Subscription credit facilities usually require the ability to make, receive, and enforce capital calls on a pro rata basis, whether directly or indirectly through a cascading pledge structure, on 100% of the pool of capital commitments comprising the collateral. In addition to maintaining a broad source of repayment via the subscription collateral, this structure is preferred because it ensures that capital calls to repay subscription credit facility indebtedness can be made in accordance with applicable limited partnership agreements (“LPAs”), which typically require pro rata capital calls in the ordinary course of business.

Even where the underlying LPAs do not contain a pro rata capital call requirement, general market expectations of equitable treatment support the case for the ability to make pro rata capital calls. Otherwise, there is a heightened risk that investors may dispute their obligation to fund capital calls to the extent they perceive the capital call to be contrary to the LPA’s terms or unduly burdensome for a certain subset of the broader investor group.

Requirements for Pro Rata Capital Calls Generally

As a general rule, most LPAs require pro rata capital calls on all investors in the structure, including across feeder fund vehicles, with limited exceptions for specific overcall rights, payment of management fees, expenses attributable to specific investors, regulatory issues, and specific investment excuse rights. In each case where non-pro rata capital calls are contemplated, the investors have expressly agreed to the exception to the general pro rata norm. In addition to these express LPA exceptions to the general pro rata capital call requirement, sponsors also may request that lenders accommodate a non-pro rata structure for various other structural reasons, primarily centered around the treatment of feeder funds.

Even where LPAs are silent or affirmatively permit non-pro rata capital calls, there is a market expectation among...