In private equity and real estate investment funds, liquidity timing between deal execution and capital call settlement is bridged via subscription credit facilities (capital call lines). Secured exclusively by the general partner's right to call capital from uncalled Limited Partner (LP) commitments, these facilities optimize IRR while enforcing strict borrowing base covenants.
The Architecture of the Borrowing Base Formula
How institutional investor credit ratings determine available fund advance rates:
The total allowable borrowing base is the sum of eligible uncalled LP commitments multiplied by their tier-specific advance rates: $B = \sum (C_i \times A_i)$. Rated sovereign wealth funds and public pension systems (Tier 1) command $90\%$ advance rates, while high-net-worth individuals and family offices (Tier 3) are capped at $50\%$ or excluded under strict concentration limits.
Fund Financing Structures Compared
| Facility Structure | Collateral Package | Pricing Spread (SOFR + Spread) | Typical Tenor / Maturity |
|---|---|---|---|
| Uncommitted Overdraft Facility | General cash balance lien | SOFR + 275 – 350 bps | Demand / 30 Days |
| NAV (Net Asset Value) Facility | Portfolio company equity distributions | SOFR + 350 – 475 bps | 3 – 5 Years |
| Subscription Credit Facility (Capital Call) | Uncalled LP commitments + Account charge | SOFR + 140 – 185 bps | 12 – 36 Months |
LP Default Remediation Workflow
How lenders execute power-of-attorney capital calls following investor defaults:
- Formal Default Notice Trigger: The GP issues a 10-day cure notice to defaulting LP with penalty interest rates ($+500\text{ bps}$).
- Exclusion from Borrowing Base: The defaulting LP commitment is immediately removed from $B$, prompting an automatic mandatory prepayment if facility outstanding exceeds the adjusted base.
- Lender Step-In Rights: Under the credit agreement deposit account control agreement (DACA), the administrative agent exercises power-of-attorney to issue direct capital calls to remaining non-defaulting LPs up to their remaining unfunded commitments.
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