On July 22nd and 23rd, we held our annual Fund Finance Mid-Year Market Update Panels, this year in Los Angeles and San Francisco (the “Market Updates”). Based on our experiences and the views expressed by the panelists at the Market Updates, capital call subscription credit facilities have continued their positive credit performance and growth momentum in the first half of 2014. Below we set forth our views of the current market trends and developments likely to be relevant for the remainder of 2014.

Credit Performance  2014 Year-to-Date Credit Performance  Mirroring all of 2013, Mayer Brown LLP has not been  consulted on a Facility payment event of default or an  institutional investor exclusion event in 1H 2014 and  we are not aware of any existing Facilities under credit  duress. All five of the bank panelists speaking at the  Market Updates reported consistent credit performance across their portfolios so far this year.   Short Term Credit Forecast Fund Investment Performance. There is an abundance of data that forecasts continuing positive Facility  credit performance on the macro level for the foreseeable future. Private equity funds of virtually all asset  classes and vintages (each, a “Fund”) have achieved  positive investment return performance in the recent  past. The Cambridge Associates LLC US Private  Equity Index® (the “C-A Index”) shows one-year and  three-year returns as of December 31, 2013 of 20.6%  and 14.9%, respectively, and Preqin reports promising  current aggregate cumulative returns for Funds of  virtually all vintages and geographies. This positive  performance has continued into 2014, with Preqin  reporting as one example a 6.3% average increase in  net asset value (“NAV”) for real estate Funds in 1H  2014. 2  While positive Fund investment performance  enhances Facility repayment prospects in its own  right, Fund limited partners (each, an “Investor”) with  demonstrable NAV in a Fund are highly incentivized  to fund future capital calls (“Capital Calls”) and avoid  the severe default remedies typical in a Fund partnership agreement (each, a “Partnership Agreement”).  Setting aside the well-established, enforceable contractual obligations of the Investors, it is difficult to  foresee widespread Investor funding defaults in the  near term when the vast majority of existing Funds  have generated positive returns. 3 Harvest Events and Investor Distributions. Additionally, there is generally positive liquidity data at  virtually every level of the Fund structure relevant for  Facility lenders (“Lenders”). Private equity-backed  investment exits in 2014 have continued and built upon  the robust harvest activity in 2013, with 394 transactions valued at $137 billion in Q2 2014 alone. 4  Exit  Summer 2014 Subscription Credit Facility  Market Review  Michael C. Mascia Zachary K. Barnett Wesley A. Misson On July 22nd and 23rd, we held our annual Fund Finance Mid-Year Market Update Panels, this year in Los  Angeles and San Francisco (the “Market Updates”). 1  Based on our experiences and the views expressed by the  panelists at the Market Updates, capital call subscription credit facilities (each, a “Facility”) have continued  their positive credit performance and growth momentum in the first half of 2014. Below we set forth our  views of the current market trends and developments likely to be relevant for the remainder of 2014.2 Fund Finance Markets Review   |   Summer 2014 events of course lead to Investor distributions, and  distributions are at record levels. In 2013, Fund  distributions to Investors greatly exceeded capital  contributions called and funded, with Funds in the C-A  Index calling $56.3 billion, while distributing $134.6  billion (the largest yearly amount since the C-A Index’s  inception). On a global basis, $568 billion was distributed back to Investors in 2013 (up 49% from 2012). 5 Investors receiving significant distributions forecasts  well for their ability to fund future Capital Calls. Secondary Funds. The fundraising success of secondary Funds, Facility borrowers in their own right,  has created an unprecedented volume of dry powder  available to offer exit opportunities to any Investor  that experiences liquidity challenges and needs to exit  a Fund position. In fact, the single-largest Fund closed  in Q2 2014, and the single largest secondary Fund to  close in history was the Ardian Secondary Fund VI,  closing on $9 billion in April. There has reportedly  been $15 billion raised by secondary Funds in 1H 2014  and there are multiple premier Sponsors in the midst  of fundraising with significant interim traction. This  significant growth in secondary Fund dry powder  creates a readily available market for any Investor  wishing to transfer, whether for diversification  purposes or because of financial distress, and the  current secondary market is very active. The first half  of 2014 saw more than $16 billion of secondary  transactions (an annualized pace that would exceed  2013 by over 10%) and it has been reported that the  Montana Board of Investments received more than 40  offers for eight Fund positions that it recently put out  for bid. 6  If the Facility market performed extremely  well during the financial crisis when the secondary  Fund market was a fraction of what it is today, today’s  secondary Funds market with some $50 billion in dry  powder certainly provides Lenders a far greater buffer  to any initial collateral deterioration.   Long-Term Credit Forecast Concerns  Despite the nearly uniform positive trending in the  data above supporting Facility credit performance,  none of it goes to the heart of the fundamental credit  underwriting premise of a Facility. That is, that the  Investors’ uncalled capital commitments are unconditionally due, payable and enforceable when called,  regardless of Fund investment performance, NAV,  receipt of distributions, market liquidity or Investor  transfers. And from this vantage point, the 2014  year-to-date trending has been far less beneficial for  Lenders. We have for some time been noting that  Facility structures have been drifting in favor of the  Funds and that Lenders have become increasingly  comfortable going incrementally down the risk continuum, at least for their favored Fund sponsors  (“Sponsors”). In fact, at the end of 2013, we gave the  view that much of the trending (as an example, the  including of certain historically excluded Investors in  borrowing bases at limited concentrations) seemed  perfectly rational and completely supportable by the  available Investor funding data. But as 2014 has  progressed and the downward trending has continued,  we are seeing the emergence of structural issues in  prospective Facilities that we believe further conflict  with Lenders’ general expectations as to the appropriate allocation of risk between the Lenders, Funds and  Investors. While the Facility market is far from uniform and every particular Facility needs to be  evaluated in its own context, there are a number of  emerging credit concerns we think Lenders should  rightfully put heavy emphasis on. Examples include  Partnership Agreements that fail to appropriately  contemplate or authorize a Facility, overcall limitations  structured so tightly that the degree of overcolleralization buffering Investor defaults is insufficiently  adequate to cover the Facility obligations in a period of  distress, lack of express Investor obligations to fund  without setoff, counterclaim or defense, and Fund  vehicles being formed in non-US partnership structures that require the Fund to issue some form of  equity shares or certificates each time a Capital Call is  funded. And there are others. Our view has been, and  remains, that the most likely way a Lender will suffer  losses in this space is not via widespread Investor credit  deterioration, but rather via a Sponsor or Fund failing  to meet its contractual obligations to Investors,  Summer 2014 Subscription Credit Facility Market Review mayer brown 3 ultimately resulting in a dispute and an Investor  enforcement scenario. Thus, Lenders should thoughtfully contemplate documentation and structural risks  that undermine their expected enforcement rights. If  this downward trending on the risk continuum continues at its current pace, we ultimately see an inflection  point where particular Lenders determine that certain  proposed structures simply drift too far from the  fundamental tenets of a Facility and no longer meet the  investment grade credit profile expected in a Facility. Facility Market Expansion  Fundraising Fund formation in the first half of 2014 has remained  positive and generally consistent with levels seen  in 2013. 417 Funds had their final closing, raising  $236 billion in capital commitments in 1H 2014.  The “flight to quality” trend has continued, with fewer  Funds being formed but raising more capital, with  the average Fund size in Q2 2014 being the largest  to date. 7  We continue to think this trend towards  consolidation slightly favors incumbent and larger  Lenders at the expense of new entrants and smaller  institutions. Experienced Sponsors are more likely to  have existing relationships with incumbent Lenders  in multiple contexts and larger Funds need larger  Lender commitment sizes in Facilities. We note,  however, that several smaller Lenders have greatly  increased their maximum hold positions and have  created syndicate partnerships to effectively compete.  Deal Volume and Pipeline Facility deal volume remains robust and likely above  2013’s pace, although we hesitate to confirm the  double-digit growth we forecasted in January based  on the available anecdotal evidence alone. The  pipeline of both large syndicated transactions and  bilateral deals forecasts well for the remainder of the  year. We expect 2014 deal volume to ultimately finish  ahead of 2013, albeit perhaps by only single digits.  Growth Prospects The Facility market, in our view, still projects substantial opportunity for future growth. With global  dry powder now at an all-time high of $1.16 trillion as  of the end of Q2 2014, up a full 8% from the end of  2013, there is simply a greater and increasing pool of  collateral available to support Facilities. 8  And if you  take a ratio of Facility size to Fund uncalled capital  across a large portfolio of Facilities (admittedly not a  statistic clustered close to the mean) and determine  an average percentage, say 30%, you could project out  a potential Facility market size of well over  $300 billion. As most market participants estimate  the current Facility market to be less than $200  billion, it does appear that plenty of existing Funds  have yet to benefit from Facilities. When you combine  this room for further penetration into Funds new to  Facilities with the greater volume of Funds presently  fundraising (estimated currently around 2,000), the  increasing use of returned capital mechanics to  refresh dry powder and the greater use of Facilities  throughout the entire Fund life cycle, it seems evident  that the opportunity for outpaced growth remains. 9 Facility Market Trends There are a number of interesting trends in the  Facility Market itself that are impacting both  transaction structures and terms. We highlight  below a few that are most impactful.  Extensive Refinancing Activity Many Facilities of 2011 or so vintage have been  coming up for renewal and the vast majority have  been extending instead of terminating. Lenders are  increasingly comfortable extending Facilities beyond  Fund investment periods (subject to appropriately  supportive language in Partnership Agreements) and  Funds appear to be valuing the liquidity and other  utility of a Facility well into their harvest periods.  Virtually all Facilities coming up for renewal have  been pricing flat to down, further encouraging their  extension. We expect the volume of amend and  Summer 2014 Subscription Credit Facility Market Review 4 Fund Finance Markets Review   |   Summer 2014 Summer 2014 Subscription Credit Facility Market Review  extend activity to increase slightly towards year-end,  mirroring an uptick we experienced in 2H 2011.  Transaction Structures  Structural Evolution. The evolution of Fund structures continues to complicate Facility structures, as the  incorporation of multiple Fund vehicles, in an effort to  optimize investment structure for Investors, is continuing and perhaps accelerating. Separately managed  accounts, co-investment vehicles, joint ventures and  parallel funds of one are all increasingly common,  each of which stress the traditional commingled Fund  collateral package for a Facility. As the various vehicles  often have challenges being jointly and severally liable  for Facility obligations, Lenders are increasingly  finding themselves with Facility requests involving  single-Investor exposures. Interestingly, in certain  instances, these single-Investor exposure structures are  leading back to the delivery of Investor acknowledgment letters (which have been in certain cases trending  out of the commingled Fund market), as Lenders seek  credit enhancements to offset the lack of multiple  Investor overcollateralization. Umbrella Facilities. We are seeing increased appetite  for umbrella Facilities (multiple Facilities for unrelated  Funds advised by the same Sponsor but documented  on the same terms in a single set of loan documents). In  fact, Mayer Brown LLP has closed more umbrella  Facilities in 1H 2014 than in all of 2013. Hedging Mechanics. Embedding hedging and swap  collateralization mechanics into Facilities has also  accelerated in 1H 2014. While extending Facility  collateral to cover collateralization requirements  under ISDAs entered between the Fund and the  Lender has existed in the bilateral Facility market  for some time, including clear structural borrowing  base allocation, tracking and measurement mechanics in syndicated Facilities is relatively new.  Regulatory Impact  The regulatory landscape continues to occupy a  substantial amount of Lender and Sponsor time.  Analyzing Facilities for compliance with the final  Volcker Rule, for appropriate risk weighting under  Basel III and other regulatory capital regimes and  the appropriate outflow analysis under the minimum  liquidity coverage ratio promulgated by the US  regulatory agencies all require thoughtful care in  application to Facilities, especially in light of the  speed of Facility structural evolution. We expect the  regulatory environment will be increasingly relevant  throughout 2014 and that Lenders may ultimately  need to structure around, or price, for their increasing regulatory requirements, particularly around  Facility unfunded revolving commitments. 10 Legal Developments Cayman Islands Legal Developments  Two new statutory enactments have occurred in the  Cayman Islands in 1H 2014, both of which are in  small part helpful to Lenders. The first, the  Contracts (Rights of Third Parties) Law, 2014, was  enacted on May 21, 2014. Although not explicit as  to Facilities, the new law allows third parties not  party to a contract (such as a Partnership  Agreement) to rely on and enforce provisions that  are intended by the contracting parties to benefit  the third parties, even though the third parties are  not signatories. This brings Cayman Islands’  third-party beneficiary law closer in line with other  jurisdictions and can ultimately accrue to the  reliance and enforcement benefit of Lenders if  Partnership Agreements are expressly drafted to do  so. The second key change is the enactment of the  revised Exempted Limited Partnership Law, 2014,  which took effect on July 2, 2014 and is a comprehensive revision of previous Cayman Islands  exempted limited partnership law. While few of the  changes are relevant for Facilities, the new law does  expressly confirm that any right to make Capital  Calls and to receive the proceeds thereof vested in a  general partner or the Fund shall be held by the  general partner as an asset of the Fund, thus  providing greater certainty of a Fund’s right to mayer brown 5 Summer 2014 Subscription Credit Facility Market Review  grant security in the right to issue and enforce  Capital Calls. 11  Case Law Development: Wibbert v. New Silk A case of interest to Lenders, Wibbert Investment  Co. v. New Silk Route PE Asia Fund LP, et al., is  pending in the New York state courts. While no  mention of a Facility is evident in the pleadings,  the case is illustrative of the type of fact pattern  and dispute that could potentially find a Lender in  an enforcement scenario. In this case, the Investor,  Wibbert Investment Co. (“Wibbert”), alleges,  among other things, that the Fund failed to disclose  the occurrence of a key person event after a principal of the Sponsor was charged and convicted of  insider trading and that the Fund’s general partner  committed gross negligence and/or willful malfeasance. The Fund fully contests the claims and the  facts are in dispute. Wibbert has declined to fund a  Capital Call and alleges that the Fund has threatened to implement default remedies as a result. On  June 17, 2014, at Wibbert’s request, the New York  Supreme Court, Appellate Division, granted a  preliminary injunction in favor of Wibbert barring  the Fund from declaring Wibbert in default and  from exercising default remedies while the case  proceeds. The ruling is currently on appeal. While  the facts of this case are highly unique and have  involved extensive publicity in connection with the  trials and convictions of certain of the principals,  the case does stand as evidence of why Lenders may  want to consider the importance of a contractual  obligation on Investors to fund Capital Calls to  Lenders without setoff, counterclaim or defense.  The case merits further attention and monitoring  as it proceeds. 12  Case Law Development: TL Ventures, Inc. In June 2014, the US Securities and Exchange  Commission (the “SEC”) brought a pay-to-play case  against a Sponsor pursuant to Sections 203(e) and  203(k) of the Investment Advisers Act of 1940 (the  “Advisers Act”), to our knowledge the first such case  brought by the SEC. The SEC alleged that an  associate of TL Ventures, Inc. made a $2,500  campaign contribution to the Mayor of Philadelphia  and a $2,000 campaign contribution to the  Governor of Pennsylvania at a time when the  Pennsylvania State Employees’ Retirement System  was an Investor in Funds sponsored by TL  Ventures, Inc. Both the Mayor and the Governor  have vested authority to appoint certain people  with inf luence as to investment selection. The SEC  alleged that this action violated Section 206(4) and  Rule 206(4)-5 of the Advisers Act, noting that it  need not allege or demonstrate a showing of quid  pro quo or actual intent to inf luence an elected  official by the Sponsor. The Sponsor, without  admitting or denying the relevant subject matter,  consented to an order with the SEC to resolve the  matter. As Lenders are increasingly reviewing side  letters between governmental Investors and Funds  that contain withdrawal and/or cease-funding  rights if prohibited political contributions are made  or improperly disclosed, Lenders must bear in mind  that such a circumstance may not be purely hypothetical and that even the most innocent and  well-intentioned political contributions may trigger  the withdrawal rights. 13   LSTA Model Credit Agreement Provisions On June 25, 2014, the Loan Syndications and Trading  Association® published an exposure draft of its Model  Credit Agreement Provisions. The proposed revisions  include a host of technical revisions, but the two most  relevant revisions relating to Facilities include an  extensive set of mechanics governing facility extensions and changes to the lender assignment and  participation provisions, including certain prohibitions of assignments or participations by lenders to  competitors of the borrower or institutions the  borrower has requested in advance be disqualified for  assignments or participations. August 8, 2014 is the  current target date the LSTA plans to publish the  revisions. A copy of the exposure draft is available to  LSTA members on the LSTA’s website at http://www. lsta.org/legal-and-documentation/primary-market. 146 Fund Finance Markets Review   |   Summer 2014 Summer 2014 Subscription Credit Facility Market Review  Conclusion We project a robust Facility market to continue in 2H  2014 building on the growth and positive momentum  to date, but with competitive, structural and underwriting challenges at the margins. We expect the  number of Facilities consummated will continue to  grow at an outpaced but measured rate, reflective of  the time-consuming nature of educating new Sponsors  of the utility and benefits of a Facility. We continue to  anticipate excellent credit performance throughout the  remainder of 2014, but recommend caution to Lenders  as certain emerging Facility structures reallocate the  traditional Facility risk allocations among Lenders,  Funds and Investors and stress some of the most  fundamental tenets of a Facility