Updated 2025
The market for subscription-backed credit facilities, also known as “capital call” or “capital commitment” facilities (“Subscription Facilities”), was recently unsettled by reports that an international private equity fund had allegedly released its investors’ capital commitment obligations in violation of covenants under its Subscription Facility, potentially leaving the Subscription Facility lender exposed without sufficient collateral coverage with respect to the loan amounts outstanding. While most lenders have always been aware of this risk, many market participants have re-focused their attention on this issue and are now looking to better understand a lender’s protections against a fund-borrower (the “Fund”) and its investors following the unauthorized release of the investors’ obligations to fund their capital commitments to the Fund.
A key to understanding the risks of a Fund releasing its investors’ capital commitment obligations without lender consent is to examine the jurisdiction in which the Fund is organized. Jurisdictions differ on the statutory and common law protections available to lenders that might find themselves in this situation. Accordingly, prior to entering into a Subscription Facility (or allowing a new Fund to join an existing Subscription Facility), lenders should be comfortable with the Fund’s governing law and understand any jurisdiction specific risk with respect to the enforceability of capital commitments.1 Fortunately, from a US perspective, statutory law in jurisdictions in which Funds are frequently formed (e.g., Delaware and New York) provides some helpful protections to Subscription Facility lenders that find themselves in a situation where a Fund has released capital commitment obligations in violation of its contractual obligations under a Subscription Facility.
Under Delaware limited partnership law, Subscription Facility lenders can take comfort in the fact that even when a general partner releases the Fund’s investors from the obligation to fund their capital commitments, so long as the lender reasonably relied...