Impact Of Subscription Credit Facilities In Private Capital

Preqin is constantly looking at how alternative assets are evolving in order to ensure our data adds context, clarity and conviction to your decision-making. The use of subscription credit facilities (also known as equity bridge facilities, subscription line facilities or capital call facilities) by private capital funds to facilitate short-term financing is nothing new; the benefits they can offer to both fund managers and investors are wide and include:

Q1 hedge fund letters, conference, scoops etc

  • Reduced risk of transactions falling through: capital is fully covered by the loan as opposed to requiring capital calls from multiple LPs.
  • Enhanced competitiveness: credit facilities are requested and deployed rapidly, which is particularly important for time-sensitive transactions like co-investments; LP capital calls are typically a comparatively lengthy procedure.
  • Cash flow management: GPs can use credit lines to smooth outgoings and capital calls, meaning LP capital calls can be requested in larger batches as opposed to requesting frequent smaller calls.
  • Reduced administrative burden: managers can use bridge facilities to prevent capital calls when investments do not come to fruition.
  • Improved liquidity: distributions can be paid to LPs before the liquidation of an asset. This is of greater importance to open-ended vehicles which stand to lose strong assets if a large enough redemption request from an LP is made.

Credit facilities have moved into the spotlight in recent years, largely due to the repayment term becoming much longer, which can cause a headache for investors. The internal rate of return (IRR) – which is by no means the only measure of fund performance – is favoured by private market investors, insomuch as a manager’s incentive award can be determined by achieving certain IRR thresholds.

The downside of screening potential managers predominantly using IRRs are twofold:

  1. The IRR calculation is heavily influenced by timing; by using credit lines to delay the capital call for long periods of time, IRRs can be manipulated to appear larger than if the capital call was made as soon as possible to cover the loan.
  2. For an LP evaluating a fund, prior performance is one of, if not the most, important criteria for making an investment. Managers often raise capital for a new fund in an early part of their existing vehicle’s lifespan and this early-life IRR is more susceptible to manipulation from credit facility usage.

NEW DATA: Credit Facility Usage in Funds

To help institutional investors with their due diligence and returns analysis, we have added subscription credit facility usage across the industry’s most comprehensive private capital fund dataset on Preqin Pro.

Preqin’s current subscribers across all private capital asset classes can now identify funds based on credit line usage; incorporating this information into our benchmark data or your own custom benchmarks will enable  far greater insight when assessing prospective and current managers.

Get in touch with one of our team if you are interested in a more diligent approach to fund screening and analysis.

Article by Preqin

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