Originally published March 21, 2018; updated June 26, 2024

Although the growing market for subscription-backed credit facilities (each, a “Subscription Facility”) has witnessed very few defaults or similar events necessitating non-consensual enforcement actions (each, a “Default”), Subscription Facility lenders and other secured parties thereunder (the “Secured Parties”) nevertheless should understand and, if necessary be prepared to quickly enforce their rights in the collateral pledged under such Subscription Facility—a point consistently reinforced by both bank regulators and risk teams at many of our clients. Similarly, private equity fund borrowers (each, a “Fund”) and fund sponsors should also understand the remedial actions a Secured Party may take under a Subscription Facility so that they can be prepared to respond appropriately should a Default arise and the Secured Parties elect to exercise their enforcement rights. Although certain rights and remedies may be available to Secured Parties following a Default, in most circumstances the most effective method of managing a Default will be for the Fund and the Secured Parties to develop a mutually agreeable strategy on how best to address the Default. In the event that the parties cannot agree on a strategy to work through the Default, the relationship between the Fund and the Secured Parties has turned sour or if the circumstances warrant an immediate exercise of remedies (e.g., the investors have moved to remove the Fund’s general partner or change the investment manager or the Fund or investment manager has committed fraud), the Secured Parties may determine exercising remedies in lieu of negotiating a workout is necessary.

To that end, this Legal Update examines the rights and remedies typically available to Secured Parties following a Default under customary, agented Subscription Facility documentation and provides recommendations for additional, preemptive actions that Secured Parties should consider incorporating into their standard policies to...