Institutional Limited Partners Association (ILPA) has regularly reported on the increased frequency and volume of subscription facilities used by general partners (GPs) as a means to finance investments, instead of calling on the commitments of the limited partners (LPs). Over the past few years ILPA has been particularly focused on ensuring that LPs obtain accurate information in relation to their liquidity exposure and the methodology for calculating the internal rate of return (IRR) across the funds in which they have invested.
To address the issues associated with the above, on 11 June 2020, ILPA issued guidance that focuses on enhancing transparency around subscription lines of credit. We summarise below some of these key recommendations.
1. Starting from the first reporting period ending on 30 June 2020, a GP using a subscription facility should explicitly disclose to LPs on a quarterly basis:
- the total size and balance of subscription facility
- how much of the LPs’ and GP's unfunded commitment is financed through the facility
- the average number of days each drawdown is outstanding
- the net IRR, with and without the use of the subscription facility
2. A GP using a subscription facility are also encouraged to provide a schedule of cash flows alongside the LPs’ capital account statement and schedule of investments.
3. Starting from the first reporting period ending on 30 June 2020, a GP using a subscription facility should explicitly disclose to LPs on an annual basis (independent of the annual reporting package):
- the name of the lead bank
- any borrowing limits on the relevant fund (such as the drawdown limit or maximum allowable borrowing period (i.e., number of days))
- the repayment date for the facility (including renewal option)
- the borrowing base
- the interest rate or rates applicable to the facility
- the amount of fees payable under the terms of the facility (arrangement fees, unused commitment fees, etc.) and total amount of fees paid so far
- the use of the proceeds of drawdowns under the subscription line facility – for example, are drawdowns used to bridge capital calls (and the nature of those capital calls) or for other purposes (e.g., accelerated distributions)