Introduction

A subscription credit facility (a “Facility”) is an extension of credit by a bank, financing company, or other credit institution (each, a “Lender”) to a private equity fund (the “Fund”). The defining characteristic of such a Facility is the collateral package securing the Fund’s repayment of the Lender’s extension of credit, which is composed of the unfunded commitments (the “Capital Commitments”) of the limited partners to the Fund (the “Investors”) to make capital contributions (“Capital Contributions”) when called upon by the Fund’s general partner, not the underlying investment assets of the Fund itself.

The documents establishing a Facility contain provisions extending credit to the Fund and securing the related rights of the Lender. Additional documentation governs Investors’ rights and obligations to the Fund as they relate to the Facility. Specifically, Investors’ rights and obligations largely arise under the Fund’s limited partnership agreements and Investors’ subscription agreements. However, individual Investors also frequently negotiate and enter into a letter agreement with the Fund (“Side Letters”), separate and apart from other Investors, which interprets, supplements, and alters the terms of that Investor’s rights, duties, and obligations under the related limited partnership agreement or subscription agreement. Side Letters can and do have a significant impact on Facilities.

Traditionally, Side Letters have been used to address unique economic issues between Funds and their Investors (e.g., family and friends or late-closing investors) and/or issues specific to particular Investors (e.g., governmentally regulated investors). That tradition has matured with the Facility market and, as such, the frequency, sophistication and size of Side Letters have grown dramatically. With that growth, issues arising in Side Letters have continued to develop, each of which holds significance for Funds, Lenders, and Investors. As discussed in greater detail below, Side Letters can impact every aspect of a Facility, including its very existence....