A Primer On Subscription (Capital Call)
Loan Facilities

Abstract

There has been a sustained resurgence of subscription loan or capital call lending facilities to private equity funds. Typically, the loans to a private equity fund are secured by a pledge by the fund (and, if applicable, the fund’s general partner) of the unfunded capital commitments of the fund’s investors and the rights and remedies of the fund in respect thereof. Because the collateral securing these loan facilities arises from the constituent documents of the fund, as well as the subscription agreements executed by the fund’s investors, the establishment and structuring of a subscription loan facility requires a comprehensive legal due diligence review of the related fund’s underlying documents, including its constituent documents, investment management agreement, offering materials, subscription agreements, and any relevant investor-side letters. It is essential that these documents explicitly permit borrowing facilities and the ability to pledge the unfunded capital commitments of the fund’s investors and the other collateral and expressly provide that the investors commit to fund capital calls. There are also less obvious, but no less important, fund document provisions that can significantly impact a lender’s rights and remedies, including provisions relating to alternative investment vehicles, the right of an investor to be excused from funding a capital call under certain circumstances, the ability of the fund to reduce unfunded capital commitments of investors by deeming the payment of certain expenditures to be capital contributions by the investors, and restrictions set forth in side letters with fund investors. Certain of the issues raised by the terms of the constituent documents for a fund can be addressed or mitigated in the loan documents, however, certain other issues cannot be easily addressed therein. As a result, it is critical to identify potential issues prior to the time that a fund’s constituent documents are finalized. The complexity of the underlying fund documents and the relative importance of the provisions therein make due diligence essential in the context of establishing these facilities, as the devil is in the details.