Subscription line
A credit line a fund borrows against, secured by its LPs' unfunded commitments.
It lets the manager invest immediately and call capital from LPs later, in one larger batch. That can lift the reported rate of return, so many LPs ask how much a fund uses it and for how long.
Lenders, usually banks, lend against the LPs' obligation to fund capital calls, so the credit quality of the LP base matters more than the portfolio. Facilities are commonly sized at 10 to 25 percent of commitments and repaid within months, though some funds keep balances outstanding for a year or more.
Because borrowing delays the date LPs send cash, it shortens the measured holding period and can raise IRR without changing the multiple, and it adds interest cost. LP associations have asked managers to report performance both with and without the effect of the facility and to disclose its size and cost.
Worked example
A fund invests $10M on day one using its subscription line and calls the money from LPs a year later. The investment doubles four years after the fund made it. Measured from the deal date the IRR is about 18.9 percent, but from the LPs' cash date it is 3 years and about 26.0 percent, while the multiple stays at 2.0x before interest.
Common questions about subscription line
Why do funds use subscription lines?
To invest quickly without waiting for LPs to fund, to reduce the number of capital calls and to smooth administration. The side effect is a higher reported IRR, which is why LPs ask for disclosure.
Do subscription lines change a fund's multiple?
Not much. They change the timing of cash flows, which mainly affects IRR. The multiple falls slightly because of interest costs.