Luxembourg Fund Financings: Is Consent Of AIFM Necessary?

In a leading investment funds jurisdiction like Luxembourg, fund financing (i.e., using credit support to enhance liquidity, leverage returns, bridge capital calls or fund acquisitions) has grown significantly in recent years in a variety of forms (e.g., subscription line facilities, NAV-based lending or hybrid facilities), and it is set to expand further.

As key players in this investment funds' ecosystem, alternative investment fund managers (the "AIFMs") play a pivotal role in managing Luxembourg alternative investment funds ("AIFs") and as such may have to be involved in fund financing transactions entered into by AIFs that they manage.

The AIFM's involvement shall depend notably on the provisions of the fund documents of the AIF entering into the fund financing (e.g., LPA, offering document) as well as on the terms of the services agreements entered into by the AIF and the AIFM (including the AIFM agreement and the investment/portfolio management agreement concluded with the investment/portfolio manager (the "IM/PM") of the AIF) and may take different forms.

AIFM consent

In certain instances, the fund documents or the AIFM agreement require, more or less explicitly, the AIFM to grant its consent to the entering into by the AIF of the contemplated fund financing transaction and related documentation.

In such circumstances, the AIF would in principle not be able to enter into the fund financing unless it has obtained such formal consent from the AIFM – or, depending on the circumstances, its non-objection – as part of its decision-making process.

There is no prescribed form for such a consent, and it will generally consist of a letter signed by the AIFM describing the contemplated transaction, notably its key financing terms and any guarantee or security interests granted thereunder, pursuant to which it confirms its consent or non‑objection.

AIFM notification/acknowledgement

In other instances, the AIFM's consent may not be required, but it may be necessary – or recommended – to notify the AIFM and/or collect its acknowledgment of a contemplated fund financing transaction. This may be the case among others in fund structures where the IM/PM has been delegated the power to enter into financing transactions on behalf of the AIF or to consent to such transactions but where the AIFM remains ultimately responsible for such delegated functions.

Conclusion

To seek or not to seek the AIFM's consent or acknowledgment in a fund financing transaction involving an AIF is ultimately to be determined on a case-by-case basis, and experience teaches us that such analysis is not always as straightforward as expected and sometimes leads to interpretation issues. It is therefore recommended to clearly agree in advance what the role of the AIFM (and/or IM/PM) will be in future fund financing transactions to be entered into by the AIF once established, taking into consideration the applicable regulatory constraints and requirements of the various parties involved, and to properly reflect such agreed process and delegation set-up in the legal documentation to ensure a streamline process in due course.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.