A DRAWDOWN NOTICE is the means used by fund managers to communicate the need to DRAW DOWN funds from its Limited Partners.
Because capital committed to a private equity fund (or fund with a similar structure and strategy) is not transferred to the fund manager at the point of subscription (or ‘commitment’), there needs to be a mechanism for drawing the required portion of the committed capital into the fund, in order for the fund to be able to make investments and fund its operations, as they arise.
How it works
The actual process varies from fund to fund and is agreed between Limited Partners (‘LPs’) and General Partner (‘GP’) or Manager as part of the investment negotiations and subscription process. The Limited Partnership Agreement (LPA) of the fund sets out what process is agreed between the partners.
A typical process would be:
- The General Partner or Manager determines how much of the commitment to draw down for an investment or to pay fees, and instructs its fund administrator to execute the drawdown calculation
- The share to be requested from each Limited Partner is agreed based on its share of commitments and/or any side agreements, depending on the circumstances
- The fund administrator creates the drawdown notices, which are approved by the General Partner (or Manager)
- The Fund administrator distributes the drawdown notices to the agreed recipients
- May be one person if an HNWI (High Net Worth Investor)
- May be many people at a large institutional investor
- The Limited Partner’s transfers funds within the stipulated timeframe (typically 10 working days)
- Cash arrives on or before the agreed date and becomes part of the cash assets of the partnership
Contents of a drawdown notice:
The following are typical elements of a drawdown notice, although the exact format and information required will most likely to be set out in the LPA:
- References to drawdown clauses in the LPA
- Details of who the investor is or the entity from which it is investing
- The amount to be transferred, and by when
- Bank details of the account to be transferred into
Depending on the arrangements agreed in the LPA, it might also contain any of the following:
- Full details of amounts previously drawn and the balance to be drawn (or re-drawn) from the investor and every other investor
- Details of what the investment is for and information about the portfolio company; its activity, and/or investor required data such as, number of employees, their gender etc.
- Fees for this deal and fee totals to date
- Next quarter’s General Partner Share (GPS, the Management Fee)
- “Negative drawdown”: offsetable fees received by a manager
- Directors’ fees/observer fees/board fees are sometimes offsetable and are given back to investors by subtracting from drawdown amount
- Re-drawable amounts: In some circumstances capital amounts that have been distributed may remain for a period of time available to the GP or Manager to be “re-drawn” into new investments.