Finding The FUNd In Pre-Funding

In this week's Fund Finance Friday, we will discuss the mechanics around an investor's right to pre-fund all or a portion of its capital commitment ("Pre-Funding Investor"). In a subscription-based lending facility, a lender will lend against the unfunded capital commitments of a fund's diverse investor pool composed of private equity funds, high-net-worth individuals, governmental entities and more. Some investors, such as tax-sensitive and governmental entities, may not want to participate in a subscription credit facility due to tax and other regulatory implications (e.g., a capital contribution linked to a financing may cause a tax-exempt investor to realize UBTI). As a result, we are seeing more mechanisms in limited partnership agreements and side letters giving Pre-Funding Investors, in respect of fund debt, the right to pre-fund the pro rata portion of their capital contributions prior to the incurrence of debt by the fund and a drawdown notice being delivered