Thursday, August 25, 2016

PEUs Lever at Multiple Levels

NakedCapitalism reported:

Subscription line financing makes it possible for general partners to borrow at the fund level on a routine basis, as opposed to its previous status as an unusual event. The bank provides a credit line with that borrowing secured not by the assets of any portfolio companies, but by the unused capital commitments of the limited partners. In other words, while these borrowings were expected to be rare and repaid by other means, from the lender’s perspective, legally they are advances against the limited partners’ capital commitments. 

Some managers use lines of credit instead of calling investor capital, thereby easing limited partners’ capital call burden
Having to borrow at the fund level is odd, especially with all the dry powder supposedly at private equity's disposal.  It makes me wonder if their fundraising commitments are as solid as presented.

If capital commitments are suspect fund level borrowing adds several stories to the PEU house of cards.