Legal form decides what a lender can take.

A fund in either centre is constituted as a limited partnership, an investment company or a contractual scheme, and all three forms are open to the private tiers. The forms are compared at formation on tax transparency, on the register's familiarity with them and on governance: who sits on the board or acts as general partner, how the holders vote, how the constitution is amended. They are rarely compared on the thing that decides the financing two years later: what a lender can take security over, who grants it, under what law, in what registry, and how it would be enforced. The legal form answers those questions before any lender is in the room, and it answers them differently for each form. A manager who chooses the form for governance has chosen its security package by accident.

This note sets out what each form offers a lender, the three drafting conditions a capital-call facility depends on, the difference between fund-level and asset-level security, what each form does at exit, how the two centres' laws treat each form, a comparison, a worked facility as a type, cases, what each party holds, the sequence, the questions managers ask, the terms and what to read.

The partnership

A limited partnership offers the undrawn commitments. The general partner's right to call capital from the limited partners, and the partners' obligation to pay when called, are contractual rights under the partnership deed, and they are assignable to a lender. A capital-call facility is built on that assignment: the lender advances against the undrawn commitments, takes an assignment of the right to call and a charge over the account into which calls are paid, and on default calls the capital itself in the general partner's name and sweeps the account.

Three things have to be true in the deed for that to work. The deed has to permit the general partner to assign the call right, or to grant security over it, and to borrow for the purposes the facility serves. The limited partners have to acknowledge, in the deed or in their subscription agreements, that a lender may make the call, that they will fund it without set-off, counterclaim or defence, and that they will fund it even if the general partner is in default or the partnership is being wound up. And the general partner's own power to borrow and to grant security has to be in the deed within a cap the lender can read, with the board or committee approvals the deed requires. Those three are drafted at formation or they are renegotiated with every partner later, and a partner who refuses is a partner whose commitment leaves the borrowing base.

The partnership also offers, beneath the fund, the general partner's own shares and the partnership's interests in its holding companies, and a lender to the partnership may take both.

The company

An investment company offers its shares, and the shares are held by the investors, not by the company. Security over the shares is therefore security granted by each holder separately, under each holder's own law, with each holder's own consent, and a lender to the company that wants share security has to take it from every shareholder. A lender to the company that takes security from the company takes it over the company's assets: its cash, its receivables from holders, and the shares of the holding companies beneath it.

The capital-call structure still exists for a company, through the subscription agreements rather than through a partnership deed. Each holder has agreed to pay calls on its shares, or to subscribe for further shares on demand, and those agreements can be assigned. The lender's counsel reads each subscription agreement rather than one deed, and any variation between them, a side letter limiting one holder's obligation, an excuse right, a different notice period, is a variation in the borrowing base. The company's own constitution has to permit the borrowing and the security, and the directors have to be able to decide it within their authority, which in the centres is examined for substance: a board that approved a facility by circular resolution without meeting is a board whose approval a liquidator may question.

A company with several share classes has several kinds of holder, and the lender reads the class rights: a class with a preferred return, a class with a different call obligation, a class held by the manager.

The contractual scheme

A contractual scheme offers the trustee's or the custodian's covenant, and the assets held under it. The participants hold units in an arrangement rather than shares in a person, and the property is held by a trustee or custodian for them. Security is over property the trustee holds, granted by the trustee with its own protections and consents in the chain, and the trustee's own liability is limited to the scheme's assets. Lenders know the form and price it: the trustee's consent is a step, the trustee's limited recourse is a term, the trustee's right to be indemnified from the scheme's assets ranks where the scheme's constitution says it ranks, and the lender's ability to reach the participants' commitments depends on how the scheme's constitution has drafted them, which is often less clearly than a partnership deed.

The deed's three conditions, drafted

The first condition, the power to assign the call right, is drafted as an express power of the general partner to assign, charge or otherwise grant security over the partnership's right to call capital and the proceeds of calls, for the purpose of any borrowing the deed permits, without the consent of the limited partners. A deed that grants a general power to borrow and says nothing about assignment leaves the lender's counsel to argue that the power is implied, and lenders do not advance on implication.

The second condition, the partners' acknowledgement, is drafted in the deed as an irrevocable undertaking by each limited partner to fund calls made by a lender to whom the call right has been assigned, in the same manner and to the same extent as calls made by the general partner, without set-off, counterclaim, withholding or defence of any kind, including any claim against the general partner, and notwithstanding any default by the general partner or the commencement of any winding up. It is repeated in each subscription agreement, because the lender wants the partner's own signature on it rather than its accession to a deed. It is also carried into every side letter by a clause providing that nothing in the letter qualifies the partner's obligation to fund a lender's call.

The third condition, the borrowing cap and the approvals, is drafted as a limit expressed as a proportion of commitments or of net asset value, with the purposes for which the partnership may borrow listed, and the approvals the deed requires, whether the general partner alone, the general partner's board or the investors' committee, stated with the thresholds. The lender reads the cap for headroom and the approvals for validity, and a facility approved by a body the deed did not empower is a facility a liquidator can question.

Reading nineteen subscription agreements

A company fund's lender reads every subscription agreement because each is a separate contract, and the variations it finds fall into five kinds. A notice period for calls that differs between holders, so that the lender's call reaches some holders later than others. An excuse right, permitting a holder to decline to fund a call for an investment its own rules forbid, which the lender treats as an uncounted commitment to the extent of the right. A most-favoured-nation election that may import another holder's qualification. A side letter limiting the holder's obligation to fund after a stated date or event. And a holder that signed a different version of the agreement from the others because it negotiated late.

The cure at formation is a single form of subscription agreement with the lender's acknowledgement drafted in, a lender's clause in every side letter, and a rule that the excuse right applies to the investment and not to the call, so that an excused holder funds the call and is excused from the investment by a reallocation. The cure afterwards is a deed of acknowledgement signed by every holder, which the lender will require as a condition precedent and which the holder that refuses will use.

The call account and the cash sweep

A capital-call 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 that every call notice 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 the centre or 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, and the lender prices that.

The scheme's trustee

A contractual scheme's trustee or custodian holds the scheme's property for the participants and grants security over it within its own protections. The protections are three. The trustee's consent to any security, which it gives on the terms of the scheme's constitution and its own risk appetite, and which is a step on the facility's timetable with a cost. The trustee's limited recourse, so that a lender's claim against the trustee is satisfied only from the scheme's assets and never from the trustee's own. And the trustee's indemnity from the scheme's assets for its own costs and liabilities, which ranks ahead of or behind the lender according to the constitution and the security documents, and which the lender reads for priority. A lender to a scheme takes all three as terms and prices the package accordingly; a manager that wants the scheme form accepts a facility that costs more than a partnership's and takes longer to sign.

Enforcement on default

On a partnership, the lender calls the capital in the general partner's name, sweeps the account and, if the partners do not fund, sues the partners on their acknowledgements. The partners' defences are what the acknowledgement excluded; a partner that funds has a claim against the general partner and not against the lender.

On a company, the lender enforces against the company's assets under its charge, in the centre's registry and court, and against the holders' shares if it took share security from each; a lender that took only the company's charge reaches the holding companies beneath and not the holders' commitments unless the subscription agreements were assigned.

On a scheme, the lender enforces against the trustee within the limited recourse, over the charged property, with the trustee's consent already given in the security document and the trustee's indemnity ranked.

In each case the enforcement runs in the centre's court for the fund-level package and in the asset state's for the asset-level one, and a lender's counsel will have read both records before pricing.

What the form does to the price

Lenders price a capital-call facility on the borrowing base, the enforcement route and the documents. A partnership with a deed drafted to the three conditions and uniform acknowledgements gets the best advance rate and margin the lender offers. A company with uniform subscription agreements gets a rate close to it; one with variations gets a smaller base and a higher margin. A scheme gets a package priced for the trustee's consent and recourse. The difference between the best and the worst case on the same register is measurable in the margin and in the months the facility takes to sign, and it was decided when the form was chosen for governance.

Fund-level and asset-level security

Security over the asset itself is granted by the holding company beneath the fund, in the state the asset sits in, under that state's law, perfected in that state's registry. The fund's legal form has nothing to do with it. A lender to a Saudi parcel company takes a mortgage over the parcel at the Kingdom's real estate registry and a pledge of the company's shares and receivables in the movables registry; whether the fund above is a partnership or a company is irrelevant to that package.

The commonest error in a first term sheet is to confuse the two: to offer a lender to an asset company security that only the fund can give, such as the undrawn commitments, or to offer a fund-level lender security over an asset the fund does not own, such as a parcel three layers down. A structure paper separates the two from the first draft: a fund-level package, granted by the fund in its form, under the centre's law; and one asset-level package per asset, granted by the asset company, under the asset state's law. The intercreditor between them is the third document.

What each form does at exit

A continuation vehicle, a secondary sale of a majority of the units or a distribution in kind each has to pass through the lender's consent, and the consent provisions differ by form because the security does.

A partnership whose call right is assigned cannot admit a new partner, or release an old one, without the lender agreeing that the borrowing base survives: the new partner signs the acknowledgement, the released partner's commitment leaves the base, and the facility may need to be resized. A continuation that transfers the portfolio to a new partnership needs the old lender's release and the new lender's acknowledgement from the rolling holders.

A company whose holders have charged their shares cannot transfer them without the chargee's release, and a secondary sale of shares is a release and a re-charge. A company whose assets are charged cannot distribute them in kind without the lender's consent to the release of the charged property.

A scheme whose trustee has granted security cannot distribute the charged property without the lender's consent to the trustee, and the trustee will not act without it.

The two centres' laws

Both centres have their own partnership law, companies law and collective investment regime, and each form is constituted under the centre's own statute rather than under onshore law. The partnership statutes in both provide for limited partnerships with a general partner and limited partners whose liability is limited to their commitments, and both permit the deed to govern assignment of partnership rights. The companies statutes provide for investment companies with variable capital and the directors' duties the centre imposes. The collective investment regimes provide for contractual schemes with a trustee or custodian. The security regimes of both centres register charges over a company's assets in the centre's own registry, and both have courts that have enforced them. A lender's counsel in the centre reads the statute for the form, the registry for perfection and the court's record for enforcement, and the reading differs between the two centres in detail a manager meets at the first facility.

By form · by lender	What is secured	Who grants it	What the lender reads	Where perfected
Limited partnership	The undrawn commitments, the call right and the call account	The general partner, under the deed	The deed, each partner's acknowledgement, the borrowing cap	The centre's registry, against the partnership
Investment company	The company's assets; or each holder's shares, separately	The company for its assets; each holder for its shares	The constitution, every subscription agreement, the board's authority	The centre's registry against the company; each holder's own jurisdiction for shares
Contractual scheme	Property held by the trustee or custodian	The trustee, within its protections	The scheme's constitution, the trustee's consent and limited recourse	The centre's registry against the trustee

The form and the register's own rules

The form is read against the register as well as against the lender, because some holders cannot hold some forms. A pension institution whose investment policy permits units in a regulated collective investment scheme may not be able to hold a limited partnership interest, which its rules read as an unlisted partnership rather than a fund. A sovereign that holds through a treaty-protected entity may need a form its treaty counterparty recognises as a company. A bank's private-banking book may be able to hold units in a scheme through a nominee and not partnership interests, because the bank's own custody arrangements do not accommodate them. A family office may prefer a company because it understands a share certificate and a board.

A manager writes the register first, reads each intended holder's capacity to hold each form, and then reads the forms against the lender. Where the register and the lender point in different directions, the structure is a master in the lender's form with feeders in the holders', or a parallel in each, and the cost of the split is compared against the cost of the facility the register's preferred form would bear.

Where it surfaces

At the first facility, when the lender's counsel asks for the instrument that assigns the call right and there is none, or asks for nineteen subscription agreements and finds three versions.

At the second close, when a new holder declines the acknowledgement and the manager must choose between the holder and the borrowing base.

At the first transfer, when the transferee has not signed the acknowledgement and the lender reduces the facility.

At the continuation, when the old lender's release and the new lender's acknowledgements from the rolling holders are discovered to be two separate negotiations.

At the distribution in kind, when the charged property cannot be distributed without the lender's consent, and the lender prices the consent.

A facility, as a type

A partnership with commitments of a stated size, a lender willing to advance a proportion of the undrawn commitments it will count, and a deed that permits assignment of the call right. The lender grades the register: sovereigns and pension institutions at full value, regulated institutions at a discount, family entities excluded, a feeder excluded because the lender cannot see its participants. The borrowing base is the graded sum. Each counted partner signs an acknowledgement: that the lender may call, that the partner will fund without set-off, that its side letter does not qualify the obligation. The facility is drawn to fund acquisitions between calls and repaid from the next call. A transfer of a counted partner's interest in year three requires the transferee's acknowledgement, or the commitment leaves the base and the facility is reduced. A continuation in year six requires the release of the assignment and its re-grant by the new partnership.

The same fund as a company: the lender reads nineteen subscription agreements instead of one deed, finds three variations, and prices the base on the sixteen it can read as uniform.

Four cases, as types

A manager forms an investment company for governance reasons, because the register wanted a board it could sit on, and seeks a capital-call facility in year one. The lender asks for an assignment of the call right and finds there is no single instrument to assign: nineteen subscription agreements, three with side letters qualifying the call obligation. The facility is priced on sixteen holders and takes a quarter longer than the manager's acquisition timetable allowed.

A manager forms a partnership whose deed permits borrowing but is silent on assignment of the call right. The lender's counsel requires a deed amendment, which needs the limited partners' consent at the threshold the deed sets; one partner uses the consent to renegotiate its own terms.

A manager forms a contractual scheme for a register that knows the form, and seeks asset-level financing in the state the assets sit in. The asset-level lender takes its package from the asset companies and never meets the trustee; the fund-level lender takes the trustee's covenant with the trustee's consent as a step on the timetable, priced in advance.

A manager chooses a partnership with the facility in view: the deed permits assignment and borrowing within a cap, every subscription agreement carries the lender's acknowledgement from first close, side letters carry a lender's clause preserving the obligation, and the register is sized to the borrowing base the manager needs. The facility is signed within a month of first close.

What each party holds

The manager holds the choice of form and the drafting that makes the form financeable.

Counsel holds the deed or constitution's borrowing, security and assignment provisions, and the opinion on the form's capacity to grant what the lender asks.

The lender holds the grading of the register, the acknowledgements and the consents at exit.

The holders hold the acknowledgement they signed, which is an obligation to fund a call made by a stranger.

The trustee, on a scheme, holds its consent and its limited recourse.

The administrator holds the call mechanics and the call account the lender has charged.

The sequence

1. The likely financing, fund-level and asset-level, is read before the form is chosen.
2. The form is chosen with the security package in view.
3. The deed or constitution is drafted with assignment, borrowing and security powers within a cap.
4. The subscription agreements carry the lender's acknowledgement from first close; side letters carry a lender's clause.
5. The structure paper separates fund-level from asset-level security, with the grantor, the law and the registry for each.
6. The year-five transactions are read against the lender's consent provisions and carved out at signing where the manager can foresee them.

Questions a manager asks

Can a company fund get a capital-call facility. It can, on the subscription agreements, and the lender reads each one; uniform agreements with the acknowledgement drafted in make the base; variations reduce it.

Does the choice of form affect asset-level financing. No. Asset-level security is granted by the asset company under the asset state's law, whatever the fund's form.

What does the holder's acknowledgement actually commit it to. To fund a call made by the lender in the general partner's name, without set-off, even where the general partner is in default, up to its undrawn commitment. Holders' counsel read it closely, and a holder that will not sign is a holder outside the base.

Can the form be changed later. A partnership can be converted to a company or the reverse only by a transfer of the portfolio to a new vehicle, with every consent that implies. The form is chosen once.

What does a lender think of a scheme. It prices the trustee's consent and limited recourse as terms and takes the package it can; a manager with a register that wants the scheme form accepts the pricing.

Does the form affect the Gulf placements. No. Each onshore state's regime reads the fund's securities, whatever their form, as securities of a foreign fund.

Terms used

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

Call right: the general partner's or company's right to require a holder to fund its commitment.

Acknowledgement: the holder's confirmation to a lender that it will fund a call the lender makes.

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

Limited recourse: a trustee's term limiting its liability to the scheme's assets.

Perfection: the registration that makes a security interest bind third parties.

Intercreditor: the agreement ranking fund-level and asset-level lenders.

What to read

The centre's partnership, companies and collective investment statutes for each form's powers and limits; the deed or constitution for borrowing, security and assignment; the subscription agreement for the holder's acknowledgement; the centre's security registry and its court's record. On this site, the vehicles, financing and security rooms under Structures.