Executive Summary

Subscription credit facilities rely on the obligations of investors to a private investment fund (“Fund”) to contribute their capital commitments to the Fund when called. From a subscription credit facility lender’s perspective, it is essential that the Fund’s limited partnership agreement (“LPA”) include an express agreement of its investors to fund their capital commitment obligations without setoff, counterclaim, or defense. In this Legal Update, we explain the rationale behind this required LPA language and its related implications for an efficient and effective pursuit of enforcement remedies under a subscription credit facility, potential ramifications of and solutions to address any LPA deficiencies regarding this provision, and related drafting considerations for a facility’s loan documentation.

Background

A subscription credit facility relies upon the obligations of a Fund’s investors to contribute their capital commitments to the Fund as and when called by the Fund or its general partner in accordance with the terms of the Fund’s LPA. The investors’ uncalled capital commitments comprise the facility’s security package, borrowing base, and anticipated source of repayment and are, therefore, central to a lender’s credit underwrite for the facility.

If an event of default exists under the facility, one of the lender’s primary enforcement remedies is to call capital from the Fund’s investors. The lender can either instruct the Fund to call capital from its investors or step into the shoes of the Fund and issue a capital call directly to the investors. In either case, the capital contribution proceeds would be applied to repay the facility.

The core terms governing investors’ capital commitments are found in a Fund’s LPA and subscription documents. As the subscription credit facility market evolved, the industry developed robust LPA provisions specific to subscription credit facilities.¹ Since a lender’s underwriting for and remedies under a subscription credit...