ILPA doubles down on transparency around subscription credit lines

The latest guidance from the LP body encourages GPs to disclose net IRR with and without the use of such facilities, in addition to the methodology used to reach that figure.

The Institutional Limited Partners Association has called for greater transparency around how general partners disclose the impact of subscription credit line use on private equity fund performance.

In follow-on guidance to its 2017 recommendations around the use of such facilities, the industry body recommended quarterly and annual disclosures regarding their impact on an individual LP’s unfunded commitments, exposure and performance, as well as the key terms and associated costs.

General partners are encouraged in the latest guidance to disclose net internal rate of return with and without the use of such facilities, as well as the methodology used to reach that figure, as this can vary.

“While the use of subscription lines has become common practice across the industry, the calibre of disclosures industry-wide remains highly inconsistent,” Neal Prunier, director of standards and best practices at ILPA, said in a statement.

“Increased standardisation in the quality and frequency of information provided to LPs can help address blind spots in their ability to manage liquidity and assess fund-level performance.”

A 2019 report from Carnegie Mellon’s Tepper School of Business found that subscription credit lines distorted a fund’s IRR by 6.1 percentage points on average. Funds sampled had borrowed an aggregate total of $5.3 billion in the first three quarters of 2018, compared with $86 million in 2014.

Institutions such as ATP Private Equity Partners, the fund of funds arm of Denmark’s largest pension, have already started to request that GPs provide an IRR that has been adjusted to compensate for the use of such facilities.

The ILPA guidance identifies key challenges subscription credit line usage poses to LPs, including a lack of visibility into exposure to private equity and accurate net asset value report; cashflow management difficulty; inflated returns, and systemic risk in the event of a multiple lines being called at once.

ILPA said a common reporting standard would save LPs and GPs time and resources in requesting or providing the information required to manage portfolio exposure.

The latest guidance was compiled with input from experts including consultants, CFOs within GP organisations, LPs, academics and industry groups.

It builds on previous IPLA guidance from 2017 on best practices related to the use of subscription credit lines. The Fund Finance Association, which was broadly supportive of ILPA’s recommendations pertaining to transparency and disclosure at the time, argued this was best agreed between LP and GP, preferably in a manner that did not unduly burden funds.

Coronavirus has prompted some general partners to consider early repayments for subscription credit line drawdowns in anticipation of potential liquidity issues among LPs. Banks have also been taking a closer look at underlying portfolios as LPs are more likely to prioritise capital calls to a better-performing fund when facing liquidity issues.

“At the time of publication of these recommendations – in the early days of the covid-19 era – LPs are scrutinising more closely than ever before both their liquidity and the cash flow models they use to project that liquidity,” ILPA’s latest guidance noted.

“This is made more challenging by the lack of visibility into how much of their unfunded commitment has been deployed into investments but financed through a subscription line rather than called from LPs.”