Gating
Due to the capital markets conditions caused by the COVID-19 crisis, liquid funds may need to activate their gating provisions in order to limit redemptions, in accordance with the terms of the fund's prospectus.
Suspension of NAV calculations, redemptions, subscriptions and conversions
In some cases, fund managers may need to suspend net asset value (NAV) calculations as well as redemptions, subscriptions and conversions. They can do so where the fund's articles of association specify the conditions for a suspension. Such conditions usually include exceptional circumstances. The current market disruption caused by the COVID-19 outbreak most likely qualifies as such.
The fund must inform the Luxembourg financial sector regulator (CSSF) of the suspension without delay. If the fund markets its units in other EU member states, the competent authorities of those states will need to be informed as well.
Cash exposure to single counterparty
Undertaking for collective investment in transferable security funds divesting or considering divesting their portfolios should respect the maximum cash exposure to any single bank, be it a custodian, sub-custodian or prime broker. The current limit is set at 20% of the fund's NAV. Any violation of the applicable rules must be reported to the CSSF.
Investor default
Funds in the investment stage may experience investor default. Depending on the provisions of the fund's documentation, the potential consequences of default on other investors and the fund will need to be investigated.
Impact on bridge financing and leverage restrictions
Investor default may also lead to an inability to refinance bridge loans in a timely manner. The possibility to rely on force majeure or similar clauses will depend on the law governing the bridge documentation and the terms of the loan agreement.
In addition, the potential consequences for the legal restrictions applicable to leverage may need to be assessed.
Exit delays and fund extension
Funds in the divestment stage may experience delays in disposing of certain assets.
Managers may also need to consider extending the life of the fund. To the extent the fund's documentation needs to be amended in this respect, managers should reach out to their investors and the CSSF without delay.
Material adverse events
Illiquid funds, such as private equity and loan-originating funds, should consider whether the COVID-19 pandemic could constitute a material adverse effect under agreements or deals that have yet to close. For transactions still in the negotiation stage, managers of illiquid funds may wish to consider building in specific thresholds to establish at which point the impact of the COVID-19 crisis on the target will be deemed to constitute a material adverse effect.
Valuation and liquidity management considerations
For reporting purposes, fund managers will need to consider how to handle valuations in these tumultuous times. In particular, those with illiquid assets under management should plan for and seek to mitigate uncertainty in the valuation process.
Fund managers with (partially) open-ended illiquid portfolios should also assess how they will address redemptions.
Mention of a subsequent event in the financial statements
Fund managers may need to include a note in their financial statements, describing the impact of the COVID-19 crisis on the fund as a major subsequent event, where applicable.
