The percentage only binds in the first half of the fund's life. After 75 per cent is called, the uncalled leg takes over and shrinks with every capital call.
Under the most common formulation, a fund may have borrowings and guarantees outstanding up to the lesser of a percentage of total commitments, often 25 per cent, and its uncalled commitments, with everything already drawn or guaranteed counted against the limit. On an illustrative $1,000m fund the limit is $250m until 75 per cent of commitments have been called, then it shrinks with every call: in year five, with $200m uncalled, a $50m subscription line and a $40m guarantee leave $110m of headroom, not the $160m that “25 per cent of commitments” suggests, and a $120m NAV facility does not fit.
Worked in full in How to Read a Limited Partnership Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The borrowing limit is one of the shortest clauses in a limited partnership agreement and one of the most consequential late in a fund's life, when GPs look at NAV facilities and portfolio company guarantees. Three words decide the answer: “lesser of”, “uncalled”, and whether the test applies when the debt is incurred or at all times. Wording varies between funds; the calculation below uses a common market form, not any particular agreement.
| Input | Value |
|---|---|
| Total commitments | 1,000 |
| Borrowing limit | Lesser of 25% of commitments and uncalled commitments |
| What counts | All fund borrowings plus guarantees of portfolio company debt |
| Cumulative capital called, years 1 to 7 | 15, 35, 55, 70, 80, 86, 90% |
| Year 5: subscription line drawn | 50.0 |
| Year 5: guarantee of a portfolio company's facility | 40.0 |
| Year 5: proposed NAV facility | 120.0 |
Limit = MIN(25% × commitments, commitments − capital called)
25% × 1,000 = 250. Uncalled falls below 250 once more than 75% has been called.
Excel: =MIN(Pct*Commitments,Commitments-Called)
| Year | Called | Uncalled | Limit | Binding test |
|---|---|---|---|---|
| 1 | 15% | 850 | 250 | 25% of commitments |
| 2 | 35% | 650 | 250 | 25% of commitments |
| 3 | 55% | 450 | 250 | 25% of commitments |
| 4 | 70% | 300 | 250 | 25% of commitments |
| 5 | 80% | 200 | 200 | Uncalled |
| 6 | 86% | 140 | 140 | Uncalled |
| 7 | 90% | 100 | 100 | Uncalled |
The uncalled leg exists because a subscription line is repaid by calling capital: debt above what can still be called could only be repaid from investments. That is exactly the debt a NAV facility is, which is why the limit bites hardest when NAV facilities become interesting, from year five onwards.
Limit = MIN(250, 200) = 200
Already used = subscription line 50 + guarantee 40 = 90
Headroom = 200 − 90 = 110
Proposed NAV facility 120 exceeds headroom by 10
Read as “25 per cent of commitments” alone, the headroom would be 250 − 90 = 160 and the facility would appear to fit with room to spare: an overstatement of 50. Forget the guarantee and the headroom looks like 150. The GP's options are to size the facility at 110, or to seek LPAC or investor consent, which agreements typically require for borrowing above the limit. Repaying the subscription line first does not help: calling $50m to repay it cuts uncalled commitments to $150m and the limit with them, and headroom stays at 110.
The subscription line lender runs its own test as well. At an 80 per cent advance rate on the $200m uncalled, the line's borrowing base is $160m, below the $200m LPA limit, so for the line itself the bank's test would bind first. A NAV facility sits outside that borrowing base altogether, and for it only the LPA headroom counts. The lender's side is worked in how a subscription line borrowing base is calculated.
Suppose the fund borrowed $240m in year four, inside the $250m limit. Whether that remains compliant depends on whether the clause tests at incurrence only or as a continuing limit.
| Year | Limit | Excess if tested at all times |
|---|---|---|
| 4 | 250 | 0 |
| 5 | 200 | 40 |
| 6 | 140 | 100 |
| 7 | 100 | 140 |
Under an incurrence test the borrowing stays permitted. Under a continuing test the fund is $40m over the limit in year five without having borrowed another dollar, simply because it called capital. Many LPAs also require subscription borrowings to be repaid within a fixed period, often 12 months, which avoids the problem for the line but not for longer-dated debt.
Quoting the percentage and stopping there. “The fund can borrow 25 per cent” is true for the first half of the fund's life and wrong for the second, which is when the question is usually asked. The other frequent error is leaving out credit support: guarantees of portfolio company debt, letters of credit and equity commitment letters backed by the fund are often within the definition, and in this case the guarantee alone uses $40m of the $110m. When an LP reviews a NAV facility proposal, the first number to ask for is the headroom calculated on the agreement's own definitions at the proposed closing date.
For LPs, the limit is a protection, not a formality. Debt above uncalled commitments is repaid from portfolio proceeds, which come ahead of distributions. The effect of such a facility on reported returns is set out in what a NAV loan distribution does to DPI.
Borrowing capacity = MIN(25% of commitments, uncalled commitments) less all borrowings and guarantees outstanding. Here it is $250m until 75 per cent is called, $200m in year five, and only $110m of headroom once the line and the guarantee are counted. The free workbook for this case includes a fee and waterfall model for your own fund.
Usually, yes. Most LPAs define the limit over borrowings and guarantees or other credit support given by the fund. In the illustrative case a $40m guarantee of a portfolio company's facility uses more than a third of the $110m of headroom left in year five, after a $50m subscription line.
Because subscription debt is repaid by calling capital, and debt above what can still be called could only be repaid from the portfolio, ahead of distributions to LPs. On a $1,000m fund the uncalled leg takes over from 25 per cent of commitments once 75 per cent is called, and falls to $100m when 90 per cent is called.
Yes, if the limit is tested at all times rather than only when debt is incurred. A fund that borrowed $240m in year four within a $250m limit is $40m over the limit in year five once uncalled commitments fall to $200m, purely as a result of capital calls.
This article is one calculation from How to Read a Limited Partnership Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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