Updated: June 2024

Subscription credit facilities, which are lines of credit in favor of private equity and similar investment funds primarily secured by the capital commitments of the fund’s investors, are most commonly structured using a borrowing base structure similar to other types of asset-backed loans. Many factors will dictate the best borrowing structure for a fund, the most important of which are the make-up of the fund’s investor pool and where the fund is in its life cycle (raising capital, harvesting investments, etc.).

Historically, each market lender has been tied to a single borrowing base philosophy that keyed squarely into its unique credit and underwriting requirements. As industry competition has continued to grow, banks have realized that a one-size-fits-all approach may not be the best long-term approach in the market. Accordingly, many lenders have adjusted their credit and underwriting policies to permit more flexibility in structuring borrowing bases to better fit a particular fund’s investor pool. Sometimes this has been accomplished by adjusting the borrowing base inclusion criteria, advance rates or concentration limits, while other times, it is accomplished by taking a completely different approach to structuring the borrowing bases.

Prior to discussing the differences between the various borrowing base structures, it is helpful to first outline the common tenants of the various borrowing base structures:

• Calculation of the Borrowing Base: A subscription credit facility borrowing base is usually calculated by taking (x) uncalled capital of each Eligible Investor multiplied by (y) the Advance Rate with respect to such Eligible Investor and (z) subtracting any haircuts related to Concentration Limits and/or Borrowing Base Deductions.
• Eligible Investors: The uncalled capital commitments of some investors will be included in the calculation of the borrowing base (“Eligible Investors”) and the uncalled capital commitments of other Investors will not be (“Excluded...