Luxembourg, an attractive framework for fund financing

Fund financings encompass various types of facilities, such as:

• capital call and subscription credit facilities (usually short term, sometimes used to procure finance pending closing of a fund, often for investment bridging purposes),
• NAV or asset backed facilities (with recourse to the underlying investments of the fund),
• hybrid facilities (combining features of the capital call and asset backed financings, often longer term and with recourse to undrawn (sometimes “recallable” depending on the life cycle stage of the fund) commitments of the investors as well as the fund investments),
• umbrella facilities (in which separate loans are provided to multiple borrowers, often structured for individual borrowers under common management).

Borrowers include a variety of fund entities while lenders include traditional banks, credit funds and private equity funds and other alternative investors.

Luxembourg is often chosen for fund financing transactions due to the strong legal framework created by the law of 5 August 2005 on financial collateral arrangements (the “Financial Collateral Law”). The law offers bankruptcy remote security interest agreements and instruments and attracts a wide range of funders due to its creditor-friendly approach. In particular, future assets can be subject to security and related rights to claims (such as capital call rights) can be covered. These aspects provide attractive features for lenders in building security packages around fund finance facilities.

A typical security package for a capital call fund finance includes a pledge over the bank account into which investors are required to deposit their capital contributions to the fund, as well as security over the uncalled capital commitments of the investors, providing the lender with the right, on enforcement, to exercise the capital call rights under the associated fund constitutional agreement (frequently, but not always, a limited partnership agreement) and an associated power of attorney for the beneficiary of the security interest to support these rights.

In connection with the security over  investors’ uncalled capital commitments, notice should be served on the investors, which can be done via an ad-hoc communication or via regular communication (e.g., in the periodic reports of the fund) and may be by way of notification on an investor portal or other valid delivery method such as email. In some circumstances (which may be driven by the drafting contained in the fund constitutional agreement) lenders also request waivers by the investors of any rights of defense, set-off or other rights – in this context, appropriate governing law may also need to be assessed, including consideration of the jurisdiction of the investor.

For NAV or asset backed facilities, the security package will extend to the underlying assets of the fund, and can include security over claims and receivables, accounts, notes, bonds, shares or other equity instruments of holding companies for example. We often see more bespoke arrangements in these transactions as parties work to structure the security around issues which might otherwise arise with third party consents and/or intercreditor challenges and have recently published a new article looking at trends in this space: 2025 NAV Facilities Outlook: Evolving Applications and Best Practice Considerations

As highlighted in this recent article, the market for these facilities is complex and driven by a number of different factors, however, the market is anticipated to continue expanding as investor comfort with the product grows and fund sponsors find more ways to effectively manage their investment portfolios. This article provides valuable insights into the evolving applications and best practices associated with NAV loans, making it a recommended read for those looking to navigate the complexities of fund financing in the current market landscape.

Our Finance and Investment Funds teams in Luxembourg are happy to assist with any queries you may have.

For a broader overview on more aspects of fund finance, we have our webinar series: Fund Finance Webinar Series: “Financing the Fund Lifecycle”. Click here for the recordings of our series of three webinars in which our multi-jurisdictional fund finance team explored financing the fund lifecycle through all relevant stages.

Authored by Ariane Mehrshahi Marks, Bryony Widdup, Valerie Laskowski, and Mariel Luna.

^{Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.}