US Fund Managers: Offering Evergreen Credit Products To EU Professional Investors – New York Office Snippet

US fund managers (USFM) increasingly adopt Luxembourg-based evergreen credit funds (ECF). Luxembourg ECFs enable USFMs to expand their AUM, diversify their earnings model and secure long-term capital. Meanwhile, EU investors gain prolonged access to a single investment product which reduces the need and costs of conducting due diligence on subsequent investment products.

Luxembourg ECFs are typically structured as a limited partnership to facilitate EU market outreach and investor preferences. The two default models for ECFs, which are both customizable, are the run-off and rolling vintage model. 

In a run-off model, investors usually subscribe on pre-set dates at NAV. Redemptions are not available on demand but only occur at pre-set redemption dates and are subject to notice. Even after the notice period, investors should not expect immediate redemption. Instead, a portion of the portfolio corresponding to the redemption request is put in “run-off” meaning that redemption occurs when the relevant portion of the portfolio liquidates. This avoids any liquidity stress on the ECF since the investors exit in the ordinary course of the asset liquidation process. In this model, management fees are generally based on NAV and carried interest is structured as a performance fee hovering around 10% of profits subject to an IRR based hurdle.

Under a rolling vintage model, investors initially commit capital to a specific fund compartment, and they subsequently roll over any unused or returned commitment in the next vintage compartment. As such it effectively functions as an ECF. Each compartment functions as a closed-end fund. Investors do not commit at NAV, but are subject to equalization within the vintage. If an investor opts out, it will not participate in a subsequent vintage and its stake in the current vintage is redeemed when the assets are liquidated. In this model, fees and carried interest mechanics follow the mechanics of a closed-end fund. This type of ECF usually adopts the Luxembourg RAIF regime, which allows each vintage to operate as a legally distinct compartment within a single legal entity.

Both models come with slow payouts, but as the typical professional ECF investor prioritizes prolonged access to a single investment product over fast redemption, this is not a concern. Overseeing an ECF entails greater administrative responsibilities compared to a traditional closed-ended product.

In jargon, the ECFs are often referred to as open-ended as they allow investors to enter the structure any time. However, these products often qualify as closed-end funds from an EU regulatory perspective. The difference is key as e.g. closed-end loan origination funds can rely on higher leverage limits (i.e., 300% as opposed to 175%) than open-ended loan origination funds and closed ended fund are exempt from certain other liquidity management rules.

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.