United States: Drafting Tips For Limited Partnership Agreements Or Operating Agreements For Companies Seeking Financing

Private equity and venture capital investment funds ("Funds") are increasingly interested in entering into credit facilities to provide these Funds with short-term liquidity. These credit facilities will typically be structured as a capital call credit facility or a subscription credit facility in which the lender will agree to make loans available to the Fund based on some percentage of the Fund's remaining uncalled capital (i.e., the amount of capital the Fund can call from its investors). Although some of these facilities may be unsecured, most of them are usually secured either by a blanket lien or a limited lien on the proceeds of the Fund's capital calls, the right of the Fund and its general partner or manager ("Managing Entity") to call capital, and the Fund's investments.

One challenge that frequently arises when lenders and Funds are structuring a capital call facility is whether the Fund's limited partnership or operating agreement (the "Fund Document") is drafted in a way to satisfy the lender's diligence requirements such that the lender has adequate assurance that (1) the Fund is able to incur and repay indebtedness, (2) the Fund and its Managing Entity can grant security interests to the lender in the applicable collateral, and (3) the Fund can call capital from its investors with limited restrictions. If the lender is not satisfied with the provisions in the Fund Document, the lender may require the Fund to amend its Fund Document, which requires the Fund to approach its investors, often leading to delays in obtaining financing and increased costs for the Fund. Therefore, it is recommended that Funds incorporate certain provisions into their Fund Documents that will satisfy lenders' requirements for such a credit facility.

Below are provisions that lenders will look for in a Fund Document when evaluating whether to extend credit to a Fund, as well as some examples of clauses that are typically flagged by lender counsel, along with alternate suggested language that is usually more amenable to lenders in these credit facilities:

1) Allow for the Fund to incur indebtedness. Although many Fund Documents authorize a Fund to incur indebtedness, they may also put certain restrictions on the type or amount of indebtedness the Fund may incur. For example, a Fund may be prohibited from incurring any indebtedness which exceeds a certain percentage of capital commitments or without the approval of a certain advisory committee or other key person. A Fund should consider specifically carving out these capital call or subscription facilities from such restrictions in order to maximize the amount of indebtedness it may incur and streamline the process needed to obtain a credit facility.

2) Allow for the Fund to secure its borrowings with a pledge of capital commitments. Some Fund Documents are silent on whether the Fund's indebtedness can be secured, and other Fund Documents state that the Fund can borrow but cannot secure its borrowings with a pledge of capital commitments. Lenders are cautious in the absence of clear language that capital commitments may be pledged to secure loan obligations. A Fund should consider adding clear language to its Fund Document, such as the following: "The Partnership and the General Partner may secure any of the Partnership's indebtedness for borrowed money with a pledge or assignment of all or any part of the Partnership's and the General Partner's (i) interest in the Partners' capital contribution proceeds and (ii) right to call and receive capital contributions."

3) Allow for the Managing Entity to pledge to the lender the Managing Entity's right to call capital. Many Fund Documents do not have language adequate to authorize the Managing Entity to grant the liens necessary for these facilities. For example, a Fund Document may authorize the Fund to grant a lien but does not explicitly authorize the Managing Entity to do so. Others may prohibit the Managing Entity from pledging its "interest" or "rights" in the Fund, which presumably would include the right to call capital. And others may permit the Managing Entity to pledge its "interest," but restrict the Managing Entity from pledging its "managerial" or "economic" interest without any indication of whether the right to call capital is included as such an interest. A best practice is to state clearly that both the Fund and the Managing Entity have the authority to grant a lien on the capital contribution proceeds and the right to call capital.

4) Have each investor acknowledges and agrees to fund any capital calls made by a lender or to repay indebtedness. Some Fund Documents do not address whether an investor would be committed to fund capital calls by third parties. Lenders prefer to see a provision in the Fund Document that commits the investors to fund any capital call required to satisfy the Fund's obligations to lenders or to repay indebtedness of the Fund.

5) Draft the "No Third-Party Beneficiary" provision expressly names lenders as third-party beneficiaries. Many Fund Documents include a blanket statement that the Fund Document shall not be deemed to construe any rights to any third party and that no third parties will be entitled to enforce any provision of the Fund Document. Such language decreases lenders' confidence that they will be able to enforce their right to call capital. Instead, Funds should consider adding a provision such as the following: "Except with regard to the rights of a secured creditor in connection with a subscription facility, the provisions of this Partnership Agreement are not intended to be for the benefit of or enforceable by any third party."

6) Limit conditions to investors' commitment to fund capital calls. Lenders prefer to see provisions in a Fund Document that commit a Fund's investors to fund capital calls without restriction except for certain mechanical conditions. The more provisions that excuse investors from funding a capital call, the less likely it is that a lender will agree to provide such a facility. In some cases, the lender may exclude investors from the loan facility's borrowing base if the excuse provisions are too broad; in other cases, a lender may require a reduced advance rate for the borrowing base. Funds should consider the potential impact of any excuse provisions an investor may want to incorporate into the Fund Document or side letters before they agree to include such provisions.

7) Make recallable capital "lender friendly." Funds often have the ability to recall distributions from their investors in certain situations. To the extent the Funds intend to include such recallable capital in their capital commitments, they should consider subjecting recallable capital to as few limitations as possible. Lenders may give Funds credit in the borrowing base for recallable capital, but only if the lender is certain that the Fund or Managing Entity will be able to recall such capital to repay indebtedness. For example, a Fund should avoid limitations on the period of time during which the Fund may recall capital or on the use of the proceeds of such recallable capital.

8) Commit investors to fund capital calls after the investment period. Although a Fund's primary investment activity will end after the termination of the commitment period or investment period, the Fund continues to make follow-on investments and manage ongoing investments and may need to continue to borrow. If the investors are not committed to making capital contributions after an investment period, then a lender may make the termination of the investment period a default or it may terminate any commitment to lend to the Fund once the investment period expires. To ensure continued access to liquidity, Funds should add language to their Fund Documents to expressly obligate their investors to fund capital calls made after the investment period in order to repay any indebtedness.

Funds should consider the above issues when drafting their Fund Documents. Funds often need financing quickly to be able to make investments, so they should consult with counsel to review their Fund Documents well in advance of pursuing a credit facility. A properly drafted Fund Document will help expedite the closing of the debt facility and reduce transaction costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions