Positioning Investment Funds for Future Financing: Key Operating Agreement Provisions

Private equity and venture capital investment funds are increasingly interested in entering into credit facilities to provide private equity funds with short-term liquidity. Funds often need financing quickly to be able to make investments. A properly drafted limited partnership or operating agreement can expedite the closing of such financing and reduce transaction costs.

In conducting its due diligence on a fund, the lender will want various assurances, including that the fund can incur and repay indebtedness, the fund and its managing entity can grant security interests to the lender in the applicable collateral, and the fund can call capital from its investors with limited restrictions.

Fund documents should allow the managing entity to pledge to the lender the managing entity's right to call capital and should name the lender as a third-party beneficiary concerning all funding provisions. Attention should also be paid to exit provisions which may affect the composition of the members or partners and the ability of the manager or lender to call capital.

If the lender is not satisfied with the provisions in the fund document, the lender may require the fund to amend its fund document, requiring the fund to approach its investors, leading to delays in obtaining financing and increased costs for the fund.

Listen as our authoritative panel discusses how best to structure fund agreements to facilitate future credit facilities. The panel will focus on the particular concerns of lenders and how to avoid the need to amend entity documents to close the deal.

1. Advantages of including funding provisions in LLC and limited partnership agreements
2. Suggested provisions
   1. Allow for the fund to incur indebtedness
   2. Allow for the fund to secure its borrowings with a pledge of capital commitments
   3. Allow for the managing entity to pledge to the lender the managing entity's right to call capital
   4. Have each investor acknowledge and agree to fund any capital calls made by a lender or to repay indebtedness
   5. Name lenders as third-party beneficiaries to financing provisions
   6. Limit conditions to investors' commitment to fund capital calls
   7. Make recallable capital "lender friendly"
   8. Commit investors to fund capital calls after the investment period
3. Exit provisions that do not impede financing

The panel will review these and other relevant issues:

• Why is it important to anticipate future financing needs when drafting a fund agreement?
• What are provisions relating to the members or limited partners to include in a fund agreement to facilitate future financing?
• Why should the manager pledge its right to make capital calls? Which portions of the agreement should include a third-party beneficiary provision?
• How might exit provisions negatively impact a fund's ability to obtain financing?