Updated 2025

Private investment funds (“Funds”) employ a variety of financing structures to improve liquidity and/or obtain leverage, and lenders similarly rely on a variety of collateral and credit support packages for repayment in connection therewith. Three types of credit support commonly used in the fund finance market are (i) the unfunded equity capital commitments of limited partners of a Fund (“Capital Commitments”), (ii) a guaranty (“Guaranty”) and (iii) an equity commitment letter (“ECL”).¹ In the event a Fund and/or a lender must attempt to monetize any of these forms of credit support for purposes of repaying a credit facility, the unique characteristics of each will dictate how the parties can effectively realize the applicable credit support. This Legal Update will discuss the enforcement of a Capital Commitment, Guaranty or ECL by the applicable party in connection with a credit facility.

Capital Commitments

Capital Commitments may be used as credit support in a credit facility that is not a standard subscription-backed credit facility or a capital call facility (“Subscription Facility”), whereby the unfunded Capital Commitments may be viewed by a lender as a potential source of repayment rather than as a direct part of the collateral. In such a credit facility, the loan documents may include representations, warranties and covenants related to the amount of unfunded Capital Commitments that must be reserved by the Fund for the duration of the facility, with the expectation that if the underlying assets of the Fund are insufficient to repay the facility, there is another liquid and substantive source of repayment that the Fund and the lender may rely upon. Following a default by the Fund under a Subscription Facility, a lender may directly enforce the right of the general partner of the Fund to make a Capital Call upon the unfunded Capital...