We are currently acting for a lender putting in place an umbrella subscription line facilities agreement for an 'evergreen' credit opportunities fund. So, what is an evergreen fund structure? In this case, it could perhaps more accurately be described as an 'evergreen fund with commitment periods', and is a closed-ended type of investment structure with finite investment and divestment periods, but sitting within a single perpetual fund structure.
Investors commit to an investment period which will be of a finite length, such as 3 years (an 'Investment Period'). That Investment Period will have a fundraising period associated with it, say of 12 months, in the same way that a normal closed ended fund would have a fund raising period running from first close to final close. Once admitted, an investor cannot withdraw or cancel the commitments it has made in respect of that Investment Period, and there are no "exit gateways" as might be the case for an open-ended fund structure. Investors will either make their commitments directly into the master fund or through a feeder fund, depending on their tax considerations. As normal, the fund makes investments during the Investment Period, and then looks to realise those investments.
So far, this all sounds like a normal single investment period closed ended fund. But what happened next is where things get different.
At a certain point during an Investment Period, such as when a certain percentage of investor commitments have been invested or a set period after the start of that Investment Period, the fund is permitted to start seeking investor commitments for a new Investment Period. This is also the same, so far, as for a normal fund. But that new Investment Period will be structured through the same fund vehicles as for the first Investment Period. The investor commitments for that second Investment Period, and the investments made with the commitments from that second Investment Period, are attributed to that second Investment Period only. There is no cross-collateralisation between the first Investment Period commitments or assets and the second Investment Period (or any later Investment Period) commitments or assets. The investors in the second Investment Period can be totally different to the investors in the first Investment Period, although in reality they are likely to substantially overlap. The second Investment Period will have its own fundraising period. In effect, the second Investment Period operates in all material respects like a totally separate fund from the first Investment Period.
The second Investment Period can be followed by a third Investment Period, and so on. In theory, there could be many different staggered Investment Periods running at the same time, but in practice there are unlikely to be more than two or three running concurrently.
So how does a sub line financing deal with this? The solution we came up with was to use an umbrella facilities agreement under which completely separate facilities are made in respect of each Investment Period. So the first facility has recourse only to the uncalled capital and drawdown proceeds of the investors who have made commitments to the first Investment Period. The second facility has recourse only to the uncalled capital and drawdown proceeds of the investors who have made commitments to the second Investment Period, and so on.
There is no recourse for the lenders of one facility to the security for any other facility. On enforcement, should the uncalled commitment security for relevant Investment Period commitments prove insufficient to repay the facility which it secures, the lenders will, like normal for a single fund sub-line facility, have the option of pursuing unsecured recourse against the assets of that Investment Period – but not the assets of any other Investment Period.
One novel feature of this evergreen fund structure is that investors in a particular Investment Period can elect, as that Investment Period draws towards its end, to start “harvesting” the proceeds of the commitments they made to that Investment Period. Two things are of note in relation to this harvesting mechanic.
First, starting at the end of the financial quarter following the end of the Investment Period, the amount of uncalled commitments which that investor has elected to harvest will be cancelled. Investment proceeds in respect the harvested amount will be paid to the investor as and when they arise. Any amount of “unharvested” commitments (which could be all of them should no harvest election be made) will be rolled forward as its new investor commitments to the next Investment Period.
Second, no matter whether an investor elects to harvest or not, it will remain liable to make capital contributions (up to its remaining uncalled capital ignoring the harvest election) to repay the liabilities of the fund, including its borrowings. As a result, the possibility of a harvesting election by investors is not an issue for lenders in respect any Investment Period.