The Institutional Limited Partners Association (ILPA) on June 27, 2017 issued the Guidance For Limited Partners on Subscription Lines of Credit used by Private Equity Funds( the ILPA Guidance). The Guidance is significant in view of the increasing calls for greater disclosure and better alignment of interests between institutional investors and General Partners (GPs) with respect to the use of Subscription Lines of Credit.
Subscription Lines of Credit are facilities which are provided by lenders to private equity, real estate, or other funds and usually secured against the limited partner commitments in the fund. The lender’s recourse for this type of facility is typically only to the Limited Partners (LPs) who have invested in the fund with the effect that all of the investor’s unfunded capital commitments will serve as collateral for the Subscription Line. The lender’s right of recourse is usually backed by a security assignment or power of attorney, on the back of which lenders can send out draw down notices to LPs in the event that a GP fails to do so. By its very nature, a Subscription Line of Credit is a revolving credit facility allowing fund managers to draw, repay and redraw. Some of the attractions of Subscription Lines to GPs include the prospect of obtaining low cost financing, quicker access to capital relative to the time typically afforded to LPs to contribute capital in response to a capital call notice . Over the years Subscription Lines have grown in use and scope by global private equity funds hence the increasing attention from industry watchers and consequently, the issuance of the ILPA Guidance.
The ILPA Guidance provides some analysis on the impact of the of Subscription Lines and takes the position that the use of Subscription Lines of Credit should accrue to the benefit of the LP and that there should be greater transparency from GPs in relation to the impact of Subscription Lines. The ILPA Guidance also recommends certain questions for GPs regarding the introduction or expanded use of Subscription Lines and makes certain recommendations on the level and frequency of disclosures to be made by GPs, the calculation of a GP’s preferred hurdle and thresholds for use of Subscription Lines of Credit.