In June 2020 the
Institutional Limited Partners Association (ILPA)
released new guidance on
Subscription Lines of Credit which aims to foster more transparency between
Limited Partners (LPs) and General Partners (GPs) regarding exposure,
capital calls and performance impacts.
It builds on ILPA’s 2017 guidance
which addresses the how the use of subscription lines of credits impacts
LPs and includes specific recommendations for more disclosure in reporting
and clarity in partnership agreements regarding the parameters for their
Over the past few years, the use of subscription lines of credit has grown,
particularly in the US, which has made it more difficult for LPs to measure
and assess both exposure and performance at the fund level and for their PE
programs in the absence of relevant disclosure around subscription lines.
While transparency generally has improved, both GPs and LPs indicate that
disclosures are not being consistently or systematically provided to LPs.
Importantly, both LPs and GPs have stated that greater standardisation
around disclosures related to subscription lines will benefit the industry.
The latest guidance aims to resolve this.
Alicia Gregory, Head of Private Equity for Australia’s Future Fund and
member of ILPA’s international membership group, and Suzanne Tavill,
Partner and Global Head of Responsible Investing at StepStone, recently
provided insights into the new guidance as part of the Australian
Investment Council’s Knowledge Sharing Series.
“If you work as a GP, you want to know what others are doing and what the
best practice is. As an investor, you need to know what your credit
worthiness is being used by GP’s for, and as an adviser, you need to know
what both LPs and GPs are thinking,” Gregory said.
“The aim of this subsequent guidance is to lay out more specifically the
incremental disclosures that will aid LPs and GPs in gaining clarity around
the impact of subscription lines, particularly with respect to an LP’s cash
flow modelling and commitment pacing, as well as the performance impacts
posed by subscription lines.”
Subscription lines of credit are worth approximately US $550bn on a global
basis and on average, the facilities are utilised at about 50%. They can
provide GPs with tremendous benefits in the early stage of a deal, for
example, where a rapid availability of cash is required, and to avoid
multiple small capital calls or the need for LP top-ups during fundraising.
Gregory also said that when used properly and efficiently, subscription
lines of credit are generally supported. In this context, it is essential
for LPs to understand how the facilities are to be used and how much they
have exposed on credit lines to gain an appreciation of their cash
“Clients views have been evolving as the subscription line market has
matured,” Tavill added. “While initially there was some concern about
unknown risk, what we have seen is a shift towards understanding how
beneficial these subscription lines can be.”
The guidance seeks to address risk areas such as a recommended cap on debt
of 15-25% of commitments and an optimal draw-down period to 180-days.
However, there have been instances where this period has been pushed
well-beyond the recommended guidance to as much as two years, which could
introduce systemic risk.
The intent of subscription lines of credit is to smooth cash flows calls
and not create an entire synthetic cashflow profile.
Tavill said the challenge to this was two-fold. “In the due diligence
process LPs want to make sure that the numbers are being unravelled so they
can have confidence in the like-for-like peer return comparison between
GPs, and secondly, in their internal systems around recognising that there
is a difference between the actual drawdown and exposure versus the
synthetic cash drawn down.”
This makes the need for an analysis of cash flow with and without the line
or credit all the more important so LPs can really understand their
Clear consistent communication and disclosure is central to creating any
issues. The ILPA guidance recommends quarterly and annual disclosures to
provide LPs with the visibility they need to better monitor the impact of
subscription lines on both exposure and performance, as well as the key
terms and costs associated with subscription lines in use.
Tavill described the work done by ILPA in this area as important for
“gaining a consistency of approach.”
“A lot of concerns around defaults, risk of defaults how the line is being
used can be resolved through constant communication between the LP and GP.
For a GP, following the guidance that ILPA has put out should remove 90% of
the questions from LPs on what you are doing,” she said.
Both panellists concurred that there is an expectation in the industry,
particularly in the US that subscription lines of credit will be used.
“If you want to attract US LPs to your fund you need to at least have the
conversation about subscription lines of credit and demonstrate how you
will adjust performance with or without them,” Gregory said.
2020 Guidance - Enhancing Transparency Around Subscription Lines of Credit
2017 Guidance - Subscription Lines of Credit and Alignment of Interests