A subscription credit facility is secured in part by the fund’s and its general partner’s (“GP”) right to call unfunded capital commitments from the fund’s investors, to receive capital contributions once funded and to enforce default remedies against investors who fail to fund. The default remedies in a fund’s limited partnership agreement (“LPA”) significantly impact the health and stability of the subscription credit facility because they incentivize investors to fund their capital contributions and help to provide adequate security for the facility. In this Legal Update, we explain common LPA default remedies so lenders can protect themselves in the event an investor defaults on its obligation to fund a capital contribution.

Background

LPAs include default remedies that may be enforced against an investor that defaults on its obligation to fund a capital contribution. If a fund defaults under a subscription credit facility, the lender has the right to step into the shoes of the GP to call capital from the investors for the repayment of the facility. Because the lender can also enforce default remedies under the LPA if the funds’ investors fail to fund their capital contributions when called by the lender, lenders need to understand the typical default remedies and how they apply.

What to Know about Typical LPA Default Remedies

LPAs include several default remedies that come into play if one of the fund’s investors defaults on its obligation to fund a capital contribution. Common default remedies include:

• Overcall Rights:The GP may issue an additional capital call on non-defaulting investors to make up a shortfall caused by the defaulting investor’s failure to fund a capital contribution. Overcall rights are not necessarily a remedy that incentivizes an investor to fund its own capital contributions, but are a remedy that lenders may rely on nonetheless in order to...