Originally published September 26, 2016; updated June 25, 2024

A management fee credit facility (a “Management Fee Facility”) is a loan made by a bank or other financial institution (a “Lender”) to the management company or investment advisor (collectively, a “Management Company”) that is typically the sponsor (or affiliated therewith) (a “Sponsor”) of a private equity fund (a “Fund”). The Lender under a Management Fee Facility is typically secured by, among other things, a pledge from the general partner (the “General Partner”) or Management Company of its rights to receive management fees under the Fund’s limited partnership agreement (a “Partnership Agreement”) or other applicable management or investment advisory agreement. The Fund itself may have a subscription credit facility (a “Subscription Facility”), also known as a “capital call facility,” for which the collateral package is the commitments of the limited partners in the Fund (the “Investors”) to make capital contributions when called by the General Partner. A Lender under a Subscription Facility typically requires a covenant that restricts payments by a Fund in respect of other debt or obligations owed to affiliates of the Fund (including, without limitation, to its General Partner or the related Management Company in respect of fees) following the occurrence and during the continuance of an event of default, any potential event of default and/or other mandatory prepayment events thereunder, essentially subordinating such payments to the obligations owing to the Lender under the Subscription Facility (a “Subordination Provision”). A Subordination Provision may be problematic for the General Partner or Management Company because the Lender under a Management Fee Facility will be reluctant to permit the subordination of the payment streams needed to make payments owed to such Lender to payments owed to a Lender under a Subscription Facility. This article will discuss the potential tension between a...