Haynes Boone Attorneys Tim Johnston, Brent Shultz and Karina Oshunkentan co-authored an article for Westlaw Today examining the growing use of management fee lines in fund finance and the key structuring, collateral and diligence considerations lenders and private equity sponsors should address as these facilities become increasingly sophisticated.
To read the full article from Westlaw Today, click here. Read an excerpt below:
A management company is the vehicle that manages the operations and investment strategies of the investment funds and houses the employees of the sponsor.
Unlike investment funds that require capital to make investments, management companies require capital to pay for operational expenses and, in cases in which the sponsor has some equity participation in these funds, to fund capital calls of the sponsor or GP commitments. A management fee line is typically documented as a revolving working capital facility.
In this structure, the management company serves as the borrower, with the facility collateralized by the assets of the management company (importantly, the contractual rights to receive management fees from underlying funds). The facility is underwritten based on the cash flows represented by these management fees, which are normally a percentage of managed assets and paid by the managed funds.
The facility may involve multiple entities where fees aggregate up through the management structure. The borrower may be an upper-tier entity, with lower-tier relying advisors or other entities serving as co-borrowers or secured guarantors. Facility size will vary depending on the size of the sponsor, requiring diligence to understand the amount of management fees the management company is entitled to collect.
In addition to traditional management fees, the management company or an affiliate may also receive other fees, including incentive or performance fees and transaction fees that offset against or are payable in addition to management fees.
