Private capital funds increasingly turning to subscription credit facilities
BY Yaelle Gang | June 18, 2019
Private capital funds are increasingly turning to subscription credit facilities, which can have their advantages but also come along with risks, according to new research by Preqin Ltd.
Subscription credit facilities provide short-term loans to cover transactional costs for private capital funds, so they don’t have to make capital calls to investors.
While their use is rising, it’s still low, the research found, with only 35 per cent of funds of vintages 2000 and onwards reporting use. It’s also worth noting that the data is based on a sample of more than 8,500 private capital funds, yet only 29 per cent disclosed their usage of credit subscription facilities.
Among those that reported using these facilities, the usage is weighted towards more recent vintages: just 26 per cent of 2010 vintage funds used subscription credit facilities, compared to 53 per cent of 2016 vintage vehicles.
Most of the growth comes from private equity funds, where the usage has more than tripled from 13 per cent for pre-2010 vintages to 47 per cent for 2010 and later vintages.
Usage rates for private debt and venture capital funds are also on the rise. Yet, usage among real estate funds, which are historically the most active when it comes to using subscription credit facilities, has remained stable, Preqin found.
Using subscription credit facilities is a double-edged sword, the report said.
One of their upsides is they can reduce the risk of transactions falling through, help with cash flow management and smooth the process and reduce the administrative burden all around, says Justin Hall, a product manager at Preqin.
Other benefits include they enhance competitiveness and improve liquidity, the report noted.
On the downside, using subscription credit facilities can also affect the internal rate of return, Hall adds. “The IRR calculation can be pretty heavily influenced by the timing. If they’re delaying capital calls for a longer period of time, then those IRRs are going to be a little more manipulated and that’s what we’re seeing. And, obviously, so many decisions are made off that IRR number.”
This can make people question whether credit facilities are making IRR a useless data point, he says.
Hall recommends that pension funds ask general partners about their usage of credit subscription facilities. “I think just asking for transparency goes a long way —asking if the GP has, or is going to plan on using, a subscription credit facility, and then just the parameters around that —how long they’re able to take out the loan for, [and for] how much of the fund? Just [ask] those basic questions and it will give a good idea of the usage there.”