Cascading pledges are frequently used in subscription finance to avoid legal impediments, avoid tax implications and mitigate prohibited transaction risk under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and Section 4975 of the Internal Revenue Code, as amended (the “Code”), while still providing lenders with collateral rights.
An express third-party beneficiary provision running in favor of a lender in a fund’s limited partnership agreement (an “LPA”) is helpful for subscription credit facilities. It bolsters the rights and remedies of a subscription credit facility lender (a “Subscription Lender”) by providing it with an independent and direct right to enforce key LPA provisions if the fund borrower defaults under the facility—in particular, rights under the LPA related to calling capital from the fund’s investors, receiving payments, and enforcing LPA remedies against defaulting investors.
Subscription credit facilities are a common financing tool for investment funds, enabling borrowing against the unfunded capital commitments of investors. Historically, lenders required investor letters (also referred to as investor acknowledgment letters) from each investor or at least each borrowing base investor to directly confirm their obligation to fund capital calls for the benefit of the lender.
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There is a spectrum of potential financing structures for a private credit fund (a “Credit Fund”) to obtain...