Stop Guessing: Due Diligence That Secures Fund Finance
For Private Equity funds and sophisticated investors, Fund Finance—the ecosystem of credit facilities provided to investment funds—is a critical component of capital management. Among the most strategic tools in this space is the Collateral Transfer arrangement, often structured as a Credit Guarantee Facility (CGF). Successful execution of these arrangements hinges on rigorous Due Diligence (DD).
In Fund Finance, due diligence isn’t just a box-ticking exercise. It’s a full review of the borrower’s stability, legal standing, and financial capacity to meet commitments secured by the collateral. The findings of this review determine whether the facility is viable and on what terms.
While this analysis focuses on facilities secured by guarantees—such as the Collateral Transfer mechanism and CGFs—it is important to note the differing scope of Due Diligence (DD) across the Fund Finance ecosystem. For subscription line facilities, DD centers on the fund’s Limited Partnership Agreement (LPA) and investor quality; for Net Asset Value (NAV) facilities, it focuses heavily on portfolio valuation; and for asset-backed facilities, the collateral quality (e.g., real estate or infrastructure) is paramount. Regardless of the facility type, a meticulous legal and financial review is essential.
Key Pillars of Fund Finance Due Diligence
Effective DD focuses on validating three primary areas to ensure the security package is robust and the repayment risk is mitigated.
1. The Sponsor and Investment Strategy
A crucial first step is to vet the General Partner (GP) or Sponsor that manages the fund. DD must establish a clear track record and alignment of interests.
- Track Record: Assessing the performance of prior funds, realisation history, and the management team’s stability.
- Fund Strategy: Analysing the stated investment thesis, target assets, geographical focus, and any potential regulatory risks associated with the strategy. This ensures the fund’s operations are consistent with the financial model underpinning the CGF.
2. The Legal Documentation and Structure
The Limited Partnership Agreement (LPA) is the core legal document and receives the closest scrutiny during due diligence.
| Document Focus | Due Diligence Objective | Impact on Collateral Transfer |
| Limited Partnership Agreement (LPA) | To confirm the GP’s authority to borrow, grant security, and make capital calls on its Limited Partners (LPs). | Verifies the legal enforceability of the security package securing the obligation covered by the Collateral Transfer instrument. |
| Subscription Documents | To verify the nature, quality, and legal jurisdiction of the underlying LP investor base. | Ensures the investor commitments are reliable and legally sound, which is the ultimate source of repayment. |
| Side Letters | To identify any preferential rights or restrictions granted to specific LPs that could impair the fund’s ability to draw down capital when required. | Mitigates the risk of unexpected challenges to the fund’s liquidity, which could compromise the CGF structure. |
3. The Security Package and Repayment Mechanism
In a Collateral Transfer facility, due diligence concentrates on the security provided to the lender. The collateral’s ultimate purpose is to stand as security for the fund’s specific obligation (e.g., securing an underlying credit facility or project).
- Capital Call Rights: DD must confirm the lender has a perfected security interest (a lien) over the fund’s right to call capital from its LPs. This mechanism is the primary source of facility repayment.
- Bank Account Control: Reviewing the legal arrangements around the fund’s capital call and distribution accounts ensures the lender/guarantor maintains sufficient control or security over the cash flows.
- Borrowing Limitations: Confirming the fund is not violating any covenant that restricts the amount or nature of debt it can incur, ensuring the Credit Guarantee Facility fits within the fund’s parameters.
DD’s Role in Collateral Transfer Authority
In the context of Collateral Transfer and Credit Guarantee Facilities, Due Diligence serves a specialised purpose: validating the fund’s authority and ability to service the secured obligation.
A fund may seek a CGF from a trusted provider like IntaCapital Swiss to secure a credit line or specific project finance. The DD process ensures that:
- The fund has the contractual right to enter the CGF. (Checked via LPA review).
- The underlying LPs are contractually bound to fund capital calls. (Checked via subscription documents).
- The transfer of a Bank Guarantee (BG) or Standby Letter of Credit (SBLC) as collateral is an appropriate and permitted use of the fund’s credit standing.
By confirming the capital call process is effective, due diligence verifies the fund’s capacity to meet its obligations, thereby justifying the use of the Collateral Transfer instrument. A robust DD process is the bridge between a fund’s credit profile and the secure provision of a CGF.
Every strong financial structure rests on solid due diligence. IntaCapital Swiss applies deep expertise to ensure each Collateral Transfer is legally and financially sound.
Ready to optimise? Discover today how a Collateral Transfer facility can immediately elevate your fund’s capital strategy. Contact our experts today
