When considering an investment in a private equity fund, investors and their lawyers have a significant amount of documents to review, from the lengthy private placement memorandum (PPM) and limited partnership agreement (LPA) (often more than 90 pages single spaced) to management agreements, due diligence replies, policy documents and marketing materials. However, the document by which the actual offer to invest in a fund is made by the investor and accepted by the general partner (GP) – the subscription agreement – is often relegated to ancillary status and rarely negotiated.

What is a subscription agreement?

The subscription agreement is required when launching a private equity fund. It is a binding legal agreement among the fund, the fund's GP and each prospective fund investor setting out the basis on which a prospective investor will be admitted to the fund as an investor/limited partner. A prospective investor will make a number of representations and warranties in the subscription agreement. These representations are supported by an investor questionnaire, in which the investor certifies as to certain matters.

If one were to invest in a private company (i.e. not a fund), the subscription agreement would be in the form of a letter usually comprising less than half a page. Why then do fund subscription agreements typically exceed 25 pages and what do they contain that is so important?

What does a subscription agreement contain?

A subscription agreement mostly consists of representations and warranties (and lots of them), but the primary feature of a subscription agreement is the application to become an investor in the fund on the terms of the LPA. By countersigning the subscription agreement, the offer is accepted by the GP and the applicant becomes an investor in the fund with a commitment to make payments up to the sum inserted in the subscription agreement by the GP, such sum not to exceed the amount offered by the applicant.

Whilst the LPA is the main document for governing how the fund operates and the rights of investors in the fund (assuming a limited partnership structure), it is through the subscription agreement that the GP receives various confirmations from the investor, in the form of representations and warranties, that the GP hopes will offer a shield against claims being brought against it, either by the investor or authorities.

The representations and warranties given by an applicant cover a wide range of subjects, including:

• Investment decision: that the investor has read the PPM, LPA and information provided to it, and is making its investment decision solely on that information.
• Suitability to invest: that it has sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits of, and it is able to bear the economic risk of, its investment in the fund.
• No liquidity: that it has no immediate need for liquidity in respect of its investment and it understands that, save as set out in the LPA, it cannot withdraw from the fund and an interest in the fund cannot be transferred, except as provided in the LPA.
• Restrictions on sale: that it shall not offer, sell, transfer, pledge or otherwise dispose of, directly or indirectly, all or any part of its interest in the fund (or any interest therein), except in accordance with the terms and provisions of the LPA.
• Reliance: that the GP has not provided any investment advice or recommendation in relation to the merits of investing.
• Capacity, legality, authority, execution and compliance: these are standard confirmations to confirm that the investor has the power to enter into the fund documents.
• Provision and disclosure of information: that it will promptly provide the GP with any such information relating to the investor (or its direct or indirect owners) which is reasonably requested from time to time by the GP and which the GP determines in good faith is necessary in order for the fund, any limited partner, the GP, any entity in which the fund holds (directly or indirectly) an interest, or any affiliate of any of the foregoing, to allow any such person to comply with or satisfy any requirement imposed on such person under any law or regulation.
• Accuracy of information: as part of completing the subscription agreement, the applicant will answer various questions, usually by box checking, and provide information as to its status. It is required to represent and warrant that all information it has provided or subsequently provides is complete and accurate, and the applicant acknowledges reliance on such information on part of the fund, the GP and affiliates. 

All of the above warranties are hard for an applicant investing in a fund to resist, with each having strong arguments for their inclusion. 

A subscription agreement will also usually contain:

• an indemnity from the applicant indemnifying the fund, the GP and affiliates in relation to any and all claims, liabilities, demands, losses, damages, costs and expenses arising as a result of any breach by the applicant of any representations or warranty given by it in the subscription agreement; and 
• a wide-ranging power of attorney (PoA) in favour of the GP.

Scope for changes by the applicant?

A typical response from the GP to a request to amend the subscription agreement is often a (sometimes) polite but firm "no way", on the basis that it is a "standard document". This is a lazy and incorrect approach. There is no standard subscription agreement. The phrase "the devil is in the detail" is appropriate here. Whilst subscription agreements for funds generally cover the same ground, they will vary and such an argument should not be used to deprive the investor/applicant from negotiating a fair document.

Examples of changes that can reasonably be sought by an applicant are:

• Representations and warranties be limited to factual matters (i.e. not including any legal determinations) that the applicant can assess easily, without taking specialist or jurisdiction-specific advice.
• Push back against language along the lines that the applicant will only transfer an interest in the fund in accordance with applicable law.
• Whilst the preference for an applicant is for the subscription agreement not to include an indemnity, it may be acceptable if limited to breaches of reasonable representations and warranties which the applicant is confident that it understands and can give. The maximum liability under any indemnity should not exceed the amount of the applicant's commitment to the fund.
• Provided that the LPA contains a customary PoA, there should not be any reason for the PoA to extend further than executing the LPA.
• The applicant should ensure that the GP gives certain representations and warranties to it, including in relation to:
  • due formation and standing;
  • authority to enter into the various fund documents to which it is a party;
  • compliance with the law and other instruments;
  • accuracy of statements of fact in the PPM;
  • no material litigation of claims exists or, to the best of the GP's knowledge, are threatened; and
  • if at a first closing, that the fund has no material liabilities other than organisational expenses.