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Alternative Market Briefing

Other Voices: Coronavirus, subscription credit lines and private equity funds

Wednesday, May 13, 2020

By:Jonathan Sablone Noah Schottenstein

The current economic downturn has impacted virtually every industry and business across the globe. Just like most businesses, private funds, and in particular private equity funds, will not escape unscathed from the one-two punch of a global pandemic and economic meltdown.

The focus of much of the industry has been on the performance of portfolio companies, but trouble is also brewing at the fund level. Fund managers are grappling with how to manage downward pressure on net asset value, fairly conduct valuation analyses in an uncertain environment and manage the liquidity concerns of both the fund and the limited partner investors.

In order to do so, some fund managers are turning to a tool that was originally utilized to enhance returns and provide agility: the subscription credit line. SCLs are secured not by the underlying assets of the fund but, rather, by the capital commitments of the limited partner investors. SCLs are utilized by fund managers to delay capital calls, speed up the acquisition process and leverage the internal rate of return, which has the practical effect of speeding up the payout of carry. Although SCLs may be useful as a bridge between the current crisis and less volatile times, it is important for funds, and investors, to understand the unique risks that accompany the utilization of SCLs in a falling, as opposed to stable or rising, market.

A typical SCL contains a variety of lender protections,......................

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