Private equity funds routinely use password-protected websites (an “Investor Portal”) to issue capital calls, send distribution notices, and generally communicate with their investors. In fact, many funds no longer send hard copies of these communications by mail and, in many cases, not even via email. Despite this shift, subscription credit facility documentation has not traditionally addressed the use and control of Investor Portals in much detail. However, in light of recent market events, lenders are now examining whether it makes sense to specifically provide for mechanics addressing the lender’s use and control of the Investor Portal in subscription credit facility documentation.
Lenders are raising concerns that investors might hesitate to fund a capital call notice sent in an enforcement scenario if it is sent via courier, faxed or emailed to them—especially in light of concerns around fraudulent capital call notices being issued from illegitimate sources. Similarly, investors may be wary of funding a capital call if the related capital call notice were to come from an unfamiliar email address. The ability to post a capital call notice on the Investor Portal would minimize and reduce this risk. Although subscription lenders typically have the right to post on a fund’s Investor Portal in an enforcement scenario via the power-of-attorney and “further assurances” that are included in standard subscription credit facility loan documents, lenders are now considering obtaining “posting” privileges at the outset of the credit facility. This day-one grant of posting privileges would ensure lenders are able to make a capital call quickly and confirm beforehand that there would be no technical issues that would impede issuing the capital call. Of course, lenders would need to agree that they could only post to the Investor Portal during the continuance of an event of default.
Although some funds may initially pause at granting lenders posting privileges to their Investor Portals at the beginning of a transaction, the risk that a subscription lender would misuse this capability is remote. In reality, the risk of misuse by a lender is consistent with the existing risk that funds have already accepted in the market generally. For example, subscription credit facility agents already possess the contact information of all investors to correspond with the fund’s investors directly. Lenders also maintain the ability to give direction to an account bank with respect to blocking and distributing cash from a fund’s capital contribution collateral account via the deposit account control arrangements. Funds have traditionally been comfortable with this risk as a lender would face reputational repercussions, as well as expose itself to claims and damages, as a result of any misuse of these enforcement remedies. These same deterrents would also protect the fund from any potential lender misuse of any Investor Portal posting privileges.
In addition to lenders benefiting, funds can benefit from lender access to the Investor Portal as a way to address certain reporting obligations in subscription credit facilities, which a fund may find to be too burdensome and/or result in unintended “foot faults.” “View-only” access to the Investor Portal (where the lender would have the right to view everything posted on the Investor Portal by the fund) would facilitate real-time notice of capital calls and other communications, thereby easing the reporting compliance burden on funds. Additionally, Investor Portal access may permit a lender to trace through capital call history, recallable capital notices, and contact information updates without burdening the fund via a separate delivery requirement.
In light of the foregoing, we believe market participants will develop Investor Portal provisions in subscription credit facilities that would be used not only to ease the fund’s compliance burden, but also to address lender concerns with issuing capital calls via an outdated, paper-based process.