund Series, LaSalle Asset Management, Inc.

Phone: +1 312 228 2396

person committee that approvestransactions, valuations, major investment policies and procedures for

Joined the acquisition group of LaSalle Advisors, a predecessor, in 1985

Completed over $1 billion of acquisitions over 13 years, many as localoperating partner for institutional and HNW investors

Sears, American Hospital Supply

Charles Purse - Managing Principal, Park Hill Real Estate GroupE-mail: [email protected] Phone: +1 212 583 5786

Charles R. Purse co-founded Park Hill Real Estate Group (“PHREG”) as itsManaging Principal in October 2005 through a joint venture with The BlackstoneGroup. The business was created to act as placement agent on behalf ofsponsors of high-quality real estate investment opportunities and strategiesworldwide, including Blackstone and third party clients. Potential transactionsinclude real estate private equity funds, entity level transactions and asset-specific joint ventures across the risk/return spectrum on a global basis. ThePHREG has offices in New York City, Chicago, London, San Francisco, Dubai andSingapore. PHREG operates in conjunction with the Park Hill Group, a placementagent for private equity, LBOs, and other non-real estate investments. Bothbusinesses are now wholly-owned affiliates of The Blackstone Group.

Prior to forming PHREG, Charles Purse was a Managing Director of the RealEstate Private Fund Group ("REPFG") at Credit Suisse First Boston. This team wascreated during the second quarter of 2000 to act as placement agent on behalfof sponsors of high-quality private real estate investment opportunitiesworldwide. REPFG was an extension of the activities of CSFB's Private FundGroup and Real Estate Finance Group. Charles R. Purse had primaryresponsibility for covering institutional investors located in the eastern UnitedStates.

Prior to joining REPFG, Charles Purse was a Managing Director - Marketing andPortfolio Management and minority owner of DRA Advisors, Inc., a $3.5 billionreal estate investment advisory firm located in New York City. In this role, hehad responsibility for the formation of DRA Growth and Income Fund I, a $175million commingled fund focused on a real estate value enhancement strategy.The successful completion of the investment program for Fund I led to theformation of DRA Growth and Income Funds II ($130 million) and III ($250million), both created to continue the strategy of Fund I. In addition, CharlesPurse was actively involved in the portfolio management of DRA's fund business.

Prior to joining DRA, Charles R. Purse was a Senior Vice President - Marketingfor The Yarmouth Group, a major real estate investment management firmbased in New York and a subsidiary of Lend Lease Group (Australia). Charles R.Purse also spent nine years in a variety of real estate roles with Citibank'sChicago, Sydney, and New York offices. He started his career as a real estatelender with The Northern Trust Company in Chicago.

Charles Purse is a graduate of Dartmouth College and Northwestern University'sKellogg School of Management.

Mike Robin, MD - Global Head/Financial Sponsors Lending,
No Photo Citibank Private BankE-mail: [email protected] Phone:+1 212 559 4164
Oversees credit products tailored to the needs of Private Equity Funds, related

management companies, and their sponsor groups. His coverage sector also

lends to management companies of hedge funds. Michael was previously a

senior lender in the Private Bank’s Structured Lending Division, providing tailored

financing solutions for high net worth clients and their businesses/assets,

including real estate, aircraft, securities and unsecured with a special focus on

private equity firms and their sponsors.

Prior to joining Citigroup in 1995, Michael held various positions at Natwest Bank,

Fleet Bank and Barclays Bank in middle market lending.

Michael holds an M.B.A. in finance and public accounting from the Simon School

at the University of Rochester.

Dee Dee Sklar - Managing Director, Wells Fargo Securities, LLCE-mail: [email protected] Phone: +1 212 214 3732

Dee Dee Sklar manages Subscription Finance, which is part of Corporate DebtFinance within Asset Backed Finance at Wells Fargo Securities LLC. Joining WellsFargo in June 2012, the global team provides fund level financings to FinancialSponsors and Asset Managers who manage private equity funds, joint venturesand separate accounts (plus selective open ended funds) focused on varyingstrategies including buyout, corporate mezzanine, energy, infrastructure, realestate, secondaries, commodities and transportation. Coverage includessponsors located in the US, Europe, Latin America and Asia. During the past nineyears she has led teams that have provided subscription / capital call financingsto 250+ Private Equity funds totaling equivalent USD 100+ bio of financings.

Prior to joining Wells Fargo Dee Dee led the strategic planning and businessmanagement of origination, client, product and strategic initiatives for the GlobalFunds business at WestLB AG (Financial Sponsors, Investment Advisors and thefunds they manage) and managed strategic counterparty relationships with FIs inthe Americas. She previously held positions in Securitization at both WestLB AGand Rothschild Inc. as well an asset manager (now merged) investing debt andequity on behalf of correspondent US insurance company relationships.

Dee Dee received a BS Degree in Economics from the University of Tennessee.She is a member of the Financial Women’s Association in New York’s ResourceCommittee. She holds Series 7, 63, 24 and 79 certifications and is licensed by theFSA. Dee Dee speaks regularly at industry conferences and contributes toindustry publications.

Joshua R. Weiner - Managing Director, First Reserve CorporationE-mail: [email protected] Phone: +1 203 625 2582

Joshua R. Weiner, Managing Director, joined First Reserve in 2006. Joshua helpsdirect First Reserve's capital markets activities both in existing portfoliocompanies and with regard to new acquisitions. Prior to joining First Reserve, hewas an associate in the Capital Markets group at Warburg Pincus LLC. Prior tothat, he was an associate with Morgan Stanley in the Global Capital Markets andGlobal Leveraged Finance groups. Mr. Weiner holds a B.A. degree Magna CumLaude in History and German from Bowdoin College.

This article first appeared in a slightly different form in Law360 on December 6, 2012.

Legal Update

November 27, 2012

Sovereign Immunity Analysis in Subscription Credit Facilities

Subscription credit facilities (a Facility) have become a popular form of financing for private equity and real estate funds (Funds). The Facility’s lenders (the Lenders) are granted a security interest in the uncalled capital commitments of the Fund’s limited partners (the Investors) and the Lenders rely on the Investors’ obligations to fund capital contributions as the primary source of repayment. Governmental pension plans, state endowment funds, sovereign wealth funds and other instrumentalities of foreign and domestic governments are frequent Investors that may possess certain sovereign immunity rights against enforcement proceedings rooted in the common law concept that “the King can do no wrong.”1

Sovereign immunity in its purist form could shield a governmental entity from all liability—e.g., enforcement by a Lender seeking to collect uncalled capital commitments contractually owed by the Investor to the Fund. Thus, as Lenders evaluate the creditworthiness of governmental Investors for inclusion in a Facility’s borrowing base, they naturally inquire into how sovereign immunity may impact the enforceability of such Investors’ capital commitments.

Governmental Investors must be evaluated on a case-by-case basis to ascertain if any sovereign rights apply and, if so, whether such Investor has effectively waived its immunity. Given the financial troubles facing many governmental Investors as a result of the ongoing economic crisis and sovereign debt concerns, Lenders are

increasing their scrutiny of the credit wherewithal of such Investors and their potential ability to raise sovereign immunity as a defense in subsequent litigation. This Legal Update seeks to set forth the basic legal framework of sovereign immunity in the United States relevant to a Facility.

Basis of Immunity

At its most basic level, the doctrine of sovereign immunity states that the government cannot be sued in its own courts unless it has otherwise consented to waive its sovereign immunity. As it relates to governmental Investors organized under the laws of the United States or a political subdivision thereof (a US governmental Investor), the doctrine of sovereign immunity comes in two flavors: (i) sovereign immunity of the federal government2 and (ii) sovereign immunity of state governments and their instrumentalities pursuant to the Eleventh Amendment of the US Constitution, and in some states, through the state’s Constitution.

Sovereign immunity of the US federal government is a concept that has existed in US jurisprudence since the country’s founding.3 Through the Tucker Act,4 however, it is well settled that the US federal government has waived sovereign immunity with respect to any express or implied contract. With respect to state governments, the Eleventh Amendment, along with US Supreme Court jurisprudence on the issue, provides that states generally are immune from being sued in federal or state court without

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2 Mayer Brown | Sovereign Immunity Analysis in Subscription Credit Facilities

their consent.5 Recognizing the inequities of such a rule in the commercial context however, many state constitutions, legislatures and high courts have eroded the sovereign immunity of state governments to permit actions based on contractual claims.

The doctrine of sovereign immunity also protects certain foreign governments and international organizations of a quasi-governmental nature, such as the United Nations, against claims in US courts. The Foreign Sovereign Immunities Act of 1976 (the FSIA) generally shields such Investors, but provides an exclusive basis and means to bring a lawsuit against a foreign sovereign in the US for certain commercial claims.6

Waivers of Immunity—US Investors

There are three ways that sovereign immunity is generally waived by US governmental Investors: (i) an Investor expressly and unequivocally waiving such immunity in a writing that can be relied upon by the Lender (i.e., an “Investor Letter” delivered to the Lenders in connection with the Facility or a side letter provision running to the benefit of the Lenders), (ii) a statute enacted by the applicable governing legislature that explicitly waives immunity for contract claims in commercial transactions, such as the Tucker Act7 in the case of the US federal government, or (iii) controlling case law, typically from a federal or the applicable state’s highest court, that precludes governmental Investors from effectively raising sovereign immunity as a defense to contractual claims.

WRITTEN WAIVERS FROM INVESTORS

The best case scenario for the Lenders is an explicit waiver from the Investor or an express statement that sovereign immunity does not apply. Often in an Investor Letter, the subject Investor: (i) acknowledges and agrees that, to the extent it is entitled to sovereign immunity now or at any time in the future, it irrevocably waives such immunity to the fullest extent permitted by law and/or (ii) represents that it is not subject to,

or cannot claim, immunity from suit in respect of contractual claims to enforce its obligations under the applicable partnership agreement and subscription agreement.

A second variety of waiver is an implicit waiver. With an implicit waiver, the Lenders are provided with an affirmative representation that the Investor is subject to commercial law and that its performance under the partnership agreement, the subscription agreement and the Investor Letter (if applicable), constitutes private and commercial acts, not governmental acts. While this form of waiver is not as strong as the explicit waiver, it puts the Investor at a severe disadvantage when distinguishing itself from a private actor in the marketplace and when attempting to argue that it should be entitled to immunity as a governmental actor (note: the comfort afforded by this waiver to a Lender certainly pivots on whether applicable law has abrogated immunity for commercial transactions).

In transactions where Lenders receive Investor Letters and Investor opinions as a condition to including a particular Investor in the borrowing base, it is best practice that the Investor’s counsel opine, among other things, that the Investor has effectively waived immunity or that such Investor does not enjoy sovereign immunity in connection with its obligation to fund capital contributions to the Fund.

A third variation of waiver language common in the Facility market involves neither an explicit nor an implicit waiver, but rather a statement by the governmental Investor that despite the Investor’s sovereign immunity and its express reservation thereof, such immunity does not in any way limit the Investor’s obligations to make capital contributions under the partnership agreement. While this seemingly contradictory language is not really a waiver at all, it provides some comfort to the Lenders that the Investor has agreed to fund its capital contributions. The Facility market seems to accept this language cautiously, and then only after a careful review of


the underlying law to determine whether the applicable Investor could potentially raise a successful immunity defense in the context of a Facility.

STATUTORY WAIVERS

While it is ideal for Lenders to receive a written waiver as discussed above, Investors often are unwilling to provide such a waiver, or the Facility does not permit Lenders to request and rely on Investor Letters. US governmental Investors will frequently reserve their Eleventh Amendment rights in a side letter; hence, it is very important to carefully review and vet governmental immunity provisions in side letters against applicable law. Many states, however, have waived sovereign immunity for commercial contract claims by constitution, statute or case law.

Several states, including California and New York, have passed statutes explicitly waiving sovereign immunity with respect to contractual claims.8 In these states, a plaintiff may proceed against the state government just as if it were proceeding against a private citizen. If obtainable, Lenders should seek an explicit statement from the Investor acknowledging that the Facility qualifies under the applicable sovereign immunity waiver statute of that state. An example of such language would be: “Each of the Partnership Agreement, the Subscription Agreement and the Investor Letter constitute a contract within the meaning of [insert applicable state statute (e.g., Cal. Gov. Code Section 814, New York Court of Claims Act §8 (L. 1939, c 860), Section 12-201, State Gov. Article, Ann. Code of Maryland and ORS Section 30.320)].”

These state statutes often contain a specific set of requirements and procedures that must be complied with in order to bring suit and obtain a judgment. For example, statutes that waive sovereign immunity for contractual claims often require that a claimant show that the contract was validly authorized and entered into by the governmental Investor.9 Additionally, it is not

uncommon for such statutes to require that a claimant bring the claim within a certain period of time and in a particular venue, often a certain county or an administrative law court within the applicable state.10

Given the variations among statutes with respect to waivers of sovereign immunity, it is prudent for Funds, Lenders and their respective counsel to examine each individual state’s statute on a case-by-case basis.

COMMON LAW WAIVERS

Some state high courts have rendered decisions eliminating sovereign immunity with respect to contractual claims. For example, the South Carolina Supreme Court held that when the state enters into a contract, the state implicitly consents to be sued and waives its sovereign immunity to the extent of its contractual obligations.11 Similarly, in 2006, the Missouri Supreme Court held that sovereign immunity does not apply to breach of contract claims against state agencies.12 State courts are continuing to follow such decisions. In 2010, the Virginia Supreme Court reaffirmed its prior ruling that sovereign immunity is not a defense to a valid contract entered into by a duly authorized agent of the state.13 State courts, like state legislatures, have taken varying approaches with respect to the procedures and timelines that must be followed for a claimant to bring an action based on a contractual claim.14

We note, however, that a minority of states have bucked the trend to waive immunity for contract and thus leave Lenders at risk of enforcement uncertainty if the state defaults. While not entirely clear, the general rule in Texas may still be that state government entities cannot be sued for a breach of contract, even with evidence of a waiver to the contrary.15 At least one appellate court in Texas has attempted to reverse course, holding that there is a waiver-by-conduct exception to sovereign immunity in breach of contract cases against state entities.16 However, the Texas Supreme Court denied review of this


holding, leaving the viability of such an exception unsettled.

Waivers of Immunity—Non-US Investors

Foreign governments and their instrumentalities are also frequent Investors, often with sizable capital commitments. Lenders should carefully review such Investor’s credit, as well as the procedural requirements for enforcement of their capital commitments, including with respect to immunities.

The general premise of the FSIA is that a foreign government has immunity and cannot be sued in the United States. There are, however, three exceptions to this rule. First, waivers where the Investor has expressly waived immunity by contract, including any such waivers that arise from language in applicable international agreements.17 Second, implied waivers where the Investor (i) agrees in a choice of law provision to be “governed by” US law,18 (ii) agrees to arbitration with the expectation of enforcement of an award in the United States,19 (iii) affirmatively files a suit or responds to a pleading without raising an immunity defense20 or (iv) has signed an international convention permitting the enforcement of an award in the United States.21 Third, the “commercial activity” exception.22

Under the commercial activity exception, a claimant may sue a foreign government in a US court when the claim is based on (i) a commercial activity carried on in the United States by the foreign government, (ii) an act by a foreign government that is performed in the United States in connection with a commercial activity outside the United States or (iii) an act by a foreign government that is performed outside the United States in connection with commercial activity that occurs outside the United States, if such action “causes a direct effect” in the United States.23

Absent an express written waiver, a valid submission to jurisdiction in the United States or

an agreement to binding arbitration,24 non-US governmental Investors in the context of a Facility should fall into the commercial activity exception. In Republic of Argentina v. Weltover Inc.,25 bond holders sued the Government of Argentina for breach of contract. The US Supreme Court articulated the applicable legal standard: “[w]hen a foreign government acts, not as a regulator of a market, but in the manner of a private player within it, the foreign sovereign’s actions are ‘commercial’ within the meaning of the FSIA.”

Argentina argued that that the commercial activity exception did not apply because (i) the issuance of sovereign debt should not constitute commercial activity and (ii) the alleged breach did not have a “direct effect” on the United States. The Court disagreed on both counts. First, the Court concluded that the issuance of the bonds was of sufficient commercial character. Second, the Court rejected the argument that the FSIA required the direct effect to be “substantial” or “foreseeable,” instead concluding that it need only follow “as an immediate consequence” of the sovereign’s activity. Despite the fact that none of the bondholders were situated in New York, the Court held that the effect was direct because New York was the designated place for payment.26 This is certainly helpful precedent for Facility Lenders. For a more in-depth review of the “commercial activity” exception, please see Mayer Brown’s White Paper, “Sovereign Immunity and Enforcement of Arbitral Awards: Navigating International Boundaries,” available at http://www.mayerbrown.com/publications/detail.aspx?publication=5048.

Satisfaction of a Judgment Against a Sovereign Entity

While a governmental Investor may have waived sovereign immunity by one of the means identified above, enforcing a judgment against a governmental Investor merits additional discussion.

http://www.mayerbrown.com/publications/detail.aspx?publication=5048


First, side letter provisions may prescribe a particular jurisdiction (other than New York or Delaware) or a means of alternative dispute resolution (e.g., binding arbitration by the International Chamber of Commerce or similar body), and such provisions will affect how a Lender should pursue the Investor.

Further, once a judgment is obtained from the proper tribunal, satisfying a judgment against a governmental Investor may differ from satisfying a judgment against a private person. Due to public policy concerns, some government entities that do not enjoy immunity from suit may nonetheless argue they are effectively exempt from monetary judgments.27 In these cases, a Lender can initiate enforcement proceedings but may not be able to collect on a judgment. In other cases, payment of the judgment may require that a specific appropriation be made by the appropriate legislative body of the governmental Investor, or statutory limits may exist on the amount of the judgment that may be satisfied.

For example, in Kentucky, while the state has waived its sovereign immunity with respect to contract claims, damages are capped at twice the amount of the original contract.28 Certain states, including West Virginia, Louisiana and Connecticut, require the special approval of the legislature or some other administrative body before paying a claim.29 Obviously, a Lender needs to be familiar with these particularities.

Seeking satisfaction of a judgment against a foreign governmental Investor that has defaulted on its capital commitment poses an additional set of issues, including whether or not such Investor has any commercial assets in the United States upon which a Lender can levy in the event the governmental Investor does not voluntarily settle a judgment awarded. In the event that the foreign governmental Investor does not have any commercial assets within the United States, a Lender may need to go abroad to seek enforcement of a judgment. Enforcing a US judgment abroad requires an analysis of whether

or not the applicable foreign court will respect the judgment of the US court and if not, how such foreign court will rule if contractual liability needs to be re-litigated.

PRACTICAL CONSIDERATIONS

The good news is that Facilities have been around for many years and anecdotal evidence from active Lenders in the market during the financial crisis indicates that there have been no material governmental Investor defaults, despite significant budget issues faced by many governmental Investors. Additionally, there are practical reasons mitigating the likelihood that a state pension fund or other governmental Investor would renege on its commitment to fund capital contributions. These include the often severe default penalties found in partnership agreements, the bad publicity such Investor would likely receive and the damage the default might cause to the Investor’s credit rating and reputation in the market. Thus, while the potential for such an Investor to claim immunity when a Lender exercises default remedies is nonetheless real and must be considered in connection with formulating each Facility’s borrowing base, the practical likelihood of this happening with frequency in practice may be remote.

Conclusion

There are numerous avenues by which governmental Investors have waived sovereign immunity with respect to commercial contracts. While there are complex legal issues surrounding the interplay between the doctrine of sovereign immunity and the capital commitments of governmental Investors, Funds, Lenders and their respective counsel have vetted many of these issues in connection with prior investments and often have the analysis readily available. Accordingly, after careful review, Lenders are typically getting the comfort they need to include the majority of such Investors in the borrowing base. As no two jurisdictions are the same and

the law continues to evolve, it is important for both Funds and Lenders to evaluate governmental Investors individually and stay current on sovereign immunity analysis.

For more information about the topics raised in this Legal Update, please contact your regular Mayer Brown lawyer, or any of the following lawyers.

Zachary K. Barnett +1 312 701 8841 [email protected]

Michael C. Mascia +1 212 506 2655 [email protected]

Mark C. Dempsey +1 312 701 7484 [email protected]

Wesley A. Misson +1 704 444 3673 [email protected]

Rajeev Khurana +1 312 701 8262 [email protected]

Endnotes 1 See 5 Kenneth Culp Davis, Administrative Law Treatise 6-7

(2d. ed. 1984) (quoting William Blackstone’s Commentaries

Book III, Chapter 17 (1765-1769)).

2 Gray v. Bell, 712 F.2d 490, 507 (D.C. Cir. 1983).

3 See Cohens v. Virginia, 19 U.S. 264 (1821).

4 28 U.S.C. §1491.

5 See Hans v. Louisiana, 134 U.S. 1 (1890), Blatchford v.

Native Village of Noatak, 501 U.S. 775 (1991) and Alden v.

Maine, 527 U.S. 706 (1999) (establishing that the

immunity extends to state court).

6 28 U.S.C. §§ 1330, 1332, 1391(f), 1441(d), and 1602-1611.

7 28 U.S.C. §1491.

8 NY Ct of Claims Act §8 (L. 1939, c 860); Cal. Gov. Code

§814.

9 See Or. Rev. Stat. §30.320, which requires a government

agency to be “acting within the scope of its authority”.

10 For example, New York has vested exclusive jurisdiction

in the New York Court of Claims for actions brought

against the state of New York (See NY Ct. of Claims Act

§8 (L. 1939, c 860)), Michigan, Pennsylvania, West

Virginia, Ohio and Connecticut are among other states

that have established judicial bodies to hear claims

against the state (See Mich. Comp. Laws. Ann.. 600.605;

62 Pa. Consol. Stat. §§1721-1726; W. Va. Code §14-2-1;

Ohio Rev. Code §2744.01 et seq.; and Ct. Gen. Stat.

§4.142). In order to bring an action against the state of

New Mexico under its statutory waiver of contractual

immunity (N.M. Stat. Ann. §37-1-23), a plaintiff must (i)

bring the claim within two years from the time of accrual,

(ii) show that the contract is legally enforceable by

pleading the basic elements of contract claims—offer,

acceptance, consideration and mutual assent (See

Hartbarger v. Frank Paxton Co., 115 N.M. 665, 669

(1993))—and (ii) show that the governmental entity was

not acting outside of its designated authority or power

(See Spray v. City of Albuquerque, 94 N.M. 199, 201

(N.M. 1980)).

11 Hodges v. Rainey, 533 S.E. 2d 578, 585 (S.C. 2000).

12 Kunzie v. Olivette, 184 S.W. 3d 570 (Mo. 2006).

13 Commonwealth v. AMEC Civil, LLC, 699 S.E. 2d 499, 516

(Va. 2010).

14 Supra note 11.

15 See Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006),

which held that a public entity does not waive immunity

despite a statutory provision permitting such entity to

“sue and be sued.”

16 TSU v. State Street Bank and Trust Company, 212 S.W.3d

893 (Tex. App. 1st Dist. Jan. 11, 2007).

17 Harris Corp. v. Nat’l Iranian Radio & Television, 691

F.2d 1344 (11th Cir. 1982).

18 Marlowe v. Argentine Naval Commission, 1985 WL 8258

(D.D.C. 1985).

19 Creighton v. Qatar, 181 F.3d 118 (D.C. Cir. 1999).

20 See, e.g., Drexel Burnham Lambert v. Committee of

Receivers, 12 F.3d 317 (2d Cir. 1993).

21 Seetransport Wiking Trader v. Navimpex Centrala

Navala, 989 F.2d 572 (2d Cir. 1993).

22 28 U.S.C. §1605(a)(2).

23 Id.

24 In order to limit its exposure to the US courts, it has been

our experience that a number of foreign sovereigns will

submit to binding arbitration with the Fund or a Lender.

25 504 U.S. 607 (1992).

26 Id. at 619.

27 See Section 31452 of the California County Employees

Retirement Law (Cal. Gov. Code §31450 et seq.), which

suggests that the assets of a California county retirement

system are generally exempt from levy, execution,

assignment, and any other collection process.

Notwithstanding the express language of Section 31452

and a lack of certainty related thereto, we think there are

good arguments that Section 31452 was intended to

protect the pension benefits of the underlying

beneficiaries from garnishment and not to shield a

California county pension fund from liability for breach of

contract.

28 Ky. Rev. Stat. Ann. 45A.245 et seq.

29 See W. Va. Code § 14-2-3 (An award by the Court of

Claims is a recommendation by the court to the

legislature, and is not binding); La. Const Art. XII, §10

(provides for the appropriation of funds by the

legislature); and Ct. Gen. Stat. §4.158-160 (for claims in

excess of $7,500, the Claims Commissioner may either

(i) grant the claimant permission to sue the state agency,

in which case the state has waived sovereign immunity or

(ii) recommend payment of the claim to the General

Assembly, in which case the Assembly may accept, modify

or reject the recommendation. Upon rejection, the

Assembly may authorize the claimant to sue, or it may

reject the claim altogether.).

Mayer Brown is a global legal services organization advising many of the

world’s largest companies, including a significant portion of the Fortune

100, FTSE 100, DAX and Hang Seng Index companies and more than half

of the world’s largest banks. Our legal services include banking and

finance; corporate and securities; litigation and dispute resolution;

antitrust and competition; US Supreme Court and appellate matters;

employment and benefits; environmental; financial services regulatory &

enforcement; government and global trade; intellectual property; real

estate; tax; restructuring, bankruptcy and insolvency; and

wealth management.

Please visit our web site for comprehensive contact information for all

Mayer Brown offices. www.mayerbrown.com

IRS CIRCULAR 230 NOTICE. Any advice expressed herein as to tax matters was neither written

nor intended by Mayer Brown LLP to be used and cannot be used by any taxpayer for the

purpose of avoiding tax penalties that may be imposed under US tax law. If any person uses or

refers to any such tax advice in promoting, marketing or recommending a partnership or

other entity, investment plan or arrangement to any taxpayer, then (i) the advice was written

to support the promotion or marketing (by a person other than Mayer Brown LLP) of that

transaction or matter, and (ii) such taxpayer should seek advice based on the taxpayer’s

particular circumstances from an independent tax advisor.

Mayer Brown is a global legal services provider comprising legal practices that are separate

entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP

and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in

Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in

England and Wales (authorized and regulated by the Solicitors Regulation Authority and

registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in

France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and

Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated.

“Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown Practices

in their respective jurisdictions.

This Mayer Brown publication provides information and comments on legal issues and

developments of interest to our clients and friends. The foregoing is not a comprehensive

treatment of the subject matter covered and is not intended to provide legal advice. Readers

should seek specific legal advice before taking any action with respect to the matters

discussed herein.

© 2012. The Mayer Brown Practices. All rights reserved.

Legal Update

November 2012

Addressing UBTI Concerns in Capital Call Subscription Credit Facilities

A subscription credit facility (a Facility), also frequently referred to as a capital call facility, is a loan by a bank or other credit institution (the Creditor) to a real estate or private equity fund (the Fund). A Facility is defined by its collateral package: the obligations are secured by the unfunded capital commitments (the Unfunded Commitments) of the limited partners of the Fund (the Investors) and the Creditor’s primary and intended source of repayment is the funding of capital contributions (Capital Contributions) by such Investors.

When a Fund incurs debt under a Facility, certain of its tax-exempt Investors, such as pension plans, private foundations, universities and charitable endowments (Tax-Exempt Investors) can be subject to unrelated business income tax (UBIT) on their unrelated business taxable income (UBTI) under the US Internal Revenue Code (the Code). Preferring to avoid paying UBIT, such Investors often require a Fund to covenant in its partnership agreement that the Fund will not incur, or will limit or minimize, UBTI.

This Legal Update provides a basic understanding of UBTI and sets forth structural and practical solutions to enable a Fund to enter and benefit from a Facility.

Understanding UBTI

A Tax-Exempt Investor is generally exempt from US federal income tax. However, to prevent Tax-Exempt Investors from unfairly competing with

their taxable counterparts, they are subject to taxation on their UBTI under Section 511 of the Code. UBTI is defined, generally, under the Code as any income earned or derived by a Tax-Exempt Investor from a trade or business that is unrelated to the Tax-Exempt Investor’s exempt purpose.1 While the Code provides that most forms of passive income, such as interest, dividends and capital gains, will not be treated as UBTI,2 UBTI does include income that is derived from assets that are subject to “acquisition indebtedness.”3

Acquisition indebtedness is generally the unpaid amount of any indebtedness incurred directly or indirectly to acquire or improve an asset, including (i) indebtedness incurred in acquiring or improving the asset, (ii) indebtedness incurred before the acquisition or improvement of the asset if such indebtedness would not have been incurred but for the acquisition or improvement of the asset and (iii) indebtedness incurred after the acquisition or improvement of the asset if such indebtedness would not have been incurred but for such acquisition or improvement and such indebtedness was reasonably foreseeable at the time of the acquisition or improvement.4

UBTI generated by a Fund that is classified as a partnership for US federal income tax purposes “flows through” to its Tax-Exempt Investors and retains its character as UBTI in the hands of the Tax-Exempt Investors.5 Consequently, if such a Fund incurs debt in connection with its acquisition of an investment (an Investment),

2 Mayer Brown | Addressing UBTI Concerns in Capital Call Subscription Credit Facilities

a pro rata share of the Fund’s income from the Investment allocable to certain Tax-Exempt Investors may result in UBTI for such Investors.

Practical and Structural Solutions

There are a variety of solutions that a Fund may deploy to enable the use of a Facility without generating UBTI. The best solution to manage this issue, however, will ultimately depend on a number of specific factors, including but not limited to: (i) the Fund’s organizational structure; (ii) the Fund’s investment strategy; (iii) the overall composition of the Fund’s Investors; and (iv) the actual sensitivity to UBTI of the Fund’s Tax-Exempt Investors. Below are potential alternatives that enable a fund to borrow under a Facility without attributing the debt specifically to the Tax-Exempt Investors for purposes of the UBTI rules. It should be noted, however, that these alternatives may each raise other tax issues for Investors and only after consideration of all factors, including those described above, can an optimal approach be identified.

TIMING OF THE BORROWING

In practice, UBTI can be avoided based on the tenor of the individual loans under a Facility. For example, if acquisition indebtedness is paid off more than 12 months prior to the date that the debt-financed Investment is sold, UBTI on the gain should be avoided.6 Thus, for Funds making Investments with lengthy time horizons, indebtedness under a Facility giving risk to UBTI may be only a theoretical concern, not a practical one. This is especially true for funds that only use a Facility during their investment period. However, as the timing of harvest events is inherently unpredictable, Funds may have discomfort relying on this exemption in isolation.

BLOCKER CORPORATIONS

If a Fund acquires an Investment in or through an entity classified as a corporation for US federal income tax purposes (as opposed to an

entity classified as a partnership for US federal income tax purposes) and such entity or a subsidiary is the borrower under the Facility, the Investment generally does not generate UBTI because, under the Code, the debt of a corporation is not deemed to be the debt of the shareholders. Thus, a Fund can block UBTI by employing a structure that permits its Investments to be made through a blocker corporation. Several structural variations as to how that can be accomplished are set forth below along with the corresponding adjustments to the Facility structure.

Tax-Exempt Blocker. A Fund can be structured so that the Tax-Exempt Investors hold their interests in the Fund through a blocker corporation. For example, if the Fund is a Cayman Islands limited partnership, the Tax-Exempt Investors invest in the Fund through a Cayman Islands feeder that elects to be classified as a corporation for US federal income tax purposes. This allows the Fund to borrow under a Facility without generating UBTI for the Tax-Exempt Investors.

Fund Blocker. The Fund entity itself could form a blocker corporation subsidiary to borrow the funds under the Facility and thereby block all Investors from a pro rata share of the Facility debt. For example, a Cayman Islands limited partnership Fund (the Fund Parent) could form a wholly owned Cayman Islands entity that elects to be classified as a corporation for US federal income tax purposes (the Blocker Sub) through which it borrows monies under a Facility and


makes its Investments. The Blocker Sub will effectively block UBTI for the Tax-Exempt Investors. Under this approach, however, all Investors and Fund Parent are effectively blocked and other tax considerations may be impacted.

When a Fund employs a Blocker Sub structure, the Facility security structure must be adjusted to accommodate the Fund structure. Often, the Fund Parent simply guarantees the Blocker Sub’s obligations under the Facility, and secures such guaranty with the pledge of its Uncalled Commitments in favor of the Creditor. However, in certain circumstances such a guaranty may be deemed too analagous to debt of the Fund Parent, and further Facility structural changes will be required.

One such structural change is commonly referred to as “Cascading Pledge Structure” in the Facility market. To accomplish this, the Fund Parent secures its capital commitment to the Blocker Sub with a pledge of its Unfunded Commitments. In turn, the Blocker Sub on-pledges such Unfunded Commitments to the Creditor to secure the obligations under the Facility.

Parallel Blockers. In a situation where a Fund is structured as a series of parallel funds, each parallel fund forms an appropriate borrower-entity that acts as a co-borrower. For example, the Tax-Exempt Investors would invest through a parallel fund that would form a blocker corporation as its borrower, while the Non-Tax-Exempt Investors would invest through a parallel fund that might form a tax pass-through entity as its borrowing vehicle. This way, the Tax-Exempt Investors’ UBTI concerns are accommodated while the non-Tax-Exempt Investors can continue to invest through pass-thru entities. Various cross-collateral arrangements between the co-borrowers would then be put in place in the Facility for the benefit of the Creditor to ensure that the Unfunded Commitments of all Investors provide cross-collateralization.

POTENTIAL ADDITIONAL SOLUTIONS

There are additional potential structural solutions to avoid generating UBTI, particularly for Funds that invest in real estate. For example, the Code has an explicit exemption for debt-financed real estate—specifically for certain Tax-Exempt Investors such as pension plans and educational institutions—recognizing the common practice of financing real estate Investments.7 Complying with this exemption requires care and is beyond the scope of this Legal Update (especially with regard to the “Fractions Rule” component), but it is another available option for real estate Funds.


Additionally, dividends and capital gains from REITs are generally not subject to UBIT even if the REIT borrows under a Facility to finance an Investment, so use of REITs in a real estate Fund’s structure is another effective UBTI blocking technique.8

Market Trends and Conclusion

Interestingly, in recent years, we have seen a trend where Tax-Exempt Investors are increasingly open to bearing UBIT in certain circumstances, especially in Funds with very high expected returns. In fact, many Tax-Exempt Investors now seem satisfied if the Fund will simply covenant to give them the option to elect to fund any particular Investment through a blocker entity (as opposed to requiring the Fund to take commercially reasonable steps to avoid generating UBTI). Regardless, there are solutions available to a Fund to eliminate or reduce UBTI for Tax-Exempt Investors but still enjoy the benefits of a Facility. However, the appropriate solutions depend on the specific characteristics of the particular Fund and its Investors.

IRS Circular 230 Notice. Any advice expressed in this Legal Update as to tax matters was neither written nor intended by Mayer Brown LLP to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed under U.S. tax law. If any person uses or refers to any such tax advice in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, then (i) the advice was written to support the promotion or marketing of that transaction or matter by a person other than Mayer Brown LLP, and (ii) such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

For more information about this Legal Update or Subscription Credit Facilities generally, please contact:

Mike Mascia +1 212 506 2655 [email protected]

For more information about this Legal Update or Fund tax-structuring generally, please contact:

Jason Bazar +1 212 506 2323 [email protected]

Jeffery M. Bruns +1 312 706 8793 [email protected]

James E. Clegg +1 212 506 2529 [email protected]

Endnotes

1 Code Section 512(a)(1).

2 Code Section 512(b).

3 Code Section 512 (b)(4); Code Section 514.

4 Code Section 514(c)(1).

5 Code Section 512(c); Code Section 513(b).

6 Code Section 514(c)(7). However, in the case of income

other than disposition gain, UBTI will be determined based

on the average acquisition indebtedness during the tax year

in which such income is generated.

7 Code Section 514(c)(9).

8 However, REIT dividends may be treated as UBTI for

certain pension plans if the REIT is, directly or indirectly,

predominantly owned by pension plans. Code Section

856(h)(3)(C).

Legal Update

July 12, 2012

DBRS Publishes Updated Methodology for Capital Call Subscription Credit Facilities

On July 10, 2012, DBRS Ratings Limited and DBRS, Inc. (collectively, “DBRS”) released their updated methodology for Capital Call Subscription Credit Facilities (each, a “Facility”), titled “Methodology: Global Subscription Loan” (Capital Call), July 2012 (the “Updated Methodology”).1 The Updated Methodology replaces its earlier iteration, which was released in November 2009 (the “2009 Methodology”). The Updated Methodology carries forward the 2009 Methodology’s blending of rule-based and principle-based criteria, but includes several noteworthy changes and clarifications which are highlighted in this Legal Update.

Material Changes to the 2009 Methodology

Criteria for Investor Inclusion in the “Allowable Borrowing Base”

Like its predecessor, the Updated Methodology includes a DBRS review of each limited partner (each an “Investor,” and collectively, the “Investors”) in the applicable fund (the “Fund”) for inclusion in an “Allowable Borrowing Base.” However, the Updated Methodology enumerates specific legal criteria an Investor must satisfy in order for its uncalled capital commitment to be included in the Allowable Borrowing Base. The criteria include, among other things:

A first priority perfected security interest in the Investor’s uncalled capital commitment;

Consent to the Fund’s incurrence of the debt, the granting of the security interest and the assignment of the Fund’s right to call capital and to receive capital contributions;

Agreement to fund all capital contributions used to repay the Facility without setoff, counterclaim or defense, and an agreement to fund all capital contributions to a designated account, which is pledged to the agent under the Facility;

Waiver of sovereign immunity, if applicable; and

Agreement to deliver confirmation of its uncalled capital commitment.

Investors that do not meet the required legal criteria are excluded from the Allowable Borrowing Base and their uncalled capital commitments are not considered for modeling purposes, although the Updated Methodology does suggest that DBRS gives qualitative consideration to the credit enhancement provided by the uncalled capital commitments of excluded Investors.

The DBRS Diversity Model

The Updated Methodology eliminates the dual “Weak Link Approach” and the “CDO Technology Approach” of the 2009 Methodology and replaces them with a single “DBRS Diversity Model” designed by DBRS specifically for Facilities. The DBRS Diversity Model utilizes a Monte Carlo simulation to determine the potential default behavior of the Investors

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2 | DBRS Publishes Updated Methodology for Capital Call Subscription Credit Facilities

included in the Allowable Borrowing Base. The articulated quantitative inputs include each Investor’s uncalled capital commitment, their ratings, recoveries, industry and region, and the tenor of the Facility. The output from the simulation is used as a benchmark during the DBRS committee discussion process.

METHODOLOGY NOW GLOBAL

The Updated Methodology has been expanded to apply to jurisdictions outside of the United States, recognizing both the growth of European and Asian private equity fund formation and the increased prevalence of parallel fund formation in tax haven jurisdictions. Thus, security interest and other legal opinions from jurisdictions outside of the United States are explicitly contemplated to be sufficient to satisfy the legal opinion requirements.

Other Changes in the Updated Methodology

Other noteworthy changes to the 2009 Methodology include the following:

DBRS may give credit to the general partner’s unfunded capital commitment if it is appropriate to do so under the Facility’s transaction documents;

The Updated Methodology employs a new “Interest Rate Coverage” analysis, which models the worst-case interest rate as per the Facility’s transaction documents to determine any appropriate credit implications;

DBRS now expects Rating Agency Notification if the net asset value of the Fund falls below 50%; and

The Updated Methodology incorporates the DBRS Idealized Default Probability Table, which is attached as Appendix A to the Updated Methodology.

Summary

While the Updated Methodology provides additional guidance and clarification as to certain specifics that DBRS will be looking for and requiring in its ratings process, it continues to recognize the significant qualitative and subjective aspects of a Facility that impact the overall credit quality assessment. For example, the Updated Methodology explicitly notes that DBRS will consider such factors as the percentage of the capital commitments that have been previously funded by the Investors and invested by the Fund, the Fund’s specific penalties for defaulting Investors and the increase or decrease in the net asset value of the Fund, but it does not set out explicit covenant minimums, “skin in the game” tests, leverage limits or other similar requirements (other than a notice requirement if net asset value falls below 50%). Additionally, the Updated Methodology acknowledges the secondary market for Investor interests, giving qualitative weight to its enhancement benefit, and explicitly states that DBRS has not observed any recorded losses as of the date of publication. Thus, while these qualitative factors do not easily lend themselves to simple quantitative inputs in a model, the Updated Methodology indicates DBRS intends to weigh these factors in its committee process. Of course, as with any methodology with principles-based components and consideration of qualitative factors, the practical impact of the changes will be more apparent once the Updated Methodology has been applied to actual Facilities.

Endnotes 1 The Updated Methodology is publicly available

at www.dbrs.com under “Methodologies.”

Mayer Brown is a global legal services organization advising many of the world’s largest companies, including a significant portion of the Fortune 100, FTSE 100,

DAX and Hang Seng Index companies and more than half of the world’s largest banks. Our legal services include banking and finance; corporate and securities;

litigation and dispute resolution; antitrust and competition; US Supreme Court and appellate matters; employment and benefits; environmental; financial

services regulatory & enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and

wealth management.

Please visit our web site for comprehensive contact information for all Mayer Brown offices. www.mayerbrown.com

IRS CIRCULAR 230 NOTICE. Any advice expressed herein as to tax matters was neither written nor intended by Mayer Brown LLP to be used and cannot be used by any taxpayer for the purpose of avoiding

tax penalties that may be imposed under US tax law. If any person uses or refers to any such tax advice in promoting, marketing or recommending a partnership or other entity, investment plan or

arrangement to any taxpayer, then (i) the advice was written to support the promotion or marketing (by a person other than Mayer Brown LLP) of that transaction or matter, and (ii) such taxpayer should

seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown

Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and

regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its

associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. “Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer

Brown Practices in their respective jurisdictions.

This Mayer Brown publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject

matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.


0712

For more information about the matters raised in this Legal Update or about Subscription Credit Facilities in general, please contact:

Mike Mascia +1 212 506 2655 [email protected]

Wes Misson +1 704 444 3673 [email protected]

Holly Morgan +1 704 444 3689 [email protected]

OCTOBER 2011

Subscription Financing – Are Side Letters Binding?

Side letters are commonly used as ancillary agreements to Cayman exempted limited partnership agreements and often form an important part of the documents reviewed in subscription financing transactions. They can serve to affect the economic relationship between an investor and the partnership and supplement the obligations or grant exemptions as between the partnership and a particular partner. But are they enforceable? Although it is usually intended that side letters will give rise to legally enforceable rights and obligations, unless carefully drafted, they may have no more than moral effect. The recent English case of Barbudev v. Eurocom Cable Management Bulgaria EOOD and others [2011] EWHC 1560 illustrates this problem and provides some useful guidance as to what the English courts will consider when deciding whether, and to what extent, to enforce the terms of a side letter. Although not binding, the Babudev case would serve as persuasive authority before the Cayman courts. Four key factors were identified as follows:

1. Has there been offer and acceptance as between the partnership and the investor? This is generally easy to establish and does not typically cause problems.

2. Is there a clear intention to create legal relations? Following Barbudev, this depends not on the parties’

subjective opinions but on “a consideration of what was communicated between them by words or conduct, and whether that leads objectively [to the appropriate conclusion]” (RTS Flexible Systems Ltd. v. Molkerei Alois Muller GmbH & Co KG [2010] 1 WLR 753). There is a strong presumption that parties to a commercial transaction intend to create legal relations (Esso v. Courts of Customs and Excise [1976] 1 WLR 1). However, the court will look to all the circumstances of the case, including to provisions in the side letter and whether it is signed by both parties, in determining whether the relevant intention exists.

3. Is there certainty? The side letter must be sufficiently complete and amount to more than an “agreement

to agree”, and the language must be certain. The courts will interpret a contract but cannot go so far as to create one.

4. Is the side letter supported by consideration? This means that sufficient consideration must move from the

person to whom the promise is made. It need not move to the person making the promise.

Bermuda

British Virgin Islands

Cayman Islands

Guernsey

Hong Kong

Isle of Man

Jersey

London

Mauritius

Seychelles

Shanghai

Zurich

As such, the courts treat the enforceability of side letters like any other contract. The fundamentals of offer and acceptance, intent, certainty and consideration remain essential elements to the enforceability of the side letter. The Cayman Islands provides an excellent legal framework for the formation of private equity structures. Nevertheless, it is important to bear in mind that as a common law jurisdiction the fundamentals of contract law still apply, before one simply assumes that the side letters being reviewed are enforceable. For more information, please contact:

OUR ORGANISATION Appleby is a leading provider of offshore legal, fiduciary and administration services. With an unparalleled presence in the key offshore jurisdictions of Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius and the Seychelles, the group offers advice on offshore law. We also have offices in four international financial centres: London, Hong Kong, Shanghai and Zurich. Over 800 lawyers and professional specialists deliver sophisticated, specialised services, primarily in the areas of Corporate and Commercial, Litigation and Insolvency, Private Client and Trusts and Property. We advise global public and private companies, financial institutions, and high net worth individuals, working with them and their advisers to achieve practical solutions, whether in a single location or across multiple jurisdictions. This eAlert is published by APPLEBY and is not intended to be, nor should it be used as, a substitute for specific legal advice on any particular transaction or set of

circumstances. It does not purport to be comprehensive or to render legal advice and is only intended to provide general information for the clients and professional

contacts of Appleby as the date hereof.

Copyright © 2011 Appleby. All rights reserved.

Julian Black

Partner, Global Team Leader Structured Finance

Cayman Islands +1 345 814 2717

[email protected]

Simon Raftopoulos

Partner, Local Team Leader Corporate Finance

Cayman Islands +1 345 814 2748

[email protected]

Legal Update

July 7, 2011

Enforceability of Capital Commitments in a Subscription Credit Facility

Introduction

A subscription credit facility (a “Facility”), also frequently referred to as a capital call facility, is a loan made by a bank or other credit institution (the “Creditor”) to a closed end real estate or private equity fund (the “Fund”). The defining characteristic of a Facility is the collateral package: the obligations are typically not secured by the underlying assets of the Fund, but instead are secured by the unfunded commitments (the “Capital Commitments”) of the limited partners of the Fund (the “Investors”) to fund capital contributions (“Capital Contributions”) when called from time to time by the Fund or the Fund’s general partner. The loan documents for the Facility contain provisions securing the rights of the Creditor, including a pledge of (i) the Capital Commitments of the Investors, (ii) the right of the Fund to make a call (each, a “Capital Call”) upon the Capital Commitments of the Investors after an event of default and to enforce the payment thereof, and (iii) the account into which the Investors fund Capital Contributions in response to a Capital Call.

As we come out of the recent financial crisis, Investors appear willing to again make Capital Commitments to Funds, and the number of Funds in formation and seeking Capital Commitments appears to be up markedly from the recent past. Correspondingly, Fund inquiries for Facilities are also on the rise. As Creditors evaluate these lending opportunities, they

naturally inquire into the enforceability of Investors’ Capital Commitments in the event of a default under a Facility. This Legal Update seeks to address the current state of the law on point.

Enforceability of Capital Commitments

Although the subscription credit facility product has been around for many years, the volume of published case law precedent on point is limited. Creditors typically see this as a good thing: few Facilities have defaulted and thus there has been little need for litigation against Investors seeking to compel the funding of Capital Contributions. Anecdotal evidence during the financial crisis certainly supports this positive performance, as very few Investor defaults, let alone Facility defaults, have been reported by active Creditors in the market.

There is, however, published legal precedent supporting Creditors’ enforcement rights, and it is generally accepted that a Creditor can enforce the Capital Contributions of the Investors under two separate theories of liability: state statutory law and general contract law. We examine each in turn below. Additionally, a Creditor’s rights to the Capital Commitments of the Investors should not be materially impaired by a Fund’s bankruptcy proceeding. While there is not definitive legal authority negating all possible defenses an Investor could raise, there is sufficient law on point to give Creditors’ ample comfort that the collateral supporting a Facility is enforceable.

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2 Mayer Brown | Enforceability of Capital Commitments in a Subscription Credit Facility

STATE STATUTORY RIGHT OF CREDITORS TO

CAPITAL COMMITMENTS

Delaware Statutory Law. Most Funds are formed as either limited partnerships or limited liability companies, and the vast majority of stateside Funds are organized under Delaware law. Delaware statutory law contains specific provisions addressing the obligations of an Investor to a Fund: “Except as provided in the partnership agreement, a partner is obligated to the limited partnership to perform any promise to contribute cash or property or to perform services, even if that partner is unable to perform because of death, disability or any other reason.”1 In addition, an Investor’s obligation to honor its promise to make Capital Contributions explicitly extends for the benefit of Creditors, and although an Investor’s obligations to the Fund can be “compromised” by consent of the other Investors, this compromise will not excuse the liability or obligations of the Investor in question to Creditors of the Fund. Title 6, Section 17-502 (b)(1) of the Delaware Code provides:

Unless otherwise provided in the partnership agreement, the obligation of a partner to make a contribution or return money or other property paid or distributed in violation of this chapter may be compromised only by consent of all the partners. Notwithstanding the compromise, a creditor of a limited partnership who extends credit, after the entering into of a partnership agreement or an amendment thereto which, in either case, reflects the obligation, and before the amendment thereof to reflect the compromise, may enforce the original obligation to the extent that, in extending credit, the creditor reasonably relied on the obligation of a partner to make a contribution or return.2

The Revised Uniform Partnership Law, adopted by most states, contains similar provisions allowing a Creditor to enforce its rights against an Investor, even if the Investor’s obligations to the Fund have been compromised.3 The

Delaware LLC statutory framework provides similar protections for Creditors.4

A Delaware Superior Court has confirmed a Creditor’s cause of action against an Investor to compel the funding of its Capital Commitment under Delaware statutory law. In In re LJM2 Co-Investment, L.P., a Delaware limited partnership was formed by Andrew Fastow, the then-CFO of Enron, for the purpose of making investments in energy and communications businesses related to Enron. The Fund secured nearly $400 million in Capital Commitments and entered into a $120 million syndicated Facility, in what appears to have been a “No Investor Letter” transaction.

The Facility included an “Undertaking” pursuant to which, if the Fund defaulted, the Creditors could issue Capital Calls to cure any payment default. When Enron went bankrupt, the Fund defaulted and the Investors declined to fund Capital Calls issued by both the general partner and subsequently by the Creditors. Instead, the Investors amended the Partnership Agreement, in violation of the Facility provisions, to compromise and rescind the Capital Calls. Without additional Capital Contributions, the Fund could not meet its obligations and filed for bankruptcy. The bankruptcy trustee issued an additional Capital Call—which the Investors again declined to fund—and then commenced litigation against the Investors.

The Investors moved to dismiss the statutory cause of action under Title 6, Section 17-502(b)(1) of the Delaware Code based on a variety of arguments, including that the Creditors could not demonstrate “reliance” on their Capital Commitments as required by the statute. The court ruled in favor of the Creditors, holding that they stated a claim for relief under Section 17-502(b)(1) and that the Creditors adequately alleged reliance on the Capital Commitments.5 While not an ultimate ruling, the framework set forth by the court looked quite favorable for the Creditors, and the case appears to have been resolved prior to the issuance of any subsequent opinions.


New York Statutory Law. New York law imposes a similar duty on Investors for “unpaid contributions” to the Fund, and this obligation extends for the benefit of the Fund’s Creditors.6 Additionally, an Investor may be liable with respect to its unfunded Capital Commitment even after exiting the Fund. In In re Securities Group 1980, the trustee of the Fund’s bankruptcy estate brought an action seeking to enforce the Investors’ Capital Commitments, which they had declined to fund after principals of the Fund sponsor were convicted of tax fraud. The Federal Court of Appeals, affirming the Federal Bankruptcy Court, held that the Investors were obligated to fund their Capital Contributions irrespective of the alleged fraud committed by the Fund Sponsor: “Under the statutory provision [of New York law], even if a debt to a partnership creditor ‘arises’ after the limited partner’s withdrawal, the withdrawn limited partner is nevertheless liable for the debt if the creditor ‘extended credit’ before the amendment of the limited partnership certificate.”7 The court went on to uphold the liability of the Investors to the Fund’s Creditors reasoning that “the limited partners should bear the risk that the partnership’s assets could become worthless.”8

CONTRACTUAL RIGHT TO CAPITAL

COMMITMENTS

Breach of Contract. Under a theory of contract liability, an Investor’s obligation to fund its Capital Commitment is an enforceable contractual obligation pursuant to the terms of the partnership agreement (the “Partnership Agreement”). An Investor is held accountable for its Capital Commitments on the ground that it has entered into a contractual relationship with the other partners to make Capital Contributions or contribute other property to further the Fund’s financial growth. Accordingly, the failure of an Investor to honor its obligations would constitute a breach of contract, and the Investor would be liable for such a breach.9

To rely on a theory of contractual liability, the Creditor needs to have standing to assert the claim for breach. To help establish standing, the Partnership Agreement and the Facility documents should contain affirmative language evidencing: (i) the right of the Fund or general partner to make Capital Calls on the Investors and their obligation to fund their related Capital Contributions and (ii) a pledge by the Fund of its right with respect to such Capital Calls and the enforcement thereof to Creditors. If the Partnership Agreement provisions create the contractual obligation and the Facility documents contain the requisite pledge, the Creditors will be well-positioned legally to enforce the Investor’s Capital Commitments.10

Iridium. A federal district court’s ruling in Chase Manhattan Bank v. Iridium Africa Corporation illustrates the importance of the Partnership Agreement in protecting the rights of Creditors. In this case, the Creditor entered into a $800 million Facility with Iridium LLC based on provisions in the Iridium LLC agreement (the “LLC Agreement”) that the Creditor had the right to call on Iridium’s members’ Reserve Capital Call obligations (“RCC Obligations”), and a certificate from the secretary of Iridium LLC certifying that the LLC Agreement was “true and correct.” Under the terms of the Facility, the Creditor was assigned Iridium’s RCC Obligations. When Iridium defaulted on its loan, the Creditor sought to enforce the assignment of the RCC Obligations. In resolving the dispute, the district court reviewed the language of the LLC Agreement, which contained provisions stating that a member’s duty to perform its RCC Obligations was “absolute and unconditional” and that each member “waived in favor of [the Creditor] any defense it may have or acquire with respect to its obligations under the [RCC].” Therefore, the court granted summary judgment in favor of the Creditor on its breach of contract claim against the Investors.11

Material Breach. An Investor may argue, under contract law, that it should be excused from


further performance of its obligations to a Fund in instances where there has been a material breach by the Fund or its General Partner. This is a relatively well-established general legal principle.12 However, this release of an Investor’s liability has been held not to extend to the obligations the Investor owes to Fund Creditors. In distinguishing the relationship between an Investor’s duty to the Fund and other parties contracting with the Fund, a Massachusetts Court of Appeals held that “relations of a limited partner to the partnership … are more complex in that other limited partners and third parties rely on an expressed obligation, made public by filing, to contribute resources to the partnership.”13 The court further noted that the Uniform Partnership Law places an emphasis on protecting the rights of outside parties that rely on the commitments of limited partners in extending credit to the partnership, because, without this guarantee, Creditors would be unlikely to enter into the loan with the limited partnership.14 In fact, in a different case, even where the Fund’s principals were convicted of fraud in relation to the Fund, a court has held that the obligation to pay Capital Commitments to Creditors was not excused.15 These case precedents provide strong authority supporting the enforceability of Capital Commitments—even in the case of a material breach by the Fund. However, it is still advisable to require language in the Partnership Agreement and, if applicable, the Investor Letter, that Capital Contributions will be funded by the Investor “without set-off, counterclaim or defense” to further weaken any material breach defense.

ENFORCEABILITY OF CAPITAL COMMITMENTS IN

BANKRUPTCY PROCEEDINGS

In the event of the bankruptcy of the Fund, the causes of action entitling the Creditor to relief will not change—they will still be based on the same statutory and contractual theories. But the context of the proceedings, and the potential defenses asserted by the Investors, will likely change. A Creditor’s rights will be subject to the

applicable provisions of the U.S. Bankruptcy Code (the “Code”) and will likely be represented by the Fund itself, as debtor-in-possession (“DIP”) or a bankruptcy trustee (the “Trustee”). Within a bankruptcy, the DIP or the Trustee acts on behalf of the Fund and seeks to maximize the value of the Fund’s estate to pay off its obligations to its creditors. As such, the Trustee typically seeks to marshal Fund assets by making a Capital Call and bringing litigation against the Investors if necessary.16

In a Fund bankruptcy, an Investor’s primary argument is likely to be that its remaining Capital Commitment is an “executory contract” under Section 365(c)(2) of the Code, rendering the obligation voidable. An “executory contract,” although not specifically defined in the Code, is generally considered to be a contract where both counterparties have material, unperformed obligations. Generally, in bankruptcy, the DIP or the Trustee gets to decide whether to assume an executory contract (and be bound thereunder) or to reject it and thereby effectively disaffirm any such continuing obligations. However, under Section 365(c)(2) of the Code, a DIP or Trustee is prohibited from assuming an executory contract if it is by a third party to “make a loan, or extend other debt financing or financial accommodations to or for the benefit of the debtor, or to issue a security of the debtor.”17

In Iridium, the Investors argued that the LLC agreement containing their RCC Obligations was a financial accommodation contract that the Code prohibited from being assumed. The court rejected this argument, noting that the purpose of Section 365(c)(2) of the Code is to protect parties from extending additional credit or funding whose repayment relies on the fiscal strength of an already bankrupt debtor. The court held that the RCC Obligations, in contrast, were not “new” obligations, having long since been committed by the members: “In these circumstances, the Court concludes that the [members] are not within the class of creditors


Congress intended to protect under Section 365(c)(2) of the Bankruptcy Code.”18

This ruling leaves an important consideration from a practitioner’s perspective, as tax considerations have caused some Funds to allow for Capital Contributions to be funded in the form of loans instead of equity. While we would be hopeful a court would look through this phraseology to the substance of what an Investor’s Capital Contributions are, the “loan” language might give an Investor a stronger basis to argue that the applicable agreement was one to extend a loan or financial accommodation, and thus non-assumable under Section 365(c)(2). To help better protect the Creditor against this possibility, we prefer to see explicit language in the applicable Partnership Agreement and, if applicable, in the Investor Letter, substantially to the effect that, in the event that any loans funded in lieu of Capital Contributions under the Partnership Agreement would be deemed to be an executory contract or financial accommodation in connection with a bankruptcy or insolvency proceeding, each Investor irrevocably commits to cause any amounts that would otherwise be funded as loans to be made as a Capital Contribution to the Fund.

Conclusion

While there is not a definitive case fully vetting and dismissing every argument Investors could potentially assert in attempting to avoid honoring their Capital Commitments, the existing statutory and case law provide significant comfort that Investors’ Capital Commitments are enforceable obligations, even in a Fund bankruptcy context.

Endnotes 1 DEL. CODE ANN. tit. 6, § 17-502(a)(1) (2010) (emphasis

added).

2 DEL. CODE ANN. tit. 6 § 17-502(b)(i) (2010).

3 See UNIF. P’SHIP LAW § 502(c) (provisions allowing a

Creditor to enforce its rights against a limited partner, even

if a limited partner’s obligations to the limited partnership

have been compromised).

4 See DEL. CODE ANN. tit. 6, § 18-502 (2010).

5 See In re LJM2 Co.-Investment, L.P., 866A. 2d 762 (Del.

Super. Ct. 2004).

6 N.Y. P’SHIP LAW § 106(1)(b) (limited partner liable for

“any unpaid contributions which he agreed in the certificate

to make in the future at the time and on the conditions

stated in the certificate”); see also § 106(3) (“[T]he

liabilities of a limited partner … can be waived or

compromised only by the consent of all members; but a

waiver or compromise shall not affect the right of a creditor

of a partnership, who extended credit … to enforce such

liabilities.”).

7 In re Sec. Group 1980, 74 F.3d 1103, 1110 (11th Cir. 1996);

see also Int’l Investors v. Bus. Park Fund, 991 P.2d 219

(Alaska 1999) (limited partners liable to creditors who

extend credit based on limited partners’ capital

commitments).

8 Id. at 1111 (citing Kittredge v. Langley, 252 N.Y. 405, 169

N.E. 626 (1930)).

9 Each case cited hereunder was decided under Delaware or

other U.S. law. While applicable local counsel should be

consulted in connection with funds that have parallel or

feeder vehicles formed in other jurisdictions, other

jurisdictions do have precedent consistent with these

holdings. For example, Appleby has confirmed that,

assuming that the New York law Facility documentation

creates a valid and enforceable security interest over the

Capital Commitments, Creditors will be well placed legally

to enforce the Investor’s Capital Commitments in a Fund

governed by the laws of the Cayman Islands (Mayer Brown

LLP does not opine on the laws of the Cayman Islands). See

also Advantage Capital v. Adair [02 Jun 2010] (QBD)

Claim no. HQ10X01837 (Order for breach of contract

granted in favor of private equity fund that sued a limited

partner for repudiation under English law).

10 See NAMA Holdings, LLC v. Related World Mkt. Ctr., LLC,

922 A.2d 417, 434 (Del. Ch. 2007) (“As a general rule, only

parties to a contract and intended third-party beneficiaries

may enforce an agreement's provisions.”); see also

Insituform of N. Am., Inc. v. Chandler, 534 A.2d 257, 268

(Del. Ch. 1987) (“It is universally recognized that where it is

the intention of the promisee to secure performance of the

promised act for the benefit of another, either as a gift or in

satisfaction or partial satisfaction of an obligation to that

person, and the promisee makes a valid contract to do so,

then such third person has an enforceable right under that

contract to require the promisor to perform or respond in

damages.”).

11 Chase Manhattan Bank v. Iridium, 307 F.Supp 2d 608,

612-13 (D. Del. 2004). Similarly, the Bankruptcy Court in


In re Securities Group 1980 held that the Investors were

liable under a contractual theory of liability under the

applicable Partnership Agreement. See 74 F.3d at 1108.

12 Partnership Equities, Inc. v. Marten, 15 Mass. App. Ct. 42,

45, 443 N.E.2d 134, 136 (Mass. App. Ct. 1982) (“If [limited

partner’s] enrollment were merely a bilateral agreement

between the defendants and the general partners, the

principle of contact law upon which the defendants rely,

that a material breach excuses nonperformance might well

apply.”).

13 Id. (emphasis added).

14 Id. at 45.

15 In re Securities Group 1980, 74 F.3d at 1109 (“[A] material

breach of the partnership agreement … would not excuse a

limited partner’s commitment to contribute additional

capital on the conditions stated in the certificate [of limited

partnership].”).

16 See Lowin v. Dayton Sec. Assoc., 124 B.R. 875, 892-93 (M.D.

Fla. Bankr. 1991); see also In re LJM2 Co-Investment, L.P.,

866A.2d 762, 781 (Del. Super. Ct. 2004).

17 11 U.S.C. § 365(c)(2).

18 Chase Manhattan Bank v. Iridium Africa Corp., 2004 WL

323178 at *4 (D. Del. 2004); see also Lowin, 124 B.R. at 901

(stating that a Trustee’s enforcement of the limited

partners’ Capital Commitments “is not the equivalent of

requiring the limited partner defendants to extend new

credit to the debtors in the form of loans, lease financing or

purchase of discount notes”).

For more information about the enforceability of Capital Commitments, or any other matter raised in this Legal Update, please contact any of the following lawyers.



Wesley A. Misson +1 704 444 3673 [email protected]

Mark C. Dempsey +1 312 701 7484 [email protected]

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0711

July 2012

Methodology

Global Subscription Loan (Capital Call)

contact information Matthew La Capra, CPASenior Vice President – U.S. & European Structured Credit+ 1 212 806 [email protected]

Jerry Van KoolbergenManaging Director – U.S. & European Structured Credit+1 212 806 [email protected]

DBRS is a full-service credit rating agency established in 1976. Privately owned and operated without affiliation to any financial institution, DBRS is respected for its independent, third-party evaluations of corporate and government issues, spanning North America, Europe and Asia. DBRS’s extensive coverage of securitizations and structured finance transactions solidifies our standing as a leading provider of comprehensive, in-depth credit analysis.

All public DBRS ratings and research are available in hard-copy format and at DBRS.com, our lead delivery tool for organized, Web-based, up-to-the-minute information, and select ratings are available electronically on Bloomberg. We remain committed to continuously refining our expertise in the analysis of credit quality and are dedicated to maintaining objective and credible opinions within the global financial marketplace.

This methodology replaces and supersedes all related prior methodologies. This methodology may be replaced or amended from time to time and, therefore, DBRS recommends that readers consult www.dbrs.com for the latest version of its methodologies.

contact information

Global Subscription Loan (Capital Call)July 2012

3

Subscription Loan (Capital Call)

TABLE OF CONTENTS

Description of the Capital Call Lending Facility 4

Purpose of the Methodology 4

How the Capital Call Lending Facility Works 4

Who Are the LPs? 5

What Is Being Financed? 5

The DBRS Capital Call Rating 5

Legal Criteria for Inclusion of LP Commitments in the Allowable Borrowing Base (ABB) 5

Example of ABB & Advance Rate Calculations 6

Interest Rate Coverage 7

The DBRS Diversity Model For Capital Call Transactions 8

Capital Call Deals - Qualitative Factors 9

LP’s Incentives to Fund 9

Substitutions 9

Cross Collateralization of LPs 9

Net Loss Experience 9

Capital Call Transactions - Legal Structural Features 9

Enforceability Opinion 9

Security Interest / FPPSI 10

Timing Opinion 10

Types of Capital Call Lending Facilities 10

Bank Lines of Credit 10

Liquidity Facilities on ABCP Conduits 11

Ratings During the Ramp Up Stage 11

Surveillance 12

Fund Performance 12

Surveillance During the Investing & Managing Stages 12

Surveillance During the Ramp Up Stage 13

Operational Reviews 13

Appendix A: DBRS Idealized Default Probability Table 14


4

Description of the Capital Call Lending Facility

PURPOSE OF THE METHODOLOGY

Private Equity, Real Estate and other related funds (“Private Equity Funds”) raise capital for investment purposes from the General Partner (“GP”) and the Limited Partners (“LPs”) (taken together, the “Inves-tors”). The GP of the fund typically invests between 1% and 2% of total capital, with the balance of funds raised from the LPs. The GP is charged with managing the fund on behalf of all of the fund’s In-vestors. The LP’s Unfunded Commitment is at the forefront of the DBRS rating on capital call lending facilities. DBRS may also give credit to the GP’s Unfunded Commitments if it is appropriate to do so as per the transaction documents. There has been an increase in capital call lending facilities as a means for the GP to act quickly to fund opportunities. These facilities have primarily been provided by ABCP conduits and by banks pursuant to bank lines of credit. DBRS methodology addresses the ultimate payment of principal and interest, on or before the latest date for repayment of the facility.

HOW THE CAPITAL CALL LENDING FACILITY WORKS

The LPs have agreed, typically via a partnership agreement, in some cases an investor letter, to fund investments or to repay fund liabilities when called upon by the GP of the fund. The LP’s commitment period to fund investments is generally 2 to 3 years; however, the LPs can generally be called upon to repay fund liabilities, which include capital call lending facilities, through the term of the partnership (generally up to 10 years). The capital call lending facility relies on the LP’s obligation to fund the unfunded portion of their capital commitment (herein referred to as “Unfunded Commitment”). When the GP targets an investment, the GP will ask the LPs to fund their share of the investment via a capital call. The LPs generally have about 15 days to fund. If the GP needs to act quickly, or if it would rather finance the investment via the capital call lending facility, it will ask such facility to fund the investment.

LPAccredited & Institutional

Investors


Investors


Investors


Investors

PRIVATE EQUITY FUNDInvestments $ GP

$

Capital Call Lending FacilityA) ABCP ConduitB) Bank Lines of Credit

$


5

WHO ARE THE LPS?

The LPs are either qualified purchasers or accredited investors, or the equivalent in the jurisdictions in which their commitments are solicited. They primarily consist of pension plans (public and private), endowments, institutional investors, funds of funds, family offices, and high net worth individuals (“HNWIs”). These LPs typically sign a subscription agreement and partnership agreement, which com-mit them to fund capital when called upon.

WHAT IS BEING FINANCED?

The Unfunded Commitments of the LPs are the primary source of payment that will ultimately repay the capital call lending facility.

The DBRS Capital Call Rating

DBRS uses the DBRS Diversity Model designed for capital call structures to ascertain the expected losses at a particular rating level. This output is compared with the advance rate DBRS recognizes in the structure. This will yield the benchmark rating to be considered during the committee process.

The DBRS capital call rating relies on the source of payment from the Unfunded Commitments of the LPs. More specifically, DBRS relies on the enforcement of such commitments, including enforcement following the bankruptcy of the Private Equity Fund itself. The LPs in the Private Equity Fund have agreed, typically in the relevant partnership agreement and/or a separate investor letter delivered to the capital call lending facility, to fund their capital commitments without defense, setoff or counterclaim. It is important to note that only those LP commitments that conform to DBRS’s legal criteria for inclu-sion into the Allowable Borrowing Base (“ABB”) are included in the model analysis. This will dictate the advance rate that DBRS will recognize (see example of the ABB and advance rate calculation on page 6). Those LPs that do not meet DBRS criteria for inclusion in the ABB are still available to the lenders of the facility; however, no credit is afforded to them in DBRS analysis.

Analyzing the effect of the bankruptcy of the Private Equity Fund itself is necessary to this analysis because it is not a bankruptcy-remote entity. Thus, the worst case scenario must address the bank-ruptcy of the Private Equity Fund at the worst possible time. The DBRS rating is issued based upon the expectation of the ultimate payment of principal and interest on or before the time period on which the rating is based.

LEGAL CRITERIA FOR INCLUSION OF LP COMMITMENTS IN THE ALLOWABLE BORROWING BASE (ABB)

In order to be included in the ABB, the documentation governing an LP’s commitment is expected to meet the following criteria:

• DBRS expects a first priority perfected security interest (“FPPSI”), or the equivalent in the appli-cable jurisdiction, in the uncalled commitments of the LPs in the fund.

• In either the private equity fund’s partnership agreement, the transaction credit agreement, or in the investor letter provided in connection with the subscription facility there should be:


6

− A consent to the subscription facility (to the incurrence of debt), and to the:� grant of an effective security Interest in the applicable jurisdiction in the investor’s capital

commitment;� assignment of the GP’s right to call capital;1 and� right to receive capital contributions.

− An agreement to fund all capital contributions that will be used to repay the subscription facility without set off, defense or counterclaim. An agreement to fund all capital contributions to a specifically designated account2� pledged to the subscription facility agent.

− Investor agreement not to cancel, reduce or modify its capital commitment without the consent of the subscription facility agent.

− Investor agreement not to transfer its interest in the fund without the consent of the subscrip-tion facility agent.

− Agreements addressing waiver of sovereign immunity (for governmental and sovereign wealth fund investors), ERISA compliance (for ERISA plan Investors) and consent to acceptable juris-diction (for non-U.S. Investors).

− Agreement of the investor to provide the subscription facility agent from time to time with financial information and, if requested, a confirmation of the Investor’s current unfunded capital commitment amount.

EXAMPLE OF ABB & ADVANCE RATE CALCULATIONS

1,500,000,000.00-350,000,000.00

1,150,000,000.00585,000,000.00

50.87%

1,150,000,000.00565,217,391.30

49.15%

** This example assumes a 3.5% per annum maximum interest rate during a the l ife of the rating. The amount modeled will mirror the rated transaction documents.

Example of Allowable Borrowing Base & Advance Rate Calculations

Total Investor Commitments to the fundInvestors not eligible per DBRS legal criteria for inclusion

DBRS Allowable Borrowing Base (ABB)Maximum Advance Amount*ABB Advance Rate

Step up interest coverage adjustment (if applicable)DBRS Allowable Borrowing Base (ABB)Adjusted Maximum Advance Amount (3.5% per annum)** DBRS Advance Rate

*The Maximum Advance Amount is the total amount that can be financed in the facil ity. This amount includes reductions for excess concentrations.

1. DBRS notes that, in addition to an assignment of the right to call capital as part of an enforcement of the security arrange-ments, it is common in capital call lending facilities for the facility agent to have the right to call commitments directly from LPs in the event that a specified number of LPs default on their commitments.

2. Legal criteria for account banks are consistent with DBRS’s Legal Criteria for U.S. Structured Credit Transactions Methodology.


7

Interest Rate Coverage Whether the Capital Call rating is on the risk to a liquidity provider or on a bank line of credit, DBRS must model the interest that will accrue during the life of the rating. The transaction documents will stipulate the interest expected during the normal course of business, as well as a step-up rate expected during a distressed period. The model must capture the maximum amount of interest that could accrue during the life of the deal. DBRS will model both the ‘normal’ period interest and the step-up rate of interest. DBRS will refer to its Unified Interest Rate Model for US and European Structured Credit when applicable (i.e. floating interest rates). For ease of understanding how this affects the advance rate that DBRS recognizes, the example on the prior page uses a simple fixed rate 3.5% per annum. In this case, the Maximum Advance Amount would be divided by 1.035 to arrive at the Adjusted Maximum Advance Amount. It can be observed that the DBRS Advance Rate decreases from 50.87% to 49.15%. This means that more credit enhancement would be required to cover off the worst case interest rate. In summary, DBRS models the worst case interest rate as per the transaction documents. Finally, the DBRS Advance Rate is compared with the diversity model’s output of expected losses at each rating level based on the portfolio (“ABB”). The result is used as a benchmark rating to be discussed in the committee process.

THE DBRS DIVERSITY MODEL FOR CAPITAL CALL TRANSACTIONS

The DBRS Diversity Model uses a Monte Carlo simulation to determine the default behavior of the portfolio of LPs constituting the DBRS ABB. Recoveries from defaulting LPs are either simulated using a beta distribution, or in some cases, where supporting data is unavailable, conservatively assumed. The inputs of the model reflect the risks inherent in capital call structures and include each LP’s Unfunded Commitment, rating, recoveries, industry and region, as well as the tenor of the facility. The diversity model will determine correlation assumptions based on each LP’s industry and region. The central tenet of the DBRS capital call rating relies on the LP’s obligation to fund. In assessing the credit risk of an individual LP, DBRS uses its own rating where applicable; in the absence of either a public or private rating (or an internal assessment), DBRS may use ratings from another acceptable rating agency3 for the first group. Where no rating or suitable proxy is available (which is often the case for HNWIs and may be the case for certain institutional investors), DBRS uses conservative assumptions based on data from its own default experience on capital call ratings, as well as obligor performance data from other asset classes within structured finance.

Please see the diagram on the following page.

3. Discussion point in the committee process.


8

DBRS DIVERSITY MODEL FOR CAPITAL CALL TRANSACTIONS

Limited Partners - Corporates - High Net Worth Individuals

Key Quantitative Inputs - Default Probability - Tenor - Correlation - Recoveries

DBRS Diversity Model for

Capital Calls

Rating Recommendation

Model Output

Committee Discussion


9

CAPITAL CALL DEALS - QUALITATIVE FACTORS

DBRS considers the features of each transaction individually. The strengths or lack thereof are discussed in the committee process and could affect the prescribed rating level output from the model positively or negatively. DBRS notes the following general features of capital call transactions:

LP’s Incentives to FundIn general, if an LP in a Private Equity Fund decides not to fund its Unfunded Commitment, the LP will face a penalty, which generally includes a diminution of its ownership interest in the fund. Penalties are set in each partnership agreement and typically range between 20% and 100%. Thus, each LP, after it has funded capital, will generally have a strong incentive to continue to fund future capital calls on its Unfunded Commitment. It should be noted that the strength of this feature is at its peak at the end of the investment period when LPs are heavily invested. This is the inverse of the peak of the cross-collateral-ization strength (discussed further below). Notwithstanding this feature, in analyzing the risk associated with capital call deals, DBRS focuses on the worst case scenario where the fund is itself bankrupt. Under these circumstances, the LPs lose their natural incentive to fund, although they remain legally obligated to fund up to their Unfunded Commitments.

SubstitutionsIn the event that an LP is unable to fund, it, often along with the GP, will, rather than risking losing part or all of its investment, look for a replacement to assume that LP’s commitment. This feature of replacing LPs is the expected protocol and represents a strength of capital call structures. It should also be noted that typically the Subscription Facility Agent (acting for the lenders) and the GP must consent to any new LP.

Cross Collateralization of LPsIf an LP were unable to replace itself and defaulted on its commitment to fund, the other LPs would typi-cally be obligated to fund up to their Unfunded Commitments. Thus, there is a cross collateralization among LPs that benefits the capital call lending facility. The advance rate in the allowable borrowing base measures the amount on cross collateralization in any particular transaction. If, for example, there is a 50% advance rate on allowable borrowers, it would mean that the facility is allowed to lend half of the ABB. Converse to the strength of the “LP’s Incentive’s to Fund” mentioned above, cross collateralization is at its peak in the beginning of the investment period because the uncalled commitments are at their highest levels.

Net Loss ExperienceDBRS has rated a number of capital call transactions. There have been no recorded losses observed as of the date of this methodology. DBRS asks for a history of default experience for each GP’s past funds when a rating is sought.

CAPITAL CALL TRANSACTIONS - LEGAL STRUCTURAL FEATURES

The DBRS capital call rating relies on:

1. Enforceability opinion(s).2. A First Priority Perfected Security Interest (FPPSI) or the equivalent in the applicable jurisdiction(s),

on the source of payment (the Unfunded Commitments of the LPs).3. Opinion(s) as to timing of ultimate payment after a fund bankruptcy, if applicable.


10

Enforceability OpinionDBRS must be satisfied that each LP’s Unfunded Commitment is enforceable both pre- and post-bank-ruptcy of the fund regardless of jurisdiction.

In this regard, DBRS notes that LPs waive all rights, namely:

1. Set off2. Counterclaim3. All Defenses4

Security Interest / FPPSIIn the US, DBRS expects the agent for the capital call lending facility to have a first priority perfected security interest in the uncalled commitments of the LPs in the fund. Specifically, DBRS expects the agent, on behalf of the lenders, to have a security interest in the contractual obligation of the LPs to fund capital when called upon, up to their Unfunded Commitment amount. DBRS also expects the agent to have been given an assignment of the right to call such Unfunded Commitment. As a result, upon the occurrence of any event of default under the capital call lending facility (including the bankruptcy of the fund), the agent for the capital call lending facility has the right to call the LPs to fund their Unfunded Commitments, the right to receive the capital contributions and the right to direct those funds into a segregated account for the benefit of the capital call lending facility. For European transactions, DBRS must be satisfied that a similarly effective security interest in the uncalled capital commitments is obtained. The jurisdiction of the private equity fund and of the LPs as well as the governing law and jurisdictions specified in the legal agreements must each be considered and any issues covered satisfactorily in transaction opinions.

Timing OpinionFor Bank Line of Credit Ratings,5 DBRS will likely ask for a timing opinion. DBRS assumes the fund enters bankruptcy one day before the stated maturity date on a bank line of credit. DBRS also assumes a Stay6 is put into place preventing the repayment of the facility by the initially stated maturity date. DBRS may request an opinion confirming the time within which monies due from LPs will be available to pay amounts due under the facility. In the context of a US fund this timeframe is typically one year following the bankruptcy of the fund. The timing implications for different types of capital call lending facilities are described in further detail below.

TYPES OF CAPITAL CALL LENDING FACILITIES

Generally, the two types of capital call lending facilities are:

1. Bank Lines of Credit2. Liquidity Facilities on ABCP Conduits

Bank Lines of CreditA bank may provide financing for private equity funds. DBRS rates to the ultimate payment of princi-pal and interest. Each capital call structure is expected to mitigate worst case scenario timing such that principal and interest will ultimately be payable after a specified period of time following the initial stated maturity date of the bank line of credit under the related loan documents to allow for an intervening

4. All defenses include any rights, claims, defenses, or setoffs that the investor may have against the fund or its GP, including claims of fraud and breach of fiduciary duty.

5. Liquidity Ratings may require a timing opinion also if the agreement has a legal stated a maturity date.6. A Stay can be described as a judicial order holding any payments from a recently bankrupt entity in abeyance.


11

bankruptcy of the fund. The DBRS rating is therefore based upon an expected final ‘collection date,’7 which will incorporate this period. For example, if the timeframe, as in US transactions, was one year after the initial stated maturity date, the collection date for that capital call deal would be defined in the legal documents as a date that is no shorter than 18 months after the initial stated maturity date. The DBRS rating addresses the ultimate payment of principal and interest on or before the collection date (or similar meaning term) in the legal documents.

It is important to note that all funds are expected to be collected at the initial stated maturity date and to be enforced to the full extent possible for collection on and after that date. Also, the legal contract should extend, at a minimum, through the earlier of 1) the collection date or 2) the full and final repayment of the initial maturity date. As such the collection date would be expected to be null and void upon full repayment of the liability rated by DBRS.

Liquidity Facilities on ABCP ConduitsWhen an ABCP conduit funds a capital call deal, it initially does so through the ABCP market. If the funds from the LPs are not adequate to pay the ABCP on a timely basis, the conduit will fund the ABCP through the liquidity facility and thus the payment is ultimately due to the liquidity facility supporting the capital call deal in the conduit. Therefore, the ultimate timely payment of the liquidity facility is what is typically requested to be addressed in the DBRS rating.

Because the liquidity facilities are provided by the sponsor bank, often the repayment of principal and the payment of interest in respect of the liquidity facility only fall due after the funds have actually been received and distributed by the conduit. Nonetheless, the DBRS rating addresses the ultimate payment of principal and interest.

RATINGS DURING THE RAMP UP STAGE

Typically, ratings on capital call transactions occur after the LPs are set. On occasion, DBRS is asked to rate transactions that are in their ramp-up stage before the identity of all the LPs have been finalized. Because the LPs are not static during the ramp-up stage, the analytical review entails running the portfolio of prospective LPs on a realistic worst case basis.

Additional analyses conducted in relation to such a ramp-up stage portfolio include but are not limited to:

• A review of fund’s experience.

• A review of the bank’s experience with capital call transactions.

• A request for the former fund’s portfolio’s and data, if necessary.

• A request for a list of prospective LPs under consideration for the transaction for which a rating is being sought.

• Additional correspondence, as necessary, with the bankers regarding prospective LPs.

The goal is to ascertain the realistic worst case LP mix. From the information above, the analyst will construct two or more realistic worst case portfolios for committee discussion. The number of portfolios constructed largely depends on the information supplied to DBRS.

7. For the purposes of this report, the term collection date will mean the date that is, at a minimum, 6 months after the timing opinion conclusion. In a US transaction, this would likely be 18 months after the initial stated maturity date on bank lines of credit.


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Surveillance

As a preface to this section, the stages of the private equity fund are germane to the scope and nature of the surveillance DBRS will conduct. There are three distinct phases to the Private Equity Fund:

1. Ramp Up Stage - This stage is characterized by the GP raising commitments from the LPs to fund its venture. This stage typically lasts 9 to 12 months following the initial closing of the fund.

2. Investment Period Stage – This stage is characterized by a static pool of LPs that are expected to fulfill their commitments within this time period. This stage is usually 2 to 3 years, but can sometimes be as much as 5 years. It should be noted that the LPs are contractually obligated to fund investments for the 2 to 5 year period noted above and are generally legally responsible through the entire life of the fund (which is usually not more than 10 years) to repay fund lia-bilities. This is clearly the most active phase for the capital call lending facilities. Typically, this is the stage in which the agent for the capital call lending facility will seek a rating.

3. Managing Stage – This phase is marked by the GP managing the investments until the fund winds down.

FUND PERFORMANCE

DBRS will expect Rating Agency Notification if the Net Asset Value (“NAV”), or appropriate perfor-mance measure, of the fund falls below 50%. It should be noted that it is not uncommon for NAVs to be relatively lower in the beginning stages as investments are generally illiquid and ‘out of favor,’ expenses are high, and the assets have not been harvested. Nonetheless, if the NAV of a fund falls below the aforementioned level, DBRS will review the facts and take appropriate steps to ensure the risk is properly reflected on a forward looking basis.

SURVEILLANCE DURING THE INVESTING & MANAGING STAGES

DBRS will monitor capital call lending facilities as appropriate in order to capture unfolding risks that may occur. Primarily, DBRS will review a compliance certificate that, along with other information, should certify that:

• The LP’s ratings have remained unchanged. • No transfers from LP to LP have occurred.• No covenants have been breached.• No triggers have been breached.• No LPs have defaulted.• The NAV of the fund is not below 50%.

If any of the above are not answered in the affirmative, DBRS will investigate the matter and take the appropriate action in order to reflect the rating of the transaction on a go forward basis. This may include a full committee based on new information.


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Along with a review of monthly compliance certificates, DBRS will re-evaluate the capital call transaction as and when required and in any event no less than annually with a full committee replete with re-running the DBRS Diversity Model with updated information, if any.

SURVEILLANCE DURING THE RAMP UP STAGE

Surveillance during the ramp up stage includes, but is not limited to, the review of the compliance cer-tificate and any other information DBRS deems necessary to ascertain that the risk profile of the rated deal remains unchanged. For those deals that were initially rated during the ramp up stage, the LPs will change to a static portfolio. Therefore, DBRS will conduct a rating committee of the deal after the ramp up stage has concluded and the investment period stage begins.8

OPERATIONAL REVIEWS

DBRS will typically conduct an operational review on the capital call lending facility being rated and, if necessary,9 the GP of the fund in order to reach and maintain such rating.

8. During the investment period stage, it would be unusual for LPs to change.9. The decision on whether to conduct an operational review on a GP will be largely based on DBRS’s familiarity with that GP.


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Appendix A: DBRS Idealized Default Probability Table

Rating 1 2 3 4 5 6 7 8 9 10AAA 0.0110% 0.0264% 0.0460% 0.0699% 0.0987% 0.1330% 0.1736% 0.2212% 0.2765% 0.3405%AA (high) 0.0161% 0.0390% 0.0691% 0.1071% 0.1539% 0.2107% 0.2784% 0.3580% 0.4501% 0.5554%AA 0.0212% 0.0517% 0.0922% 0.1442% 0.2091% 0.2883% 0.3832% 0.4948% 0.6237% 0.7703%AA (low) 0.0281% 0.0709% 0.1297% 0.2055% 0.2994% 0.4123% 0.5445% 0.6962% 0.8672% 1.0571%A (high) 0.0419% 0.1095% 0.2045% 0.3280% 0.4801% 0.6602% 0.8671% 1.0991% 1.3543% 1.6306%A 0.0487% 0.1287% 0.2419% 0.3893% 0.5704% 0.7841% 1.0283% 1.3005% 1.5978% 1.9173%A (low) 0.0945% 0.2420% 0.4391% 0.6815% 0.9643% 1.2825% 1.6309% 2.0045% 2.3990% 2.8101%BBB (high) 0.1860% 0.4685% 0.8333% 1.2659% 1.7521% 2.2792% 2.8359% 3.4126% 4.0013% 4.5956%BBB 0.2318% 0.5818% 1.0305% 1.5581% 2.1460% 2.7776% 3.4384% 4.1166% 4.8024% 5.4884%BBB (low) 0.3732% 0.8912% 1.5142% 2.2099% 2.9528% 3.7230% 4.5053% 5.2884% 6.0636% 6.8252%BB (high) 1.0800% 2.4384% 3.9327% 5.4686% 6.9863% 8.4500% 9.8400% 11.1473% 12.3697% 13.5091%BB 1.3627% 3.0573% 4.9001% 6.7721% 8.5997% 10.3408% 11.9738% 13.4908% 14.8921% 16.1826%BB (low) 2.2346% 4.7297% 7.2541% 9.6836% 11.9572% 14.0507% 15.9604% 17.6938% 19.2641% 20.6863%B (high) 3.6297% 7.4056% 11.0204% 14.3419% 17.3292% 19.9866% 22.3389% 24.4186% 26.2592% 27.8922%B 4.8503% 9.7471% 14.3160% 18.4179% 22.0296% 25.1805% 27.9201% 30.3028% 32.3799% 34.1974%B (low) 10.0776% 17.6609% 23.5135% 28.1371% 31.8670% 34.9314% 37.4891% 39.6528% 41.5044% 43.1047%CCC (high) 18.7898% 30.8505% 38.8426% 44.3357% 48.2625% 51.1831% 53.4376% 55.2363% 56.7119% 57.9502%CCC 22.2746% 36.1264% 44.9743% 50.8151% 54.8208% 57.6837% 59.8169% 61.4696% 62.7949% 63.8884%CCC (low) 61.1373% 68.0632% 72.4872% 75.4076% 77.4104% 78.8419% 79.9085% 80.7348% 81.3974% 81.9442%C 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000%

Copyright © 2012, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings, reports and any other information provided by DBRS are provided “as is” and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, in-terruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Repre-sentative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT http://www.dbrs.com/about/disclaimer. ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON http://www.dbrs.com.

www.dbrs.com

DBRS, Inc.140 Broadway35th FloorNew York, NY 10005TEL +1 212 806 3277


Fact Sheet

Mayer Brown has represented the lead agent and lenders in over 150 subscription credit facilities since 2007 alone, including facilities for many of the world’s largest and most sophisticated real estate and private equity funds. We have working relationships with nearly every major lending player in the US market and the majority of active lenders in the UK and European markets.

We have represented the lead agent and lenders in many of the largest subscription credit facilities ever consummated, including multiple facilities with in excess of $3 billion of lender commitments. We have closed transactions across from many of the world’s preeminent fund sponsors, including facilities with Goldman Sachs, Blackstone, Morgan Stanley, Fortress, First Reserve and others. We have led transactions funded by balance sheet lenders and commercial paper conduits, as well as large syndi-cated facilities designed to accommodate both lender types, as well as insurance companies. We have deep bench strength in the product, with multiple partners and associate teams across the globe with extensive experience exclusively in fund financings and our related practices, such as ERISA, tax and government are world class.

We are experienced documenting a variety of fund financing products, including subscription credit

facilities and underlying asset-level leverage facilities for mezzanine and other loan funds, as well as the hybrid facilities which are again starting to surface in the market. We maintain a database of investor documentation including subscription agreements, investor letters, side letters and legal opinions for more than 1,400 distinct investors.

We have represented the lead agent and lenders in many of the largest subscription credit facilities ever consummated.

Mayer Brown’s European, Asian and Brazilian offices coordinate seamlessly on cross-border transactions, and we have an experienced network of tax-haven jurisdiction firms (Caymans, BVI, Luxembourg, Guernsey, Canada, etc.) that we coordinate with extensively. Many of our transactions are multi-currency

Mayer Brown is a global legal services organization advising many of the world’s largest companies, including a significant portion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world’s largest banks. Our legal services include banking and finance; corporate and securities; litigation and dispute resolution; antitrust and competition; US Supreme Court and appellate matters; employment and benefits; environmental; financial services regulatory & enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and wealth management.

Please visit our web site for comprehensive contact information for all Mayer Brown offices. www.mayerbrown.comMayer Brown is a global legal services provider comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. “Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© 2013 . The Mayer Brown Practices. All rights reserved.

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with respect to investor commitments, advances and/or letters of credit, and we are fluent in the related reserve and swap mechanics.

We bring a unique market perspective to fund financing based upon our vast experience in representing fund sponsors, general partners and limited partners in connection with their formation, management and/or investment in various open and closed end fund vehicles. Over the last five years, we have represented a broad range of general partners and sponsors in the formation of over 200 various debt, infrastructure, private equity and real estate funds and over 500 limited partners in connection with their investment in various funds. As a result, we have represented over 70 fund sponsors in connection with subscription credit facilities and other fund financings during that 5-year period. A few of the fund sponsor borrowers we have represented include CB Richard Ellis, LaSalle Investment Management, ING Clarion, Principal Global Investors, Equity International, Heitman and Walton Street Capital.

For more information about this topic, please contact any of the following lawyers.



Ann Richardson-Knox +1 212 506 2682 [email protected]

Banking & Finance

With more than 200 finance lawyers in offices across the Americas, Asia and Europe, Mayer Brown has one of the largest finance practices in the world — and with that size comes the knowledge, experience and resources to tackle transactions of any scale in almost any jurisdiction.

Practice Overview

BANKING & FINANCE

Banking and finance is a founding practice of Mayer Brown and continues to represent one of the firm’s signature strengths. Many of the firm’s largest clients are bank holding companies, commercial banks, investment banks, insurance companies, asset-based lenders, leasing companies or institutional real estate companies.

Our banking and finance practice also represents numerous finance companies and fixed income funds, mezzanine investors, hedge funds, financial service boutiques, and other financial institutions, as well as a large number of borrowers operating in many different businesses and industries.

With more than 200 banking and finance lawyers across the Americas, Asia and Europe, our strength is based on our global platform and our balanced and integrated practice, which encom-passes all the focused skill sets that our clients demand—from cross-border acquisition finance and international capital markets work, through to project finance, structured finance, and derivatives. Chambers and Partners has described the firm as a “banking ‘powerhouse’ for its sheer manpower and global coverage” and we are regularly ranked in the key league tables for legal representations in both banking and securitization transactions.

As financial institutions become one-stop shops, and transactions increasingly combine a broader range of products, including securitization and derivatives, the number of law firms that can meet all of these require-ments is declining. Mayer Brown is one of the few that has both the breadth of offering and the international platform to service these needs—particularly when markets are volatile and deal structures can change overnight.

Asset FinanceMayer Brown has an active asset finance practice with experience across industries, asset classes and product lines. Our experience includes leveraged leasing and structured finance, lease and equity portfolio transfers, as well as debt financing and Islamic finance. In Asia, Mayer Brown JSM has the leading aviation and ship finance practice in the region, particularly in relation to LNG (Liquid Natural Gas) transportation, where the

mayer brown 1

“ Mayer Brown is an

excellent firm with a

great reputation and

respect in the industry.”

~ Chambers USA 2012

2 Banking & Finance

firm has had a role in the acquisition, financing and operation of approximately 30 percent of the total world fleet. Recent award-winning work includes the Odebrecht S.A. $1.5 billion financing of two deep sea drilling vessels, which was named “Americas Deal of the Year 2009” by Project Finance International, and the ICBC cross-border vessel leasing transaction which was named Asset Finance Deal of the Year 2011 by Asian Legal Business Awards.

Leveraged FinanceMayer Brown is one of the most active law firms representing lenders, sponsors and borrowers in an extensive and wide range of leveraged finance transactions across all parts of the capital structure. We routinely represent banks and other institutional lenders in the negotiation of secured and unsecured general corporate and working capital facilities of varying complexity, including competitive-bid facilities, multicurrency facilities and, particularly, cross-border facilities. Work includes syndicated credits, multi-currency loans, letter of credit and guarantee facilities, sub-participations, assignments and transfers, guarantees, letters of comfort and all forms of security.

We have represented agent banks and bank syndicates in financings for virtually all major LBO sponsors and private equity firms, including hostile tender offers and multi-jurisdictional cross-border transac-tions. Working with our high-yield and subordinated debt team, we are a “one-stop shop” for bank/bond acquisition and leveraged financings, including the provision of bridge commitments and facilities and first lien/second lien financings.

ASSET-BASED LENDING AND RECEIVABLES FINANCING

Mayer Brown has one of the leading international practices in asset-based lending (ABL), with transat-lantic coverage and experience across numerous jurisdictions and industries. Our ABL attorneys represent a wide range of asset-based lenders and are highly skilled in documenting and structuring the most complex ABL transactions involving all types of collateral. We have particular experience with first lien/second lien transactions and have been involved in complex intercreditor issues around the world. Our experience across jurisdictions has given us an understanding of the issues surrounding the granting and perfection of security interests and recoveries on insolvency in the many jurisdictions in which ABL lenders operate.

RESTRUCTURING AND WORKOUTS

We represent secured and unsecured creditors exten-sively, acting individually and on behalf of lending syndicates and committees of creditors, in numerous corporate and real estate bankruptcies. We cover every phase of client representation, including the structuring of workouts, the negotiation and prepara-tion of transactional and financing documents, and all aspects of bankruptcy proceedings, US Chapter 11 and Chapter 7 cases and their European and Asian equivalents, including debtor-in-possession (DIP) financing, negotiation and preparation of plans of reorganization, and adversary litigation in connection with or related to insolvency issues.

DISTRESSED DEBT AND NON-PERFORMING LOANS

We are recognized as one of the leading law firms in the European distressed debt and non-performing loans (NPL) market. We regularly represent sellers and buyers in major NPL transactions as well as in their day-to-day trading activities. Documents created by our firm have established market stan-dards, particularly in Germany, and are indirectly used by a variety of participants. Our experience includes financing NPL transactions via leveraged loans and securitizations.

“Clients appreciate the team’s global vision and business-savvy approach” ~ Chambers Europe 2012

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Debt Capital MarketsWe regularly represent issuers and underwriters in the US, Europe and globally in connection with issuances of fixed-income securities in public offerings, including shelf takedowns, in Rule 144A offerings, in international offerings and in private placements. Our attorneys are regularly involved in complex high-yield transactions and have broad experience in multi-tiered financings as well as intricate subordination and intercreditor issues. Our experience also encompasses hybrid capital product structuring and execution for financial institutions to bolster regulatory or rating agency capital ratios. These securities combine elements of both debt, such as fixed payments and tax deductibility, and equity, such as qualifying as capital.

We also represent issuers and financial advisers in connection with asset liability and capital management transactions. With respect to debt securities, these transactions include privately negotiated and open market purchases and/or tender or exchange offers to retire or replace debt with new debt or common or preferred equity, consent solicitations to modify the terms or covenants of the debt or a combination of both.

Structured FinanceWith more than 100 structured finance lawyers in offices across the Americas, Asia and Europe, Mayer Brown has one of the largest structured finance practices in the world. We can tackle transactions of any scale in almost any jurisdiction. We are one of a handful of international law firms that have securitized virtually every asset type that can be securitized, including auto loans and leases, credit cards, student loans, mortgage loans, insurance, intellectual property and a variety of alternative asset classes. We also have one of the largest asset-backed commercial paper practices in the world and repre-sent virtually every major bank sponsor in at least some of their conduit transactions.

We have been at the leading edge of the securitization industry from its early days and continue to be at the forefront of new developments—whether it is the securitization of intellectual property or non-performing

loans, securitization as an acquisition financing tool, or issuances under the US Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). A key factor in our ability to structure transactions globally is the depth of knowledge within the firm of the relevant regulatory and international accounting standards issues, and the close cooperation between our finance and regulatory attorneys. The firm’s unparalleled regulatory knowledge is the result of decades of industry leadership on a range of securities, bank capital, consumer protection and accounting issues and provides us with a perspective that can give clients a critical edge in deal structuring.

DERIVATIVES AND STRUCTURED PRODUCTS

We have an active derivatives and structured products practice, representing sponsors, arrangers, placement agents, collateral managers, derivative counterparties, investors, credit and liquidity providers and ratings agencies. We also act as US counsel to the International Swaps and Derivatives Association (ISDA) in a variety of matters.

Our lawyers understand the world of equity and index derivatives, derivatives-linked securities, fund-linked derivatives, commodity-linked derivatives, constant proportion portfolio insurance (CPPI) products, hybrids and other exotic derivatives. We are regularly called upon to bring the two worlds of hedge fund and financial institutions together by structuring lever-aged total return swap programs linked to loan portfolios, indices, hedge fund portfolios and other asset pools. We combine our derivatives experience with our extensive private investment fund practice to create a variety of fund structures for facilitating synthetic investment opportunities. Few other firms have the lawyers on the ground in the major markets of Europe, Asia and the Americas with our derivatives experience.

“A force to be reckoned with on domestic and cross-border financial transactions.” ~ Chambers UK 2012

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Projects and Infrastructure Mayer Brown has an award-winning Global Projects group that is regularly involved in some of the largest and most innovative projects across the globe. In the last ten years, we have participated in over 20 award-winning transactions across five continents, spanning all sectors, including power, oil and gas, renewable energy, mining, roads and motorways, ports, water, industrial, manufacturing and other infrastructure facilities. We represent developers, sponsors, investors, contractors, operators, governments and public agencies, commercial and investment banks, and bi- and multilateral agencies such as the Export-Import Bank and the International Finance Corporation.

On every project we bring together an experienced cross-disciplinary team of lawyers to provide integrated

legal advice to meet our clients’ needs, from structured finance through to infrastructure, energy, government and regulatory, tax, construction and engineering, environmental, corporate and securities and real estate.

Real Estate FinanceWe regularly represent individual lenders, syndicates and other market participants in all types of real estate finance transactions. These transactions include investment property funding, construction funding, and predevelopment commitment funding. As part of these deals we are often involved in structuring the relevant financing arrangements (including creating synthetic leases, participating, convertible and other “equity kicker” loans, “credit-enhanced” revenue bond financings and multi-tranched/layered debt arrangements). Our practice covers origination as

well as the subsequent distribution (whether by way of syndication, securitization or otherwise) of real estate transactions. We believe that our experience in advising lenders and investors on real estate finance transactions is enhanced by our regular representation of some of the most significant real estate developers, institutional advisers and investors and lessors.

Emerging MarketsMayer Brown has been active in the emerging markets for many years and has developed significant transac-tional experience in every region. The areas in which we most often work are bank financing/debt trading, capital markets, securitization and global projects.

While transactions in the emerging markets can be as straightforward as in other jurisdictions, they often are far more complex. We are constantly investing in our capability to provide our clients with both comprehensive advice and strong execution in these dynamic markets. We offer:

• Fluency in local languages, including Cantonese, French, Gujarati, Hebrew, Hindi, Korean, Mandarin, Polish, Portuguese, Punjabi, Spanish, Thai and Vietnamese

• Understanding of the cultural nuances with implications for business activities in a given country

• Familiarity with jurisdictional regulatory and international trade laws

• Understanding of market-access issues and ability to identify points of entry for clients

In addition to our on-the-ground presence in China, Singapore, Thailand and Vietnam, we have formed an association with the Brazilian law firm, Tauil & Chequer Advogados (T&C), which has offices in São Paulo and Rio de Janeiro. Through T&C, our clients have access to a full service Brazilian domestic law practice.

“ A true blue banking and finance firm, they’re quite prodigious.” ~ Chambers Asia 2012

Global PrivateInvestment Funds

M

Practice Overview

M

p

i

a

arch 2011ayer Brown has an extensive global

rivate investment funds practice

nvolving more than 100 lawyers from

cross the firm’s worldwide offices.

Mayer Brown | 1

Global Private Investment Funds

Mayer Brown has an extensive global private investment fundspractice involving nearly 100 lawyers from across the firm’sworldwide practice areas. Our lawyers’ broad marketexperience enables fund sponsor, adviser and investor clientsto structure funds and investments creatively and efficiently tomaximize fundraising flexibility and opportunities.

Our lawyers advise fund sponsors in connection with the structuring, marketing,regulation and operation of public and private investment funds in a range ofjurisdictions worldwide, including emerging markets such as China, Latin America, India,Central Asia and Africa. The funds we have structured include limited partnerships,authorized and unauthorized unit trusts, and closed-end and open-end investmentcompanies with a wide range of investment styles and objectives, including privateequity, infrastructure, real estate, mezzanine and venture funds.

Fund clients of the practice include major and boutique fund management companies,banks and insurance companies.

A core strength of the global investment funds practice is the provision of transactionaland regulatory support for established funds, including advising on investments,secondary market transactions, leveraged financing, admission of new investors andrecent and impending regulatory developments. Our lawyers also advise institutionsseeking to invest in a wide range of established funds and funds in formation on thepotential tax, regulatory and other legal implications of those investments.

The Private Investment Funds team includes Mayer Brown lawyers from a variety ofpractices who work closely together to ensure readily available corporate, securities,real estate, investment management, financial services, ERISA and tax capabilities. Wehave offices in many of the jurisdictions in which our clients invest and have establishedalliances with leading law firms in many other jurisdictions, thus enabling us to provideinformed, comprehensive tax and other legal advice in connection with fund formation,structures, acquisitions and dispositions. Our broad market experience enables us toassist fund clients to plan and implement creative and flexible fund structures.

Mayer Brown | 2

BREADTH

Mayer Brown regularly handles a wide range of global private investment fund matters,from the formation of multibillion dollar funds with global investors to the review andnegotiation of fund terms on behalf of institutional investors. We advise fund sponsorson tax, structuring, securities, employee benefits and ERISA, banking, insuranceregulatory, communications and other regulatory issues in connection with thestructuring and offering of their domestic and offshore funds. The funds we representinclude closed-end and open-end direct funds, fund-of-funds, master-feeder parallelfunds, and multi-manager investment funds. They include the full range of investmentstyles and objectives, including:

Leveraged buyout funds

Venture capital funds

Infrastructure funds

Real estate funds

Mezzanine funds

Hedge funds

International funds

Opportunity funds

Commodity funds

Risk arbitrage funds

Absolute return funds

Collateralized loan and bond funds

Distressed debt funds

Emerging markets funds

Energy funds

Other sector funds

We are also involved with innovative private fund products, such as insurance-wrappedfunds, private equity funds targeting the defined contribution plan market, and privatefunds that increase their potential investor base by registering under the US InvestmentCompany Act of 1940.

GLOBAL REACH

We have offices in many of the jurisdictions in which our clients invest, enabling theprovision of local law and tax advice in connection with fund formation, structureacquisitions and dispositions. In Asia, Mayer Brown JSM was named the 2010 “Asia LawFirm of the Year – Fund Formation” by Private Equity Real Estate who also noted that“Mayer Brown is growing a reputation for its fund formation services.” Mayer Brownhas been serving the needs of corporate clients and financial institutions in LatinAmerica for more than 20 years. We understand the region and know what it takes toensure that transactions reach a successful conclusion. Through our association withBrazilian law firm Tauil & Chequer in association with Mayer Brown LLP (T&C), we arefurther able to offer our clients legal counsel on matters governed by Brazilian law.Lawyers at T&C represent sponsors, investors and pension funds in Brazilian privateequity funds (FIPs), Brazilian real estate funds (FIIs) and Brazilian receivables investmentfunds (FIDCs). Lawyers in our European offices have experience in structuring andestablishing funds in England, Ireland, the Channel Islands, France, Luxembourg andGermany, and handling fund listings on the Irish Stock Exchange, the Luxembourg StockExchange and elsewhere. In Germany, we provide advice both on the largelyunregulated funds side and with respect to funds regulated by the German InvestmentAct. For the first time, Décideurs Juridiques, a leading French publication, ranked MayerBrown’s Paris office in the fund formation category, noting our “strong reputation.”

Mayer Brown | 3

REPRESENTATION OF FUND SPONSORS

We represent fund sponsors in the organizing and raising of private funds that range insize from US$100 million to several billion dollars in capital commitments. Ourfamiliarity with investor and fundraising market issues, combined with our broadsubstantive and geographic capabilities and our practical approach, enables us to helpclients to market and close substantial funds despite difficult fundraising marketconditions.

We recognize the importance of structuring the participation by the fund principals andother insiders to maximize their after-tax returns and to align their interests with fundobjectives. We have extensive experience in creating complex investment programs,leveraged co-invest programs and other tax-advantaged and estate-planning investmentstructures for principals of the fund sponsor, as well as for officers and employees of thesponsor and financial institutions affiliated with the sponsor.

After the closing of a fund, we advise our fund clients in connection with portfolioinvestments, which often, depending on the nature of the fund investments, requiresupport from a variety of our leading practice and industry groups.

REPRESENTATION OF MANY LEADING FUND INVESTORS

We represent a number of leading investors in their private investment fundinvestments, including private and government pension plans, financial institutions,universities, sovereign wealth funds and other foreign investors, insurance companies,religious and charitable organizations, high net worth individuals and family businesses.Our lawyers have developed efficient methodologies to analyze and review privateinvestment fund terms for our investor clients. Because of our work with a wide varietyof private investment funds, we are able to quickly advise investors as to market termsand practices and the customary range of solutions to issues that arise.

Mayer Brown | 4

Complementary Practices

Portfolio Company Transactions. We are one of the world’s leading international legaladvisers to private equity funds and their portfolio companies and management teamsin private equity investments and exits. We have represented private equity clients inmanagement and leveraged buyouts, follow-on acquisitions, real estate investments,public-to-private transactions, private investments in public companies, seed andventure capital investments and all forms of exit transactions including auction sales,recaps and IPOs.

M&A and General Corporate. The firm has more than 300 lawyers in our Corporate andM&A practice. We represent a broad spectrum of public and private companies,including many Fortune 500 and FTSE 250 companies, as well as private investment andleveraged buy out firms, joint ventures, individuals, and institutional investors inconnection with mergers, acquisitions, divestitures, joint ventures and strategicalliances. Chambers USA states that the practice “has depth, and talent within the depth– the work is of a very high quality,” while attorneys are “easy people to deal with, withgood client skills.” Additionally, Chambers states that “clients value the ingenuity withwhich it puts together the most expansive transactions.” The firm acts for 87 of theFortune 100 and has developed industry-specific experience in areas such asautomotive, chemicals, infrastructure and retail.

Our London Corporate Group has been ranked as the “No. 1 corporate team” for itsmarket size by Chambers UK, calling it “a collection of strong individuals with aflourishing practice.” Chambers Global stated that Mayer Brown’s London office is“ultra-responsive and dedicated to the achievement of its clients' goals. London office isdefinitely proving a useful stepping stone to the European market.”

Our European practices combine an intimate knowledge of their local laws and marketswith the resources of a major international practice to provide advice on a full range ofdomestic and cross-border transactions, as well as all aspects of local business law.Chambers Global says “The global expansion of this ‘excellent firm’ attracts an ever-increasing number of clients seeking assistance with cross-border corporate/M&Amatters.”

Senior Debt Finance. Our senior debt and acquisition finance lawyers represent many ofthe most active financial sponsors and money center lenders and investment banks thatprovide related bank debt and high-yield financing to private equity representation ofsenior and subordinated lenders in leveraged buyouts, recapitalizations, restructuringsand other change-of-control financings. Legal 500 USA stated that the firm’s “flourishingbanking and finance practice ‘does outstanding work’ for numerous leading financialinstitutions…[T]he team is praised for its ‘very high-quality service levels.’”

High-Yield and Debt Securities. Our high-yield work has involved a large number ofproject financings, new issuances and refinancings, as well as restructurings and consentsolicitations. We represent a variety of underwriters and issuers in the Rule 144Amarket and otherwise in connection with the offering of high-yield debt securities.Chambers Global commented that issuers and underwriters endorse Mayer Brownattorneys as “business-oriented and dedicated to the success of the deals and growth ofour business.”

Employment. Executive compensation, employment and ERISA issues frequently arise inprivate equity transactions, and employment issues can be among the most contentiousaspects of complex acquisitions and exits. With our in-depth understanding of pension,benefits and personnel issues, our team can create effective executive retention andinvestment programs and executive employment arrangements.

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Tax. Our global private investment fund team includes members of Mayer Brown’sinternationally recognized Global Tax practice, which provides tax planning andstructuring advice in connection with private equity investments and dispositions,including advice to management teams to help motivate them to achieve the bestresults in their portfolio companies. The July 2008 issue of France’s Magazine desAffaires ranked the firm’s French tax practice as the second leading tax practice inFrance in relation to tax planning and tax structuring in investment fund work.

Infrastructure. Our global infrastructure practice comprises attorneys in the Americas,Europe and Asia who advise on the full range of infrastructure transactions. We helpclients with the financing and development of new infrastructure projects, as well as onthe financing, acquisition or leasing of existing infrastructure assets. We also advise onthe formation of the infrastructure funds that invest in these assets. Our clients includedevelopers, sponsors, investors, contractors and operators as well as commercial andinvestment banks, international financial institutions, export credit agencies, ratingagencies and government and public agencies.

We offer the depth of knowledge and resources required to advise on any phase of thefinancing, development or operation of major projects. We regularly assist clients indeveloping the financial structures that drive infrastructure investment, whetherthrough senior and subordinated lending, equity investments, securitization orleveraged lease transactions.

Regulatory Practice

Mayer Brown offers a broad global financial services regulatory and enforcementpractice involving lawyers in the Americas, Europe and Asia who work with leadingglobal financial services firms to provide thoughtful and creative solutions to complexissues. This experience, coupled with our geographic scope, enables us to advise ourprivate fund clients on a wide range of increasingly complex regulatory, tax and otherlegal issues that affect private funds and their sponsors and investors. We counsel ourclients in virtually every interaction they may have with a regulatory agency. Thisincludes preparing and filing registration statements and forms for licenses, andnegotiating with regulators about everything from customer complaints to regulatoryinspections to administrative actions.

We provide ongoing counsel on compliance issues affecting investment advisers,broker-dealers and commodity pools and advice on compliance with specific laws andregulations applicable to broker-dealers. We regularly advise our clients as well as otherindustry participants on emerging regulatory issues, including ERISA and pension issues,securities registration exemptions, privacy regulations and Sarbanes-Oxley and PatriotAct compliance. Some of the topics about which we regularly advise our private hedgefund clients include soft dollars, private offerings and the use of the Internet, new issuesregulation, capital introduction programs, anti-money laundering regulationcompliance, performance advertising issues, Sarbanes-Oxley Act, trade allocations,Forms PF, 13D, 13G, 13H, 3, 4 and 5 filings, and privacy regulations. A number of ourlawyers previously worked with the regulatory agencies that oversee the private fundbusiness, and we are frequently consulted by those agencies as they review andconsider changes to fund regulation.

Practical Market Knowledge

Our lawyers not only possess outstanding legal qualifications but also have a broadunderstanding of investor-specific issues, including side letter provisions, the trendtowards the requisite public disclosure of fund results, preferred return, managementfee and carry terms and calculations, and investor demands for greater protection forclawback claims. Our experience and global perspective provide insight into the market

Mayer Brown | 6

terms, trends and emerging issues in the private investment fund market, and ourrepresentation of leading institutional investors and “gatekeepers” for privateinvestment funds enables us to anticipate major issues and investor initiatives and tobetter structure market-tested solutions.

Industry Experience

The lawyers in our Global Private Investment Funds practice come from, and haverepresented companies in, a variety of industries. This practical experience allows us toquickly and seamlessly provide the proper context for the regulatory, disclosure andother commercial issues that arise during the course of fund formations and portfoliocompany transactions. Among the industries where we have extensive experience arethe following:

Automotive

Chemicals

Consumer Products and Retail (including Food, Beverage, and Packaging)

Energy

Financial Institutions (including Banking and Insurance)

Gaming/Gambling

Health Care and Pharmaceuticals (including Biotechnology)

Information Technology

Infrastructure

Media and Telecommunications (including Entertainment)

Real Estate and REITs

Sports (including Sporting Goods)

Transportation

Related Practice Areas

Collateralized Debt Obligations

Derivatives

Financial Services Regulatory and Enforcement

Investment Management

Private Equity

Real Estate

Tax Transactions & Planning

Insurance

Energy

Mayer Brown | 7

Demonstrated Global Leadership

In 2011, Mayer Brown ranked in the top ten list of the "most active law firms by number of funds" in

the Dow Jones Private Equity Analyst survey

Mayer Brown represents 12 of the world's top 20 largest real estate investment managers in fund

formations

“[Mayer Brown’s] private equity funds practice, which is hailed as ‘nothing short of terrific,’

particularly when it comes to real estate funds. The team provides ‘very good understanding of the

business and great value for money,’ and has ‘an excellent reputation in the institutional world, and a

strong performance record’” Legal 500 USA 2012

"The funds team at Mayer Brown is praised for its responsiveness and its ability 'to advise

knowledgeably about both UK and US legal issues'" Chambers UK 2012

Décideurs Juridiques, a leading French publication, ranked Mayer Brown’s Paris office in the fund

formation category noting our “strong reputation”

Juve, a leading publication for legal research in Germany, ranked Mayer Brown’s German practice in

the area of investment funds, noting that practice strengths include “Good integration of the

individual practice groups, close ties with the UK and US practice” (2010)

Mayer Brown JSM named “Asia Law Firm of the Year – Fund Formation” by

Private Equity Real Estate News (2010)

Mayer Brown's Private Equity group in Paris has been named the "best investment funds advisor"

among law firms in France, ranking in value and volume by l'AGEFi, one of the leading French

newspapers covering business and finance (2012)

Mayer Brown | 8

Representative Fund Sponsors

AEW Capital Management, L.P.

American Realty Advisors

Arsenal Capital Partners

Bank of America Merrill Lynch

Banyan Tree Group

CarVal Investors

CB Richard Ellis Investors, LLC

CIBC Global Asset Management Inc.

The Column Group LLC

Commonfund Realty, Inc.

Cornerstone Real Estate Advisers

LLC

CWCapital Partners

Deutsche Sachwerte Emissionshaus

AG

EGS Healthcare Capital Partners, LLC

Equity International

Energy Capital Invest

Verwaltungsgesellschaft mbH

GEM Realty Capital, Inc.

Gilbert Global Equity Partners

Green Investors AG

Grosvenor Investment Management

Limited

GSO Capital Partners

Hannover Leasing GmbH & Co. KG

Heitman Capital Management LLC

Henderson Global Investors

Hudson Clean Energy Partners, L.P.

ING Clarion Partners

Intercontinental Real Estate

The Jordan Company

Kenner & Company, Inc.

LaSalle Investment Management

LBO France

Macquarie Capital Advisors

Maghreb Invest Management Limited

Mesa West Capital, LLC

New Vernon Capital, LLC

Pacific Coast Capital Partners LLC

Principal Life Insurance Company

Prism Capital Partners, LLC

Prudential Real Estate Investors

R.J. O'Brien

Rothschild Asset Management, Inc.

Sarofim Realty Advisors

Security Capital Research & Management

Inc.

Silverpeak Real Estate Partners f/k/a

Lehman Brothers Real Estate Private Equity

Starwood Capital Group

TVG Capital Partners Limited

UBS Global Asset Management

Urban American Partners, LLC

Verde Realty

Vestar Capital Partners

Walton Street Capital, LLC

Wrightwood Capital

Mayer Brown | 9

Representative ERISA, Governmental, University and Other

Institutional Investors

ACE Asset Management, Inc.

Andrew W. Mellon Foundation

BMO Nesbitt Burns

Concordia Plan Services Worker Benefit Plans for the Lutheran Church – Missouri Synod

Dresdner Kleinwort Wasserstein

DuPont Capital Management

Evanston Northwestern Healthcare

Grosvenor Capital Management

Illinois State Treasurer

INVESCO Private Capital

ITB Pension Fund (UK)

MB Financial Bank

Mesirow Financial

Metal Box Pension Scheme (UK)

The Northern Trust Company

Ruffer LLP

Russell Real Estate Advisors

State Board of Administration of Florida

TIAA-CREF

Twin Bridge Capital Partners

University of Notre Dame

Weizmann Global Endowment Management Trust

Business Law Today April 2012

Published in Business Law Today, April 2012. © 2012 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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Assets such as limited partnership inter-ests, limited liability company interests, shares of closely-held corporations and life insurance policies are commonly subject to broad transfer restrictions. How these restrictions limit transfers (includ-ing grants of security) is well understood when such assets are held directly, but when these assets are held in the indirect holding system, the legal analysis of the transfer differs.

A transfer of an asset in the indirect holding system is not simply an “indi-rect transfer” of the underlying asset. It is a transfer of a new and particular set of rights created under Article 8 of the Uniform Commercial Code. Failing to dis-tinguish these rights from direct rights in the underlying asset denies core principles of the modern indirect holding system.

Hedge Funds: Illustrative TransactionsOne subset of transactions involving transfer restricted assets that exempli-fies these issues is secured financings for hedge funds known as “funds of funds.” A fund of funds is simply a hedge fund that invests in other hedge funds. In the United States hedge funds are typically organized as limited partnerships or limited liability companies. Accordingly, the concepts applicable to fund of funds transactions are illustrative for the broader group of transfer restricted assets.

Like other alternative entity assets, hedge

funds are often subject to broad transfer restrictions. Hedge funds utilize transfer restrictions to avoid being regulated under certain securities laws, such as the Invest-ment Company Act of 1940. Without this exemption, a hedge fund that offers or sells its interests in the United States would typically qualify as an “investment com-pany” under the Investment Company Act and would be required to comply with the obligations thereof, which could (1) create potentially significant administrative bur-dens for the fund, (2) limit the fund’s ability to utilize leverage, and (3) limit its use of certain investment strategies (such as short selling). Hedge funds rely on their transfer restrictions to maintain eligibility for these exemptions.

Additionally, funds of funds have an appetite for credit to manage liquidity and leverage needs. On the liquidity side, funds of funds use credit to facilitate portfolio management. If a fund is invested in illiquid assets and becomes obligated to return in-vestor capital (typically through an investor request called a redemption), the fund can readily draw on its liquidity line to meet the applicable redemption deadlines or to avoid liquidating specific assets in a down market. On the leverage side, funds use credit to magnify returns to investors, which strategy also magnifies loses.

To minimize credit risk, fund of funds lending transactions are usually secured. To secure obligations to a creditor, a fund of funds commonly pledges an investment ac-

count as collateral. This account is generally established and maintained as a “securities account” under Article 8 of the Uniform Commercial Code. All of the fund’s invest-ments (or a specified group thereof) are credited to this account. The fund grants a security interest in the account and that in-terest is typically perfected through a control agreement. These fund of funds transactions provide a useful model for the application of the concepts addressed in this article.

The ControversyThe controversy for transfer restricted assets in the indirect holding system is whether the transfer restrictions that limit transfers in the direct holding system also limit transfers of such assets once they are credited into the indirect holding system. In the case of a fund of funds transac-tion, if the pledge of a fund’s securities account is analyzed as a pledge of direct rights in the underlying hedge funds, the pledge will likely be viewed as breaching the transfer restrictions incorporated into such interests. The breach of these transfer restrictions can trigger penalties and other negative consequences that diminish the value of the collateral. Additionally, a breach of these restrictions may raise concerns about the fund’s compliance with certain representations and covenants incorporated into financing documents and may present issues for the law firm that prepares a legal opinion with respect the pledge of the securities account in such a

Transfer Restrictions in the Indirect Holding System: Is Alienability in the Form of Holding?

By E. Perry Hicks

http://www.mayerbrown.com/people/E-Perry-Hicks/



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transaction. This controversy generates market inef-

ficiencies. The specter of transfer restric-tions can sideline assets that might other-wise be available as collateral to secure obligations of indebtedness. These idled assets are significant. In 2011, assets under management in the hedge fund industry alone reportedly exceeded $2.02 trillion dollars––a historical high-water mark. Additionally, analysis by approximation to the direct holding system obscures rel-evant risks that ought to be highlighted to parties engaged in these transactions.

The resolution of this controversy re-sides in the core principles of the modern indirect holding system. Article 8 of the Uniform Commercial Code acknowledges that the form of holding is an essential consideration in analyzing transfers. The official comments to section 8-104 provide that “[w]here an item of property can be held in different ways, the rules on how one deals with it, including how one transfers it or how one grants a security interest in it, differ depending on the form of holding.” This article identifies key dis-tinctions in the direct and indirect holding systems and addresses how those differ-ences impact the legal analysis of transfers of assets subject to transfer restrictions.

The Systems of HoldingThe direct holding system (Direct Hold-ing System) is a system in which rights originate from an issuer of a security (or similar asset). This is the traditional form of holding a security. A holder of rights in the Direct Holding System (Direct Holder) includes a person that holds a certificated “security” in its own name or is the registered owner of an uncer-tificated “security” on the books of the issuer. For purposes of this paper, a Direct Holder also includes a person that holds a security or similar asset through another entity, where that entity is not a “securities intermediary.” For example, if shares of a corporation (Corp. A) are held by single member limited liability company (LLC A), the individual that holds the member-ship interests of LLC A would still be a deemed Direct Holder with respect to the Corp. A shares. As used herein, the

indirect holding system (Indirect Hold-ing System) refers to the holding system described under Part 5 of Article 8 of the Uniform Commercial Code as modi-fied by the 1994 revisions thereto (1994 Revisions) and an indirect holder (Indirect Holder) is a holder of rights arising in the Indirect Holding System. Assets cred-ited to the Indirect Holding System are referred to as “financial assets.” Under the definition of “financial assets” in section 8-102 of Article 8, parties are free to agree to treat any asset as a financial asset, un-less such asset is excluded as a “financial asset” under section 8-103 of Article 8 (such as “commodity contracts”).

The key to determining the applicable holding system is the source of the relevant rights at issue. If the rights at issue are directly traceable to an underly-ing issuer of a security (or similar asset), the rules of the Direct Holding System apply. If the rights at issue are directly traceable to a “securities intermediary” (as defined in Article 8), the rules of the Indirect Holding System apply. Applying this framework, where the sole member of LLC A transfers all of its interests in LLC A to another party, the transfer (with respect to the Corp. A shares) would be analyzed under the Direct Holding System because the rights at issue are di-rectly traceable to Corp. A (as the issuer of the corporate shares), not a securities intermediary.

The Modern Paradigm: A Brief OverviewThe 1994 revisions to Article 8 funda-mentally changed the rights of a person holding a security in the Indirect Holding System. Prior to such revision, whether a person held a security directly or indirect-ly, the person was deemed to be the owner of that security. This framework changed, however, when the 1994 Revisions cre-ated a distinction between the rights of Direct Holders and Indirect Holders. To implement this conceptual change, the 1994 Revisions created a new section in Article 8 – Part 5, entitled “Security En-titlements,” which describes the primary rights and duties of parties in the Indirect Holding System.

Security entitlements are the keystone of the Indirect Holding System. A security entitlement is both a package of personal rights against a securities intermediary and a property interest in the assets held by the securities intermediary. A person that holds an asset through a securities intermediary pursuant to Article 8 has a “security entitle-ment.” The property interest that comprises that security entitlement is described in the official comments of Article 8 as a “sui generis property interest.” Article 8 provides that the incidents of such property interest “are established by the rules of Article 8, not by common law property concepts.” The 1994 Revisions created a clear distinction between the two holding systems. The rights of an Indirect Holder are new rights and separate from the rights of Direct Holders. Consistent with this paradigm, the 1994 Revisions incorporated new and separate substantive rules for the two systems.

Separate Substantive RulesThe 1994 Revisions introduced separate substantive rules to be applied in the Direct and Indirect systems, including rules on (1) property interest remedies, (2) governing law, and (3) warranties upon transfer. These different substantive rules reinforce the unique nature of the rights arising under the two systems.

Limitations on RemediesThe remedies with respect to property interests arising in the Indirect Holding System are limited under section 8-503 of Article 8. While the securities intermediary is solvent, the entitlement holder must look to the intermediary to satisfy its claims. The entitlement holder cannot assert its property interest directly against other parties, except in extremely unusual circumstances. This remedial limitation is intended to promote the sound and efficient operation of the securities holding and settlement system by eliminating the need for purchasers to investigate whether a securities intermediary acted wrongfully in transferring a financial asset. This limitation also promotes an understanding that the property interest of an entitlement holder is a unique right, which originates from its securities intermediary, not the issuer.



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Different Governing LawSimilarly, the rules for identifying the appli-cable governing law support the distinction of the rights in both systems. In the Direct Holding System, pursuant to 8-110(a), the local law of the issuer’s jurisdiction governs concepts such as: (1) the validity of a security and (2) the rights and duties of the issuer with respect to registration of transfer. In the Indirect Holding System, pursuant to 8-110(b), the local law of the securities intermediary’s jurisdiction governs analo-gous concepts such as: (1) the acquisition of a security entitlement from the securities intermediary, and (2) the rights and duties of a securities intermediary and entitlement holder arising out of a security entitlement. Under these provisions, the governing law is determined by reference to the originator of the relevant rights. In the Direct Holding System the originator is the issuer. In the Indirect Holding System, the originator is the securities intermediary. Where the nature of the rights held in the different systems is determined by reference to different govern-ing laws, the rights themselves must be understood to be separate rights.

Separate WarrantiesAdditionally, the warranties to be pro-vided upon a transfer of rights in the two systems differ with respect to violations of transfer restrictions. Under sec-tions 8-108(a), (b), and (c), a person transferring or effecting a transfer of a directly held “security” provides, among other warranties, a warranty that the transfer “does not violate any restriction on transfer.” This warranty is appropriate under section 8-108 because transfers of securities in the Direct Holding System may violate issuer transfer restrictions.

This warranty is also appropriate for transfers that occur at the interface of the Direct Holding System and the Indirect Holding System because such transfers may also result in the violation of issuer transfer restrictions. Such transfers occur, for example, when (1) a person delivers an asset to a securities intermediary to be credited to a securities account or (2) a securities intermediary causes its entitle-ment holder to be registered as the owner of an uncertificated security. In both of

these transfers, the Direct Holder changes. Because these transfers involve rights in the Direct Holding System, the issuer’s transfer restrictions apply and potentially limit such transfers. Accordingly, the package of warranties provided for such transfers, under sections 8-109(b) and (c) for these interface transfers, include a warranty that such transfers do not violate any restriction on transfer.

In contrast, no such warranty is required in connection with instructions to effect transfers occurring entirely within the Indi-rect Holding System. Because the rights in the Indirect Holding System originate from the securities intermediary, not the issuer, it is appropriate that transfers occurring entirely within the Indirect Holding System should not be constrained by issuer-originated transfer restrictions. Consistent with this view, the package of warranties provided for such transfers under sec-tion 8-109(a), does not include a war-ranty that the transfer does not violate any restriction on transfer. Unlike the Direct Holding System, rights arising under the Indirect Holding System are not expected to be subject to transfer restrictions.

Understanding the two systems as sepa-rate regimes permits the isolation of certain commercial law issues in a manner consis-tent with the core principles of the modern Indirect Holding System. The 1994 Revi-sions to Article 8 distinguished the Direct Holding regime from the Indirect Holding regime. Accordingly, the grant of a security interest in rights of an Indirect Holder does not breach transfer restrictions originated by an issuer of the underlying asset because the rights being granted originated from the securities intermediary. This simplifies the analysis of transactions involving the transfer of transfer restricted assets, such as fund of funds transactions. Such simplifi-cation, however, is useful only if it can be reconciled with other law that may find an issuer’s transfer restrictions to be lawful and enforceable.

Preserving the Expectations of Issuers: The Intermediary as Legal Owner Issuers rely on the effectiveness of trans-fer restrictions to limit transfers by holders

of their interests for a variety of reasons. To be effective, these restrictions may need to exclude certain parties from being both legal and beneficial owners. Deeming issuer transfer restrictions to be imported into the Indirect Holding System, how-ever, is not the appropriate mechanic to give effect to such restrictions because such approach is inconsistent with the core principles of Article 8. To understand how Article 8 reconciles the expectations of issuers with the structure of the Indirect Holding System we need to review (1) a hedge fund’s need to restrict transfers, (2) the relevant securities intermediary’s awareness of such transfer restrictions, and (3) the provisions of Article 8 that enable the securities intermediary to pre-serve these expectations.

As noted previously, one common reason why a hedge fund seeks to restrict transfers is to comply with certain exemp-tions to federal securities laws, such as the Investment Company Act of 1940. Eligi-bility for such exemptions can be contin-gent on the identity of legal and beneficial owners of an issuer’s interests. In the case of the Investment Company Act, such exemptions can require that the number of “beneficial owners” be limited to not more than 100 persons or that “owners” be “qualified purchasers.” If an underly-ing hedge fund’s transfer restrictions are not effective to stop the transfers of its “beneficial owners,” the hedge fund’s compliance with such exemptions could be threatened, potentially subjecting the fund to registration requirements under the Investment Company Act.

In typical fund of funds transaction, a securities intermediary is able to give ef-fect to issuer transfer restrictions, without having to import such restrictions into the Indirect Holding System. In such transac-tions, the fund of funds, as the entitlement holder, becomes the beneficial owner. The securities intermediary becomes the legal owner of each hedge fund in which the fund invests by completing each hedge fund’s subscription documents. In the subscription process, the securities inter-mediary identifies and agrees to comply with the transfer restrictions of the hedge fund. Additionally, the securities interme-



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diary (as legal owner) commonly affirms representations, on behalf of itself and the beneficial owner, that both parties meet the criteria to hold the hedge fund’s inter-est (i.e., both parties qualify as “qualified purchasers”). To avoid breaching these representations and related obligations owed to the hedge funds, a securities in-termediary must be able to limit transfers by the beneficial owners. Fortunately, the securities intermediary is able to do so because entitlement holders cannot effect outright transfer of security entitlements without the involvement of the relevant securities intermediary.

The Concept of EligibilityWhile a securities intermediary is obligat-ed to comply with “effective” entitlement orders of specified persons under section 8-507, this obligation is not unconditional. Where a securities intermediary receives an effective instruction to transfer a secu-rity entitlement to a third party and that third party does not satisfy the beneficial owner criteria of the underlying hedge fund or such instruction is not consis-tent with the intermediary’s obligations as the Direct Holder, the intermediary might deem such transferee not “eli-gible,” as permitted under section 8-508 or deem such instruction inconsistent with its obligations, under section 8-509. In either case, the preservation of the issuer’s expectations is effected through the securities intermediary, consistent with the securities intermediary being a Direct Holder of the underlying asset. This approach avoids the need to import issuer transfer restrictions into the Indirect Holding System.

Consistent with the preservation of issuers’ expectations, pledges of rights arising in the Indirect Holding System can be implemented without effecting a transfer of the legal or beneficial owner. Where a fund of funds pledges its securi-ties account to a creditor and the creditor perfects that security interest by entering a control agreement consistent with sec-tion 8-106(d)(2) of Article 8, there is no transfer of the security entitlement and the fund remains the beneficial owner.

Redemption as an Adequate RemedyWhere a perfected secured creditor with “control” (as defined in Article 8) seeks to enforce its interest in a debtor’s securi-ties account by directing the intermediary to delivery the financial assets to a new securities account (either its own or that of a third party), the beneficial owner of the underlying hedge fund interest would change. To the extent such change is inconsistent with the obligations the securities intermediaries undertook with respect to the underlying hedge fund, or if the hedge fund is unwilling to permit such a transfer upon request by the securities intermediary, the secured creditor may not be able to effect its transfer. This limita-tion on enforcement may exist notwith-standing the secured creditor’s perfected security interest in the securities account and may significantly diminish the value of the collateral in the judgment of the creditor. In a fund of funds transaction, however, the creditor has the option of redemption, which provides an avenue of enforcement.

The benefit of redemption is that it does not require any transfer of legal or benefi-cial ownership of the security entitlement. Consequently, where a perfected secured creditor enforces on the collateral in the typical fund of fund transaction, it will be able to instruct the securities intermediary to redeem the hedge fund interests that have been credited to the securities ac-count. The securities intermediary will be obligated (pursuant to the relevant control agreement and applicable provisions of Article 8) to request a redemption of the hedge fund interest from the underlying hedge fund. The hedge fund, under its subscription documents, will be obligated to redeem the hedge fund interest (subject to the terms of its subscription documents, which may include gating limits or other restrictions). Accordingly, the secured creditor has a means of exchanging the collateral for value that is not contin-gent on the cooperation of the securities intermediary or the issuer (other than their cooperation to comply with their respec-tive obligations under Article 8 and the relevant subscription documents).

ConclusionWhen an asset is held in the Direct Hold-ing System, issuer transfer restrictions provide a direct restraint on a holder’s right to transfer such asset. This direct restraint is not applicable to the same asset held in the Indirect Holding System be-cause the source of the rights and the law governing those rights is different. In the Direct Holding System, the source of the rights is the issuer. In the Indirect Holding System, the source of rights is the securi-ties intermediary. Importing issuer-origi-nated transfer restrictions into the Indirect Holding System is inconsistent with the modern Indirect Holding System.

Where a secured creditor has the option of redemption and such option provides adequate value to the creditor (in its own judgment), the Indirect Holding System may afford holders of assets subject to transfer restrictions a means of using such capital to secure obligations that is not available in the Direct Holding System. This conclusion gives effect to the core principles of Article 8 without rendering issuer transfer restrictions ineffective. This conclusion also simplifies the commer-cial law analysis of pledges of transfer restricted assets held in the Indirect Hold-ing System, which promotes efficiencies in the market and, potentially, the broader use of such capital as collateral for se-cured financings.

E. Perry Hicks is a Finance partner at Mayer Brown LLP in Charlotte and mem-ber of the Uniform Commercial Code and Commercial Finance committees of the Business Law Section of the ABA.

http://www.mayerbrown.com/people/E-Perry-Hicks/

ARTICLE

CAYMAN SIDE LETTER ISSUES

BY SIMON RAFTOPOULOS AND TONY HEAVER-WREN Side letters have become a common feature in the private equity landscape.

Historically there had been no judicial consideration of side letters to assist in the navigation of these choppy waters. Recently, however, the Cayman Islands Grand Court has handed down two judgments relating to side letters in the hedge fund context. The lessons from these cases are largely transferrable to use of side letters in PE context:

(Medley Opportunity Fund Ltd. v. Fintan Master Fund Ltd & Nautical Nominees Ltd (21 June 2012) (the “Medley case”); and

Lansdowne Limited & Silex Trust Company Limited v. Matador Investments Limited (In Liquidation) & Ors (23 August 2012) (the “Matador case”).

The facts, findings and practical significance of each case are addressed below.

The Medley case

Facts

Fintan Master Fund Limited (“Fintan”) acting through its nominee Nautical Nominees Ltd (“Nautical”) invested $45M in the Medley Opportunity Fund (the “Fund”) in late 2007. Prior to its investment in the Fund, Fintan had entered into a

side letter with the Fund which had granted Fintan certain terms that were more favourable than those granted to other investors of the Fund. Nautical was not a party to the side letter.

The side letter included a term that, when Fintan requested a redemption of its investment, the Fund would pay Fintan the redemption proceeds immediately in cash, so far as it was possible, and to the extent that the Fund could not satisfy the redemption sum in cash, securities would be deposited into a separate liquidation account, with proceeds of realisations of those securities to be paid to Fintan as they occurred.

In the fallout of the Global Financial Crisis, the Fund offered 2 successive restructuring options to investors, the practical effect of which was to place certain limits on investor redemption rights; existing redemption requests were cancelled and quarterly distributions of excess cash on a pro rata basis. In each instance, Nautical, accepted the restructuring proposal on Fintan’s behalf.

Despite Nautical’s acceptance of the restructuring proposals, in December 2011 it submitted a redemption request, seeking a cash redemption in accordance with the Fund’s articles and the terms of the side letter.

In the ensuing litigation, the Fund claimed that Fintan had waived its redemption rights under the articles and

side letter by reason of Nautical’s acceptance of the restructuring proposals.

Findings

Fintan failed to reach first base; the Court found that although Fintan had signed the side letter, it was not the registered shareholder in the Fund and accordingly the side letter could not be enforced by Fintan. Justice Quin ruled that for a side letter to be enforceable it must be entered into by the parties intending to be bound by the agreement – that is, the fund and the investor of record. It is not sufficient for a side letter to be signed by some other party such as the beneficial owner of the shares.

Practical significance

The Medley case underlines the importance of the correct parties entering into the side letter, particularly where the investor acts through a custodian or nominee or even a manager. If the side letter is between a fund and the investor without the custodian as a party, the investor should, ideally, novate the side letter to the custodian or, as a minimum, ensure that it has a limited power of attorney from the custodian to allow the investor to enter into side letters on behalf of the custodian. Failure to attend to this requirement is likely to lead to the favourable concessions made in the side letter being unenforceable and therefore unavailable to the investor.

The Matador case

Facts

Justice Quin gave further consideration to issues pertaining to side letters in the Matador case. The Court was there required to consider the enforceability of an alleged oral agreement (characterised as an ‘oral side letter’) which was alleged to have been made in a discussion between a person beneficially entitled to shares in the Matador fund and another a representative of the investment manager of the Matador fund. The alleged side letter purported to disapply the gating and suspension provisions in the Articles of Association to redemption requests by those investors.

The Articles of Association empowered the directors of the Matador fund to gate and suspend redemptions but did not empower them to treat investors in the same class differently.

Findings

Because the alleged agreement was said to have occurred in a discussion between parties who were not, respectively, the investors of record and (an authorised representative of) the Matador fund, Justice Quin held that the alleged ‘oral side letter’ was not enforceable against the Matador fund, and hence was not binding on the liquidator of the Matador fund.

The Court found that, even if it could be said that there was an ‘oral side letter’ between the Matador fund and the investors concerned, the agreement would have been inconsistent with the Articles and would not have been effective in changing the prescribed redemption and suspension process for those investors.

For an ‘oral side letter’, or indeed any side letter in the same terms, to be valid and enforceable, firstly, the Articles must permit the fund to relax the gating and suspension provisions set out therein, and, secondly, such relaxations must be set out in an agreement specifically between the fund and the investors. Neither of these requirements was satisfied in the Matador case.

The terms and manner of redemption from a fund must be ‘sufficiently’ set out in the company’s Articles. It is sufficient, for this purpose, for a fund’s Articles to set out the general gating and suspension powers and to specifically cross-refer to another document (most commonly, the PPM) which lays out the mechanics of how the directors intend to exercise those powers.

Practical significance

Justice Quin in the Matador case emphasised the importance of providing to investors (actual and prospective) transparency in relation to key investment terms. In particular, to the extent that investors in a fund receive preferred treatment, that position needs to be ascertainable by both new and existing investors.

This does not mean that the specific details of side letters are required to be disclosed in to all investors and potential investors. However, new investors must be aware, from a plain reading of the partnership agreement, that the fund is entitled, for example, to give certain investors enhanced liquidity entitlements which will not be available to all investors. Even if those entitlements themselves are not disclosed, the new investor is nonetheless able to undertake a risk analysis and make an informed decision whether or not to invest.

The findings in the Matador case with regards to the requirement for transparency are consistent with statements made by onshore regulators and industry bodies, such as the Financial Services Authority, the Securities Exchange Commission and AIMA, each of which has stressed the need for appropriate disclosures to made, given the terms of side letters entered by the fund concerned.

A further lesson from the Matador case is that the parties entering into the side letter must each have the power, capacity and authority to do so if the side letter is to be enforceable by the investor. Where an investor enters into a side letter prior to investment and the investment is made through a custodian, the side letter should be novated to the custodian. Where a side letter is entered after an investment has been made, the side letter should ideally be a tripartite agreement between the fund, the custodian and the investor.

Taken together, the Medley case and Matador case though arising in the hedge fund context provide useful points of reference for participants in the private equity industry in relation to the use of side letters. The cases confirm some basic pre-requisites and guidelines that must be observed if the side letters are to have their intended effect and cast light on traps that might otherwise prove costly for those relying upon the terms of side agreements with the fund concerned.

SIMON RAFTOPOULOS Partner

Corporate & Commercial Appleby (Cayman) Ltd.

[email protected]

TONY HEAVER-WREN Counsel

Litigation & Insolvency Appleby (Cayman) Ltd.

[email protected]

This publication is intended only to provide a summary of the subject mattered covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

January 2013 ©Appleby

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