I’ve been talking a lot to sources recently about their initial thoughts on ILPA’s draft recommendations (I’ll reiterate they are still open for comment) for subscription credit facility (SCF) use, and one of the results was this article.
In it, three CFOs say they want to structure into their LPAs and SCF credit agreements the option to draw on credit lines for new funds and keep them open until the final fund close. (After that the repayment deadlines shorten back to, for example, 180 days – ILPAs recommended maximum.) I can’t name the funds – the conversations were ‘on background’ as we reporters say – but I think it’s a notable trend for a few reasons.
Firstly, sources representing the lending side have put it to me that there is indeed an increase in interest among fund managers for this kind of optionality. It’s existed for a while, but I’m told it’s also quite rare.
Secondly, because it has nothing to do with the covid-19 pandemic and expected consequences for fund raises (although it could help there, too). In two cases it came up naturally as part of a response to the question: “What are your thoughts about ILPA’s draft recommendations?”
ILPA recommended in its 2017 guidelines that managers report one IRR including the effect of leverage and one stripping it out. The concept makes an appearance again in the draft recommendations. But the idea of reporting two IRRs is still sort of a bugbear to some GPs who believe SCFs are generally net-beneficial for investors and fund managers alike, and that adequate disclosure should mitigate concerns.
Thirdly, and relatedly, because ILPA has pointed out that SCFs can significantly distort IRR, especially during the first two years of a fund’s life. Convincing ILPA that keeping credit lines outstanding for as much as two years from the launch of a fund is good for everyone will likely be a difficult task. On the financing side, some lenders are supportive of funds having this ability. For others (who tend to refer to their SCFs as “capital call lines” as opposed to “subscription lines”), shorter clean down periods are a core feature of the underwriting process.
The CFOs I spoke to for the above story make some arguments as to why keeping lines drawn for the length of a fundraising period should be beneficial to LPs, too, but I’d love to know what you think.
On that note: Later today I’ll have a follow-up piece, based on the same conversations with those CFOs, with their (other) initial thoughts of ILPA’s draft recommendations on quarterly and annual disclosures, increased capital call notice for LPs, and of course, calculating two IRRs. So keep your eye on our site for that.
Reg roundup: From our May issue, we bring you this compliance roundup and analysis from my colleague Bill Myers at Regulatory Compliance Watch, written just for us. In it, he takes a look at some of the ways in which regulators have so far offered private funds active relief, but also some of the increased risks, and gets insights from compliance experts for tips and advice on how to keep your private funds house in order.
Email prepared by Graham Bippart