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10.1.5: Installment Payments
An investment partnership typically does not invest its capital all at once; the process of screening and selecting
investments may take several years before the partnership is substantially invested. (The partnership is seldom
fully invested since significant cash must be held in reserve for follow-on investments in portfolio companies
needing extra cash.) Accordingly, it is customary to take the investors contributions down in installments, or
tranches, to use a popular term on Wall Street. In bygone times, the agreement typically provided that, say, one-
third of the committed capital was due on organization and the GPGP could call for the remainder in, say, two
installments estimated to occur in the second and third year of the partnerships life.
[1]
That format is no longer
a la mode; with rare exceptions, investors put up a small percentage of required capital upon organization and
calls are made thereafter on a just in time basis, i.e., to make investments.
[2]
The problem arises when a given
partner fails to honor his obligations.
The norm is to provide for a stiff penalty if the investor defaults-that is, to haircut the interest by providing that
the defaulters interest in either profits and/or capital will be reduced to some fraction of what the contribution
already made would entitle the investor to. Whether such a penalty will stand up in litigation is not settled since
conventional wisdom in the law dictates that the courts are not inclined to enforce penalties. The 1985
amendments to the Delaware version of the Uniform Act make it clear that a defaulting partner can be subjected
to various penalties, including subordination of the partners interest, forced sale, reduction or forfeiture of that
interest, redemption at an appraised value, and other grievous consequences.
[3]


[1]
The Federal Reserve Board has taken the view that installment payments in a publicly offered partnership
syndication are an extension of credit subject to the proscriptions of Regulation T, but that staged payments in a
private offering are not subject to regulation. Federal Reserve Board Release (Mar. 1972) 5-470 (interpreting
220.13 of Regulation T). See generally Hensley & Rothwell, Regulation T & Public Offerings of Limited
Partnerships: Time For A Change, 39 Bus. Law. 543 (Feb. 1984).
[2]
See 1993 Terms at 13; the discussion demonstrates dramatic improvements in internal rates of return if the
clock does not start running on the limited partners investment until the last possible moment.
[3]
Del.CodeAnn.tit.6, 17-502(c)(1985). See Basile, The 1985 Delaware Revised Uniform Limited Partnership
Act, 41 Bus. Law. 571, 589 (Feb. 1986).
Page 1 of 1 10.1.5: Installment Payments - Encyclopedia - Library - VC Experts