Originally published January 28, 2014; updated July 10, 2024
Due to previous challenges in the United States fundraising market for sponsors of real estate, private equity and other investment funds (each a “Fund”), many Fund sponsors have sought to expand their sources of capital to include investors domiciled outside of the United States (“Foreign Investors”). As such, Fund sponsors are increasingly requesting that the unfunded capital commitments of these Foreign Investors be included in the borrowing availability (the “Borrowing Base”) under the Fund’s subscription credit facility (a “Subscription Facility”).
While traditionally Funds have not chosen their lenders solely based upon whether such lender would include Foreign Investors’ capital commitments in the Borrowing Base, it is becoming a more critical factor. Consequently, understanding and addressing collateral enforceability issues related to Foreign Investors has become increasingly important for lenders. Below we set out our views on common concerns regarding collateral enforceability and some possible solutions for minimizing such risk.
Subscription Credit Facilities and Foreign Investors
A Subscription Facility, also frequently referred to as a capital call facility, is a loan made by a bank or other credit institution (a “Lender”) to a Fund. The defining characteristic of such Subscription Facility is the collateral package, which is comprised not of the underlying investment assets of the Fund, but instead by the unfunded capital commitments (“Capital Commitments”) of the limited partners of the Fund (the “Investors”) to make capital contributions (“Capital Contributions”) when called from time to time by the Fund’s general partner (the “General Partner”). The loan documents for the Subscription Facility contain provisions securing the rights of the Lender, including a pledge of (a) the unfunded Capital Commitments of the Investors, (b) the right of the General Partner to make a call (each, a “Capital Call”) upon the Capital Commitments of the...