Lending to Limited Partnerships against Capital Calls | Fieldfisher
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Lending to Limited Partnerships against Capital Calls


United Kingdom

This article sets out how these types of loans and the security are structured and the issues which need to be considered by lenders.

The Wealth Finance Brief - 1 October 2014

  • Lending to law firms
  • A Lender's Right to Take Possession of Residential Property
  • Litigation or Arbitration?
  • Lending to Limited Partnerships against Capital Calls

 Click here to download the full briefing paper >

Private equity funds requiring money for investments frequently turn to lenders to bridge the gap between the date when the investment needs to be made and the date of the next scheduled capital call on its limited partners. These equity bridge or capital call facilities are often secured on the fund's limited partners' commitments to make capital contributions. This article sets out how these types of loans and the security therefor are structured and the special issues which need to be considered by lenders.

  • What are Limited Partnerships?
    • Created under Limited Partnerships Act 1907
    • Not a separate legal entity
    • Tax transparent
    • Limited partners have liability limited to the amount of their capital contribution, but cannot be involved in the management of the Limited Partnership ("LP"). An LP is managed by its general partner which has unlimited liability
    • The LP is required to be registered at the UK Companies Registry, but unlike a limited company, only very limited information has to be registered
    • Distinguish from an LLP which does have a separate legal entity and operates more like a limited company
  • Due Diligence
    • A lender will wish to examine the limited partnership agreement. Of particular concern will be:
      • The amount of the LP's fixed capital
      • The obligations of limited partners to make capital contributions
      • Who can make calls for capital contributions?
      • Ability of LP to borrow money and create security
      • Terms of LP and manner in which it can be dissolved
      • Term of any delegation by GP of its powers to an FCA authorised manager.
    • Search at UK Companies Registry to check
      • Duly registered
      • Particulars of the LP including details of GP, limited partners and capital amounts contributed
  • Loan Agreement
    • Entered into by GP on behalf of LP, subject to any delegation to FCA authorised manager
    • Bespoke financial covenants in respect of LP and possibly limited partners
    • Events of default with possible cross-default in relation to all/ certain limited partners
    • Negative covenants covering variation to partnership agreement, incurring other indebtedness and granting any other security interests
  • Security over uncalled contributions
    • This constitutes security over an intangible or "chose in action"
    • A capital contribution in the case of a UK LP takes the form of a subordinated loan by the limited partners to the LP
    • Loans by limited partners to the LP are by case law subordinated to other creditors of the LP
    • Normally security over uncalled contributions is taken by way of assignment, but security can also be taken by way of charge
    • If the security is by way of assignment, it will usually be executed by the GP (on behalf of the LP), but may need to be executed by an FCA authorised manager if the GP has delegated its powers to such manager
    • The security required is normally the right to require capital contributions from limited partners, rights over the proceeds of the capital calls and rights to exercise penalties if a limited partner does not comply. It has become the practice of some lenders not only to take an assignment from the LP, but also from the GP itself of the right it has to make capital calls. It is debateable whether a GP has anything it can personally assign, but a benefit of this approach is that a GP (which is a UK corporate entity or UK LLP) can have such assignment registered against it at the UK Companies Registry
    • In any event, a lender will require an irrevocable power of attorney by way of security from the GP (and possible a manager) so that it can step into the shoes of the LP to make capital calls if the GP fails to do so
    • In addition, a lender will often take security over a bank account into which the proceeds of the capital contributions are to be paid. Ideally this could be a fixed charge, but if so the account would need to be treated as a blocked account and the lender would need actively to assert control over such account
    • You cannot register a security interest against an LP at the UK Companies Registry. Instead, a lender protects its security interest by giving notice to the limited partners. The main benefit of giving notice is that the priority of assignments will rank accordingly to the date when the limited partner receives notice. It also prevents limited partners from paying the contribution to the GP instead of the lender and prevents any equities (e.g. rights of set-off on similar rights) arising in priority to the lender. Ideally the lender would obtain an acknowledgment to the notice, but in practice a lender rarely gets this as GPs are very protective of their limited partners and would strongly resist the limited partners being asked to give an acknowledgement. Sometimes a lender will agree to defer requiring notice to be given until, say, the next quarterly accounts are sent by the GP to the limited partners so as to reduce the amount of paperwork received by the limited partners. A lender will agree to this if it has a good relationship with the LP and for the sake of such relationship is willing to defer perfecting its security
  • Enforcement
    • Normally the Lender (or its receiver) would step into the shoes of the GP and exercise the right of the LP to make capital calls. Obviously a lender cannot be in a better position to make capital calls than the GP under the partnership agreement so this will need to be checked prior to enforcement
    • If the lender has taken security over a bank account, it can also look to recover the proceeds of capital contributions from such account

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