Understanding Potential Recharacterization and Subordination Attacks against Bridge Loans Made byVenture Capital and Private Equity Firms

Abstract

It is not unusual for venture capital (VC) and private equity (PE) firms to make bridge loans to companies they control when those companies encounter financial distress and face a liquidity crunch. VC and PE firms should be aware of the potential attacks that may be brought against their position as bridge lenders in the event of an ultimate bankruptcy or insolvency of the borrower. Based on the law that has developed in the federal circuit courts of appeal, bridge loans made by VC and PE firms (and by others) in good faith and with some foresight should generally not be susceptible to successful attacks. The authors discuss the reasons why it is imperative to recognize the economic realities of modern finance and the frequently limited options available to financially distressed businesses. <b>TOPICS:</b>Private equity, financial crises and financial market history, legal/regulatory/public policy, portfolio construction