Fund managers won’t be happy with every recommendation the LP body is making, but in a more challenging market environment investors will surely welcome the extra disclosure.

This week the Institutional Limited Partners Association issued its much-anticipated guidance on enhanced disclosures related to subscription credit lines.

The guidance – an update to its 2017 recommendations regarding the use of such financing facilities – is meant to address what the LP body calls “highly inconsistent” levels of disclosure across the industry by increasing standardisation in quality and frequency of information provided to investors.

This should “help address blind spots in [LPs’] ability to manage liquidity and assess fund-level performance” says ILPA director of standards and best practices Neal Prunier.

In a nutshell, the new guidance recommends quarterly disclosures to LPs on a range of aspects of a fund’s subscription credit facility along with more detailed annual disclosures (here are the full details).

So far, so agreeable to the private equity industry. It’s hard to argue against providing more transparency to one’s own LPs, and for those managers already on the side of sharing more rather than less, this levels the playing field. Some also welcome that part of the initiative in that it may ultimately make it easier for service providers to automate LP reports on sub line-related matters, which they often produce now on a bespoke basis.

“We agree that there should be disclosure on a quarterly basis,” the CFO of a global mid-market firm told sister title Private Funds CFO in May, commenting on the draft version of the ILPA guidance. “I think most of the information in the ILPA template is pretty easy to provide, and I could see if this is something that LPs started asking for, we’d agree to do it quarterly.”

However, two key areas of contention for industry practitioners remain: the requirement to “clean down” the facility every 180 days and the mandate to provide two net internal rate of return figures – one with and one without the use of the facility.

“We’re not going to calculate two IRRs unless we’re absolutely forced to,” the same CFO said.

As we’ve written in the past, backing out the effects of subscription credit lines on fund IRRs is easier said than done (although not impossible). Some in the industry argue it could lead to a less clear picture for LPs on how their managers are actually performing.

Some managers have also argued for the ability to keep subscription credit lines drawn for the full duration of a fundraise to avoid messy LP rebalancing issues. This could leave lines outstanding beyond a year – far in excess of the prescribed 180 days.

Another criticism we’ve heard is that ILPA is taking something of a “blunt instrument” approach to the fund finance market. Its guidance seems to be almost wholly based on capital call facilities, particularly when it comes to recommendations for stringent “clean down” periods and uncalled capital maximums.

It’s important to remember that the ILPA guidance is just that – recommendations intended to improve communication between fund managers and their LPs. Which parts are relevant to which individual situations is up to both parties to decide.

This is not an easy time for limited partners grappling with the fallout of the coronavirus pandemic. As ILPA points out, “LPs are scrutinising more closely than ever before both their liquidity and the cashflow models they use to project that liquidity”. More information can only make this job easier.

Write to the author:

Look out for an in-depth exploration of the fund finance market in the July/August issue of sister title Private Funds CFO.