Private Equity GP and Employee Co-Investment Credit Facilities, Management Lines of Credit

As the subscription facility market has grown, fund sponsors seek other means of liquidity for their businesses and their investment professionals, and lenders seek to expand their product offerings to the sponsor. These products include working capital facilities secured by management fee income, co-investment lines of credit for employees to finance their fund interests, and GP facilities that invest GP obligations to fund capital contributions.

A management line of credit often takes the form of a "revolver" that provides liquidity to the fund manager between quarterly fees. Collateral typically includes the management fees collected and the depository bank accounts of such fees. In its due diligence, counsel must review each management agreement to understand how fees are calculated when paid and the assets under management and identify any management entity that should be joined as a credit party.

Employee co-investment facilities are typically arranged and managed by the fund sponsor on behalf of participating employees. These facilities can require a significant amount of time and expense for the sponsor. The lender must conduct due diligence to assess the creditworthiness of each borrower, and counsel must document relationships between the lender, sponsor employees, fund, GP, and any other applicable sponsor entities, each of which has distinct interests.

In GP financing, the lender may require that the GP grant a lien on its interest in the underlying fund. Most fund agreements prohibit its GP from "transferring" its general partnership interest. To solve this issue, the limited partnership agreement may be amended to bifurcate the GP's interest into a general partnership interest and a limited partnership interest. Care must be taken to avoid any conflict of interest with the fund when negotiating pricing and other terms of a partner loan program.

Listen as our authoritative panel discusses the structuring and documentation of GP and employee co-investment credit facilities and management lines of credit and the issues associated with each.

I. The impetus behind co-investment credit facilities for the sponsor and lender

II. Management line of credit

A. Collateral: points of contention

B. Due diligence of manager and management agreement(s)

C. Deal terms

III. Employee co-investment facilities

A. Role of sponsor

B. Due diligence of individual borrowers

C. Employee departures and other administrative issues

D. Documentation

IV. GP financing

A. Issues associated with the pledge of partnership interest: bifurcation into GP and LP interests

B. Ensuring continued compliance with fund agreement and fund credit facilities

C. Potential conflicts of interest

The panel will review these and other relevant issues:

• What are the key deal terms and points of contention in negotiating management lines of credit?
• What are the preferred alternatives for structuring employee co-investment facilities?
• How should a sponsor handle the departure of a key employee who is a party to a credit facility? What should the documents say?
• What are the benefits of bifurcating the GP's interest into a general partnership and limited partnership interest? Is it necessary?