A capital-call facility reads the register before it reads the fund.

A capital-call facility is secured on something the fund does not yet have: the undrawn commitments of its holders, and the manager's right to call them. The lender advances against that right, and its diligence is therefore on the holders rather than on the assets. Who they are, whether they can be relied on to fund a call, whether the documents let the lender make the call if the manager will not, what defences a holder could raise, and whether the register will still be the register when the lender needs it. A manager that built its register for the strategy and then asks for the facility learns that the lender has a second reading of the same list, and that the second reading is a credit reading with a grade for every name.

This note sets out what the facility is and what it is for, how the lender grades the register, the documents the lender reads and what it looks for in each, the three drafting conditions, the side letters and the excuse rights, the feeder and the nominee in the borrowing base, the charged account and the sweep, the transfer and the continuation under the facility, the facility's own covenants, a comparison, a worked facility as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What the facility is for

A closed-ended fund draws capital from its holders by calls, and a call takes a notice period, ten business days in a typical deed, during which the fund has an acquisition to complete or a cost to pay. A capital-call facility bridges the period: the lender advances against the undrawn commitments, the fund uses the advance, and the next call repays it. The facility lets the fund complete an acquisition in three days rather than ten, smooth the timing of calls so that holders are called quarterly rather than weekly, fund an asset-level equity contribution before the holders have paid, and in some funds defer calls to improve the reported timing of the holders' cash flows. It is short-term, revolving, and secured on the right to call rather than on anything the fund owns.

Grading the register

The lender grades each holder on its ability and willingness to fund a call, from its published credit standing where it has one and from the lender's own view where it does not. A sovereign or a pension institution with a public rating is borrowing base at full value. A regulated institution without a rating is borrowing base at a discount the lender sets. A family office with no published accounts is borrowing base at a larger discount or not at all. A feeder is assessed on what the lender can see of its participants, which is often nothing, and is excluded or discounted accordingly. A holder with a side letter that limits its obligation to fund, or gives it an excuse right, is excluded to the extent of the letter. A holder that has defaulted on a call anywhere is excluded. The facility's size is the sum of what the lender will count, multiplied by an advance rate, and the manager who built a register without reading it as a borrowing base finds the facility smaller than the term sheet promised.

The documents the lender reads

The constitution, for the manager's power to call, the call mechanics and notice period, the consequences of a holder's default, the manager's power to borrow and to grant security, the cap on borrowing, and the power to assign the call right. A constitution silent on assignment is a constitution the lender asks to be amended.

Each subscription agreement, for the holder's commitment, its acknowledgement that calls may be made by a lender, its agreement to fund without set-off or defence, and any variation from the standard form. The lender reads every one, because each is a separate contract, and a variation is a variation in the base.

Each side letter, for anything that qualifies the obligation to fund: an excuse right, a limit after a date or an event, a most-favoured-nation election that may import another holder's qualification, a reporting right that the lender's call must respect. A side letter without a lender's clause preserving the obligation is a letter the lender reads against the holder.

The classification and provenance records for each holder, because the lender has its own obligations to know whose commitments it is lending against.

The constitution again, for the default remedies, because a default remedy the lender cannot operate in the general partner's name is a remedy that does not support the facility.

The three drafting conditions

The deed or constitution permits the manager to assign, charge or otherwise grant security over the right to call capital and the proceeds of calls, for the purpose of any borrowing the document permits, without the holders' consent. The holders acknowledge, in the deed or the subscription agreements and again in a lender's acknowledgement where the lender requires one, that a lender may make the call, that they will fund it without set-off, counterclaim, withholding or defence, including any claim against the manager, and notwithstanding any default by the manager or the commencement of a winding up. And the borrowing cap and the approvals are stated so that the lender can read the headroom and the validity. Those three are drafted at formation or renegotiated with every holder later, and a holder that refuses is a holder outside the base.

Why the lender reads the register and not the assets

A capital-call facility is repaid by the next call, and the next call is paid by the holders. The assets are irrelevant to repayment unless the holders fail, and then the assets belong to a fund whose holders have failed, which is not a fund the lender wants to be a creditor of. The lender's credit is therefore the holders' credit, and its security is the right to make them pay. That is why the lender reads the register as a bank reads a book of borrowers: each name, its standing, its documents, its defences. A manager that understands the lender's question prepares the register for it, and a manager that presents the assets to a capital-call lender has presented the wrong thing.

The facility's covenants follow from the same logic. The clean-down exists so that the facility is repaid from calls and never becomes term debt secured on the assets. The borrowing base test exists so that the facility never exceeds what the counted holders would pay. The restriction on amendments to the constitution exists so that the call right the lender holds is not changed beneath it. And the representation that the fund meets its tier exists because a fund outside its tier has holders the tier did not admit, and the lender did not grade them.

The holder's counsel and the acknowledgement

A holder's counsel reads the acknowledgement as the one document in the subscription pack that creates an obligation to a stranger, and it reads it for four things. Whether the obligation is limited to the holder's undrawn commitment, and not more. Whether the holder's defences against the manager are excluded only as against the lender, and preserved against the manager. Whether the lender's call follows the deed's notice period or the facility's shorter one. And whether the holder's excuse rights and side-letter terms survive, which the lender's clause says they do not as against the lender. A holder that understands the four signs; a holder that is asked to sign a bare undertaking to pay on the lender's demand asks its counsel why, and the manager's placement slows by the answer. The acknowledgement is drafted for the holder's counsel as well as the lender's.

The default mechanics, operated by the lender

A holder's default on a call is the event the facility exists to survive, and the deed's remedies are read for whether the lender can operate them. The remedies are usually a default interest, a forfeiture or compulsory sale of the defaulting holder's interest at a discount, a reallocation of the defaulted amount among the other holders, and the exclusion of the defaulter from distributions. Each is exercised by the manager under the deed, and the assignment gives the lender the right to exercise them in the manager's name. A deed whose remedies require a committee vote, or a notice only the manager can give, or a sale only the manager can conduct, is a deed whose remedies the lender cannot operate, and the lender discounts the base for the risk that a default goes uncured.

Where it surfaces

At the term sheet, when the lender's first request is the register and not the portfolio.

At the grading, when the feeders and the family companies leave the base and the facility is smaller than planned.

At the side letters, when a qualification without a lender's clause excludes a holder the manager counted.

At a holder's default, when the deed's remedies require a step only the manager can take.

At the transfer, when a transferee that never signed the acknowledgement is found in the base at the annual review.

At the continuation, when the old facility's release and the new facility's acknowledgements were not sequenced.

The cost of getting it wrong

A facility sized on a register the lender discounts costs the acquisitions that must wait for the deed's full notice period, and the first investors' impression of a manager that cannot bridge. A deed without the assignment power costs a consent from every holder, and the holder that uses it. A side letter without the lender's clause costs that holder's base. A default remedy the lender cannot operate costs the advance rate. The three drafting conditions, the lender's clause and the charged account cost a paragraph each at formation.

Side letters and excuse rights

An excuse right lets a holder decline to participate in an investment its own rules forbid, and the lender treats it as an uncounted commitment to the extent of the right unless the constitution provides that the excused holder funds the call and is excused from the investment by a reallocation among the others. A limit on the obligation to fund after a date, a key person event or a change of control is a limit the lender reads as the end of that holder's base. A most-favoured-nation election may import another holder's excuse right or limit into a holder that had none. The cure is a lender's clause in every side letter, drafted at formation, providing that nothing in the letter qualifies the holder's obligation to fund a call made by a lender under the assigned call right, and a constitution that makes excuse a reallocation rather than an exclusion from the call.

The feeder and the nominee in the base

A feeder is one holder on the register and is graded on its participants, whom the lender cannot see unless the feeder's manager supplies the information and the participants' own standing supports it. A feeder sponsored by a bank for a private-banking book is usually excluded; a feeder for a single sovereign is graded on the sovereign if the feeder's own documents let the lender look through to it and the sovereign has signed an acknowledgement. A nominee is graded on the persons behind it the same way. A register designed to keep the count low through feeders and nominees is a register the lender discounts, and the two readings pull in opposite directions.

The charged account and the sweep

The facility is secured not only on the right to call but on the account into which calls are paid. The lender takes a charge over the account, requires every call notice to direct payment to it, and on default sweeps the account to repay the facility before the fund sees the money. The account is held with a bank the lender accepts, in a jurisdiction whose law recognises the charge, and the administrator's call mechanics are drafted so that a call cannot be directed elsewhere. A fund whose call notices name an account the lender has not charged has a facility the lender cannot enforce without the fund's co-operation.

Transfers and continuations under the facility

A transfer of a holder's interest moves the commitment out of the base unless the transferee signs the acknowledgement and is graded, and the constitution's transfer provision conditions consent on both. A continuation vehicle's rolling holders are holders of a new vehicle, and the new vehicle's facility needs their acknowledgements anew; the old facility is released on the transfer of the portfolio, and the two releases and re-grants are sequenced so that neither vehicle is unfunded. A change of manager changes the person whose power the lender holds an assignment of, and the facility's change-of-control clause reaches it.

The facility's own covenants

The facility carries a borrowing base test, an advance rate, a clean-down requirement under which the facility is repaid to zero periodically so that it remains a bridge and not term debt, a representation that the fund meets its tier's conditions, a covenant on the holder count and the minimum, a restriction on amendments to the constitution that affect the call right, and events of default that include a holder's default on a call above a threshold. Each is read against the constitution, because a covenant the fund cannot keep under its own constitution is a default written in advance.

By holder · by grade	Counted	Discount	Excluded	What changes it
Rated sovereign or pension institution	Full	None	Only on a qualifying side letter	The acknowledgement
Regulated institution, unrated	Yes	The lender's	On a qualifying side letter	Published accounts; the acknowledgement
Family office or private company	Sometimes	Large	Often	Accounts the lender accepts; a guarantee
Feeder	Rarely	On the participants	Usually	A look-through the feeder's documents permit; participants' acknowledgements
Nominee	Rarely	On the persons behind	Usually	The same
Holder with an excuse right or limit	To the extent of the obligation	None	To the extent of the right	A lender's clause; reallocation of excuse
Holder in default anywhere	No	Not applicable	Yes	Cure of the default

A timeline, as a type

Month one: the register is written and read as a base; the deed drafted with the three conditions; the subscription agreement with the acknowledgement; the side-letter form with the lender's clause. Month three: first close; the lender's term sheet; the lender reads the register, grades it, and its counsel reads the deed and the agreements in a fortnight. Month four: the facility signed; the call account charged; the first drawdown funds an acquisition in three days. Month six: the second close; the base resized on the new holders' acknowledgements. Year two: a side-letter request from a new holder for an excuse right; the lender's clause is included; the lender counts the holder. Year four: a holder defaults on a call; the lender operates the deed's remedies in the general partner's name; the defaulted amount is reallocated; the facility is repaid from the next call. Year six: the continuation; the old facility released and the new one granted on the same day on the rolling holders' acknowledgements.

The structure paper's page

The structure paper's facility page carries: the register graded as the lender would grade it, holder by holder; the three drafting conditions quoted from the deed; the acknowledgement's form and the lender's clause; the excuse mechanism as reallocation; the call account and its bank; the facility's covenants read against the constitution, with each covenant's source in the constitution named; the transfer provision's conditions; and the continuation's sequencing. The page is the lender's diligence done in advance, and a lender that receives it signs in a month.

The facility and the onshore register

Gulf institutions are the strongest names in most regional registers for a lender's purpose, and the acknowledgement is the document their counsel reads most carefully, because a sovereign's undertaking to pay on a stranger's demand is a matter its own governance approves. A manager that explains the acknowledgement to a Gulf institution's counsel in the first meeting, with the four points the holder's counsel reads, obtains it; one that sends it in the subscription pack without explanation receives questions that take a committee cycle. The acknowledgement is also read against the institution's own state's rules on guarantees and undertakings by public bodies, which Saudi, Qatari and Kuwaiti counsel confirm for a sovereign or a public pension institution.

The facility and the manager's own economics

The facility changes the timing of the holders' cash flows, and the constitution says what that does to the hurdle and the manager's share. A hurdle calculated from the date capital was drawn, where the facility deferred the drawing, is a hurdle that runs from a later date than the investment, and a manager's share calculated on that basis is larger than one calculated from the investment date. Registers have noticed, and many constitutions now calculate the hurdle from the earlier of the drawdown and the facility's funding of the investment, or cap the period a facility may be outstanding. The facility's clean-down and the constitution's hurdle basis are read together, because a facility used to improve the manager's share is a facility the committee asks about.

Reading the facility with the tier

The tier caps the fund's leverage, and a capital-call facility is leverage for the cap's purpose in most readings, whatever the constitution calls it. The facility's size is read against the cap, and a fund at the qualified investor tier with a generous cap has more room than a fund at a tier whose rules limit borrowing to a stated share of commitments. The representation that the fund meets its tier covers the leverage cap, and a drawdown that takes the fund over it is a breach of the tier and a default under the facility on the same day.

A facility, as a type

A partnership with commitments from eleven institutions, two family holding companies and a bank-sponsored feeder seeks a facility. The deed permits assignment of the call right and borrowing within a cap; every subscription agreement carries the acknowledgement; every side letter carries a lender's clause; excuse is a reallocation. The lender grades the eleven institutions at full or at a modest discount, the two family companies at a large discount, and excludes the feeder, whose bank will not supply its participants. The borrowing base is the graded sum; the advance rate is applied; the facility is sized accordingly and signed within a month of first close, with the call account charged and the clean-down quarterly. In year three a transfer by one institution to two buyers is registered on their acknowledgements and grades, and the base is unchanged. In year six the continuation vehicle's facility takes the rolling holders' acknowledgements anew, and the old facility is released on the transfer.

Four cases, as types

A manager forms an investment company for governance reasons and seeks a facility in year one. The lender finds nineteen subscription agreements in three versions, three with side letters qualifying the call obligation and no lender's clause. The facility is priced on sixteen holders and takes a quarter longer than the acquisition timetable, and the three qualified holders are asked for deeds of acknowledgement, which one declines.

A fund's register is designed to keep the count low: four feeders and two nominees for thirty underlying persons. The lender excludes all six; the base is the five direct institutions; the facility is a third of what the manager planned, and the acquisitions are funded by calls on the deed's full notice period.

A fund's deed permits borrowing and is silent on assignment. The lender requires a deed amendment, which needs the limited partners' consent at the deed's threshold; one partner uses the consent to renegotiate its own terms, and the amendment takes two quarters.

A manager drafts the deed, the subscription agreements and the side letters for the facility from first close, sizes the register to the base it needs, charges the call account and reads the covenants against the constitution. The facility is signed within a month of first close, resized on each close, and released and re-granted at the continuation on one day.

What each party holds

The manager holds the register read as a base, the three drafting conditions, the lender's clause in every side letter, the charged account and the covenants read against the constitution.

The lender holds the grading, the acknowledgements, the charge over the account and the covenants.

Counsel holds the deed's and the subscription agreements' drafting and the opinion on the assignment's validity.

Each holder holds its acknowledgement, which is an obligation to fund a call made by a stranger.

The administrator holds the call mechanics and the account.

The feeder's and the nominee's managers hold the information the lender needs to grade what is behind them.

The sequence

1. The likely facility is read at formation, and the register is sized to the borrowing base it needs.
2. The deed or constitution is drafted with the assignment power, the borrowing cap and the default remedies the lender can operate.
3. Every subscription agreement carries the acknowledgement; every side letter carries a lender's clause; excuse is a reallocation.
4. The call account is opened with a bank the lender accepts and the call mechanics direct payment to it.
5. The facility's covenants are read against the constitution before signing.
6. Transfers condition consent on the transferee's acknowledgement and grade; the continuation sequences the release and the re-grant.

Questions a manager asks

Can the facility be larger than the counted base. No. The base is what the lender will count, and the advance rate is applied to it; a manager that wants a larger facility wants a register the lender grades higher.

Is the acknowledgement a problem for holders. Their counsel read it closely, because it is an obligation to fund a lender's call without defence; most institutional holders sign it as a matter of course, and one that will not is outside the base.

What does the lender think of side letters. It reads every one, and a letter without a lender's clause is a letter the lender reads against the holder.

Can a feeder be counted. If its documents let the lender look through and its participants' standing and acknowledgements support the grade; a bank's book usually cannot.

What happens on a holder's default. The deed's remedies, operated in the general partner's name by the lender if the manager will not; a remedy the lender cannot operate does not support the facility.

Does the facility affect the continuation. The old facility is released on the portfolio's transfer and the new vehicle's facility needs fresh acknowledgements; the two are sequenced on one day or the vehicles are unfunded in between.

Terms used

Undrawn commitment: the part of a holder's commitment not yet called.

Borrowing base: the sum of the commitments the lender counts, after grading.

Advance rate: the proportion of the base the lender will lend.

Acknowledgement: the holder's confirmation to the lender that it will fund a call the lender makes, without defence.

Lender's clause: the side-letter provision preserving the holder's obligation to fund a lender's call.

Clean-down: the periodic repayment of the facility to zero.

Charged account: the account into which calls are paid and over which the lender holds security.

What to read

The constitution's call, borrowing, assignment and default provisions; every subscription agreement and side letter; the facility's borrowing base, advance rate, covenants and events of default; the account bank's terms. On this site, the financing and vehicles rooms under Structures and the worked structure on seed terms.