Recallable capital has become an increasingly common concept in subscription credit facilities. In this Legal Update, we explain the concept of recallable capital and its role in subscription credit facilities, as well as considerations for fund sponsors, lenders, and investors interested in including recallable capital as part of the facility’s borrowing base calculation. The inclusion of recallable capital in a subscription credit facility’s borrowing base requires a careful analysis of the fund documentation and tailored drafting of the subscription credit facility’s loan documentation.

Background

At the heart of a subscription credit facility are investors’ capital commitments to a private equity or similar type of fund (the “Fund”), any remaining unfunded amounts, and the ability of the Fund and its general partner to require the investors to make capital contributions to the Fund within a certain timeframe pursuant to a capital call. These obligations, and the corresponding amounts, are the crux of the collateral package and borrowing base for a subscription credit facility. Any fluctuations in the amount of the investors’ capital commitments or their unfunded capital commitments must be carefully tracked by a lender to ensure compliance with the facility’s borrowing base and to maintain adequate over-collateralization.

There are various reasons the amount of an investor’s remaining unfunded capital commitment might fluctuate over time. For instance, it might change due to a commitment increase or a partial/full investor transfer or because the Fund has called capital from the investors. Additionally, recallable capital can change the amount of an investor’s remaining unfunded capital commitment.

A Fund’s limited partnership agreement (“LPA”) may contemplate multiple potential sources of recallable capital, but, generally, recallable capital includes:

• Unused capital contributions (i.e., capital contributions that have been funded by the investors but were not deployed by the Fund for the intended purpose or within a defined...