DealLawyers.com Blog

July 21, 2017

Private Equity: Institutions Offer “Subscription Credit Line” Guidelines

This Weil Gotshal blog discusses the Institutional Limited Partners Association’s new guidelines on the use of subscription credit lines by fund managers.  These credit arrangements – which originally were used to provide short-term financing in order to streamline investor capital calls – are being used more broadly.

The blog says that the ILPA guidelines are intended to ensure that these credit lines are used in a way that benefits investors. Here’s an excerpt:

As a general theme, the guidelines emphasize stricter parameters on the use of such lines and greater transparency with respect thereto. Specifically, ILPA calls for “reasonable thresholds” relating to such lines; namely, for such lines to be (i) capped at 15-25% of uncalled capital commitments, (ii) outstanding for a maximum of 180 days, (iii) utilized for a stated maximum period of time and (iv) secured against investors’ capital commitments only and not other fund assets. Additionally, ILPA recommends that the preferred return clock is linked to the date when a borrowing is made rather than the date capital is called from investors to repay the borrowing.

With regards to transparency, the guidelines encourage enhanced disclosure regarding the use of subscription lines and their impact on performance, both during the due diligence stage of a prospective manager and the term of the fund.

The guidelines include a number of questions that investors should ask fund managers about any proposed subscription credit line, and sponsors would be wise to review those in connection with any new or expanded facility.

John Jenkins