The Institutional Limited Partners Association is gathering LP opinions on the use of fund-level credit facilities as part of a wider consultation with members as it prepares to refresh its “Private Equity Principles” document.
Fund level credit facilities – otherwise known as subscription credit lines – are being increasingly used by managers as a way of boosting the IRR on their investments.
Such facilities have been in place in some form for many years, but previously have been used conservatively to allow GPs to deploy cash quickly in acquisitions and to call only the exact amount needed from LPs. GPs are now taking advantage of longer-term bridge financing, allowing them to make investments but delay calling capital from LPs, sometimes for as long as a year. These longer-term facilities are a relatively recent phenomenon spurred on by the availability of cheap credit, with many firms only introducing them to their current generation of funds.
Jennifer Choi, managing director of industry affairs at ILPA, said that discussion on the use of credit facilities was one of “a series of conversations with our members on a range of topics” in the lead up to an effort to refresh the ILPA Private Equity Principles, a wide-ranging document it first published in 2009.
One LP with knowledge of the feedback to date said the association is getting mixed responses from all types of investor. Some are vehemently against it as they see it only as a way of artificially boosting the IRR to get the manager over the hurdle rate more quickly. Others, meanwhile, see it as an efficient use of capital; an improved IRR is of benefit to the LP as well as the GP.
The ILPA Private Equity Principles document, which was last refreshed in 2011, is designed to foster better communication and alignment between LPs and GPs by providing guidance on a range of issues, such as carried interest, transparency, fund terms and the role of a fund’s Limited Partners Advisory Committee. The association will formally launch the review process this year.