The Institutional Limited Partners Association (ILPA) released guidance regarding the use of subscription lines of credit facilities by private equity funds. ILPA outlines the risks and potential impact on limited partners.
As with most potential conflicts, ILPA recommends better disclosure and greater clarity for their use.
Subscription lines of credit are a great tool for a fund. It allows a quick draw on capital and gives the fund manager to give limited partners a better plan for when capital will be called.
But according to ILPA, some fund managers are starting to use the lines of credit to hold off calling capital for longer and longer periods of time.
ILPA is also concerned that disparate of use of lines of credit among different fund managers makes it hard to compare returns from one manager to another.
Some of the recommendations that caught my attention:
- Use the date the credit facility is drawn for calculating the waterfall instead of the capital call.
- Disclosure of the impact of the facility on IRR.
- Limit the outstanding balance to less than 25% of uncalled capital.
- Limit the borrowing to 180 days outstanding.
It would seem to me that if a fund agrees to the time limit for the outstanding balance, then the other 3 items are reduced. The facility is then much more about allowing the fund manager to have better speed of execution instead of a tool to manipulate returns.