The following Banking & Finance guidance note Produced in partnership with Peter Olds of Cleary, Gottlieb, Steen & Hamilton provides comprehensive and up to date legal information covering:
A capital call facility is a form of finance provided by a lender to a fund and typically secured against investors’ undrawn commitments. This note focuses on the main terms of capital call facilities, the due diligence that lenders will conduct, the standard security package requested by lenders and steps that borrowers can take to ensure that the negotiation process goes as smoothly as possible. For the purposes of this note, we have assumed that the fund vehicle will be a limited partnership that contracts through its general partner and that the right to call capital from investors lies with the general partner.
The general partner of a fund typically has to give investors at least 10 business days’ notice of any capital contribution needed to make an investment. Absent a source of temporary funding, this would amount to a two week stationary period that would put private equity purchasers at a competitive disadvantage compared to purchasers with immediate access to funds. To mitigate against this and other cash-flow issues (such as defaulting investors), many funds enter into capital call facilities (usually structured as revolving capital facilities) whereby a bank will lend to the fund pending receipt by the fund of the proceeds of a capital call from investors.
Capital call facilities have also been
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