ILPA’s guidelines on the use of subscription credit facilities have not been universally adopted, with terms of such facilities “remaining largely unchanged”, according to Patricia Lynch, a finance partner at law firm Ropes & Gray.
One reason the guidelines have not been more readily adopted, said Lynch, is that they “recommended caps on borrowing that were so tight that they would have dramatically reduced funds’ ability to take advantage of a subscription facility. For this reason we find that many of our investor clients prefer not to request all of the recommended restrictions.” Lynch also noted that investors are more comfortable with credit line use than “reports in the financial press would otherwise indicate.”
Where the guidelines have had an impact is in the area of transparency: “Fund managers are increasingly providing separate calculations of IRR: one reflecting the use of the subscription facilities and the other backing it out. There’s also more disclosure to investors about related costs and some of the material terms of the facilities, like prepayment triggers.”
Few investors have requested it so far, but Lynch predicts a trend towards fund terms allowing LPs to “opt out of participating in subscription facilities by funding their capital calls in advance of other investors.” This would allow them to reap some of the benefits of subscription credit facilities, such as less frequent capital calls, without having to incur the additional costs associated with them.
“We haven’t seen many investors request such a mechanism to date, but this could become more prevalent in the future if interest rates increase.”