Over the past few weeks, we have responded to a number of questions from our lender clients about a fund’s ability to call capital to repay an underwriting credit facility after the expiration or termination of the term. engagement and upon the occurrence of an event relating to a key person under the limited partnership agreement. These requests generally arise during the annual renewal of the subscription. Although the expiration of the commitment period is not as relevant to the beginning of a fund’s life, it becomes more relevant to understand the ability of a fund to call up capital as the commitment period ends. naturally terminates in accordance with the terms of the limited partnership agreement. The expiration of the commitment period can also be triggered by a key person event under the limited partnership agreement, which presents a different set of issues when considering a renewal of a credit facility. subscription and continuous drawing requests of a fund under this facility. As part of the renewal of an underwriting credit facility, a lender must confirm that a fund is authorized to call capital after any of these events occur and that capital contributions can be made. used by the fund to repay any existing obligations and future loans that may be requested by the fund under an underwriting credit facility.
Typically, a fund’s commitment period (also sometimes referred to as an investment period), as set out in the fund’s limited partnership agreement, is a period, typically between 3 and 5 years. During the commitment period, a fund will be allowed to call on capital from its investors to make new and follow-on investments in portfolio companies and to pay partnership fees. To the extent that the limited partnership agreement allows the fund to take on debt to finance the investments and to pay the expenses of the partnership pending receipt of capital contributions from the partners, the fund may decide to draw on the credit facility. subscription during the commitment period to finance the investment of the fund. The partnership agreement will further provide that each partner acknowledges and accepts that in connection with a capital call notice made for the purpose of repaying any debt for borrowed money authorized under the limited partnership agreement that each partner will remain absolutely and unconditionally obliged to finance the capital contributions. Thus, during the commitment period, the fund’s investors have agreed to commit capital to the fund, to make the capital available in the context of a call for capital, that the fund can borrow to finance investments and repay this debt in accordance with the terms of the limited partnership agreement agreement. While it is clear that the fund is obligated to repay debt during the commitment period, the same enforceable obligation to repay debt after the expiration or termination of the commitment period may not be so clear if the limited partnership agreement is ambiguous and does not provide authorization. The fund’s authorization to call its investors’ capital will likely be limited after the expiration or end of the commitment period. These limitations typically include capital funding only for follow-on investments, investments under a binding contract, and to pay for partnership expenses. Many vintage limited partnership agreements define partnership expenses to include only interest and fees. Does this mean that the fund is not obligated to repay the capital? It would be reasonable to infer that if the fund is allowed to reimburse fees and interest, this capital would also be allowed. In the absence of a clarifying provision in the limited partnership agreement, this uncertainty may persist and raise concerns as to whether the fund is allowed to repay debt after the expiration of the commitment period. Many of the more recent limited partnership agreements have addressed this market concern and now specifically state that the fund is authorized to repay amounts due under an underwriting credit facility, guarantee, a letter of credit or similar support of credit or other obligation or debt of the fund, in each case, whether entered into before or after the commitment period.
Key person event
A related question we ask clients is whether the occurrence of the expiration or end of the commitment period also triggers a key person event. Limited partnership agreements generally appoint certain key persons of the general partner who must devote the majority or substantially all of their time to the management of the affairs of the fund during the commitment period and / or the life of the fund. A key person event will occur under the limited partnership agreement if a specified number of key persons cease to be involved in the fund. In addition, the occurrence of a key person event may also result in early termination or suspension of the engagement period. During such an event, the fund may continue to operate for a predetermined period of time, but generally its actions and activities, including making investments, may be restricted by the terms of the limited partnership agreement. This is sometimes referred to as a limited mode of operation. During this limited mode of operation, the activities of the fund may be limited to making investments for follow-on investments and investments already committed. A lender’s decision to continue to make direct debits available to a fund on the Underwriting Credit Facility or to suspend all direct debit requests will be influenced by the cause of the key person’s event. However, the fund should be allowed to continue to call in capital to finance these specific permitted activities and to use the capital to repay any debt incurred for these activities. If the key person event also triggers the early termination of the engagement period, a review and analysis of the relevant provisions of the limited partnership agreement discussed above should be performed to determine the implications on the authorization of the employee. funds to repay obligations under an underwriting credit facility. Confirming that the limited partnership agreement clearly permits and obliges the fund to repay a credit underwriting facility after the expiration of the commitment period and the occurrence of a key person event is an important part of the process. diligence of a lender in deciding to renew an underwriting credit facility.