Introduction / Background

Corporate pension plans, governmental pension plans and public retirement systems (“Plan/System Investors”) are common investors in private equity and other similar investment funds (each, a “Fund”). This legal update will focus on the role that funding ratio thresholds play as metrics of the financial condition of Plan/System Investors in a lender’s underwriting process and determination of borrowing base criteria for subscription credit facilities extended to Funds.

Subscription credit facilities are lines of credit established by a bank or other credit institution in favor of a Fund. The collateral package for the lending arrangement is comprised of the unfunded capital commitments of the Fund’s investors to make capital contributions to the Fund when its general partner issues a capital call notice. The entry into a subscription credit facility by a Fund provides it with a convenient source of additional liquidity that can be used, for instance, for working capital purposes, to make investments, and to bridge capital calls from the Fund’s investors. These types of facilities are often employed as part of a Fund’s strategy to increase overall returns for its investors.

Like other types of asset-backed loans, borrowing availability under a subscription credit facility is commonly tied to a borrowing base model. The overall structure and criteria for a subscription credit facility’s borrowing base hinge on the make-up of the Fund’s investor base, as well as certain other factors, such as the current stage of the Fund’s life cycle (e.g., fundraising or harvesting investments). Lenders and borrowers work together to identify certain of the Fund’s investors that are eligible for inclusion in the borrowing base. The investors that are included by a lender in the borrowing base are the investors whose uncalled capital commitments the lender is willing to advance against. The percentage of each investor’s uncalled...