Tag: subscription secured credit facility

ILPA Guidance on Subscription Lines of Credit

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:

  1. Use the date the credit facility is drawn for calculating the waterfall instead of the capital call.
  2. Disclosure of the impact of the facility on IRR.
  3. Limit the outstanding balance to less than 25% of uncalled capital.
  4. 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.

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Private Equity Exemption Bill Moves Ahead

The Small Business Capital Access and Job Preservation Act, H.R. 1082, took another step forward this week when it was approved by the House Committee on Financial Services. It still has a long way to go before coming law so this is no time to stop getting your compliance infrastructure in place.

The bill still defers the definition of “private equity fund” to the Securities and Exchange Commission and gives the SEC six months to come up with that definition. Even assuming the bill passes and passes quickly, you would not know if you fit into this exemption until very close to the March 30, 2011 filing deadline under the Investment Advisers Act.

The bill has been revised and now imposes a leverage limitation.

“provided that each such fund has not borrowed and does not have outstanding a principal amount in excess of twice its invested capital commitments.”

I think that limitation would prohibit the use of a subscription secured credit facility by a private equity fund if they wanted to take advantage of this exemption. That borrowing is used prior to calling capital and to provide liquidity without calling capital. It makes it easier for the fund manager to smooth out capital calls to investors.

Beyond that facility, It’s not clear to me whether that limitation would include debt at the portfolio level. In reading the minority view at the end of the committee report (.pdf), they think the leverage limitation excludes leverage in the portfolio companies.

Unfortunately, the committee report comes across as very partisan and attacks Dodd-Frank as a whole. To me that would only seem to decrease the likelihood that the House as a whole will take the bill seriously.

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