Accrue Flow | Private Equity Concierge for Founders

Capital call facilities, also known as subscription lines of credit or subscription credit facilities, have become one of the most debated financial instruments in private equity over the past decade. These short-term credit facilities fundamentally alter how funds access capital from their limited partners, creating both operational efficiencies and increasing scrutiny around performance metrics.

Defining Capital Call Facilities

A capital call facility is a revolving credit line secured by a private equity fund against the unfunded capital commitments of its limited partners. When a fund needs cash to execute an investment, pay expenses, or distribute proceeds, the general partner can draw on this credit facility rather than immediately calling capital from investors.

The structure works as follows: a bank or syndicate of lenders provides credit to the fund, typically ranging from $50 million to several billion dollars depending on fund size. The loan is collateralized by the contractual obligations of LPs to fund their capital commitments when called. These facilities usually carry terms of 12 to 24 months and feature relatively low interest rates given their secured nature and the creditworthiness of institutional investors backing them.

The Operational Benefits

The primary advantage of subscription line credit lies in administrative efficiency. Traditional private equity operations require frequent capital calls as investment opportunities arise. Each call triggers a cascade of administrative work: fund managers must prepare call notices, LPs must process wire transfers, and accounting teams reconcile incoming funds across potentially hundreds of investors spanning multiple jurisdictions.

By employing a capital call facility, a fund might reduce capital calls from 15-20 per year to just 3-4. The GP draws on the credit line for immediate needs, then periodically makes larger, consolidated capital calls to repay the facility. For LPs, this means fewer disruptions to their cash management, reduced wire transfer fees, and simplified portfolio administration. Pension funds and endowments managing dozens or hundreds of fund commitments particularly appreciate this streamlining.

Additionally, subscription lines provide operational flexibility. Funds can close transactions quickly without waiting for capital to be wired, sometimes crucial in competitive deal environments. They also enable funds to earn interest on called capital by keeping it invested longer in LP portfolios.

The IRR Controversy

While operational benefits are clear, subscription facilities have sparked intense debate around their impact on internal rate of return calculations. IRR is the gold standard performance metric in private equity, measuring the annualized return between when capital is invested and when it's returned.

Here's the issue: when a fund uses subscription line credit, the IRR clock doesn't start until the facility is repaid through an actual capital call from LPs. If a fund purchases a portfolio company using borrowed money and holds that debt for 12 months before calling LP capital, those 12 months effectively disappear from IRR calculations, even though the fund controlled the asset.

Simplified Example

Consider a fund that buys a company for $100 million using its credit facility, then sells it 24 months later for $130 million.

Scenario A (No Facility):If the fund called LP capital immediately, the IRR would be approximately 14%.
Scenario B (With Facility):If the fund waited 12 months to call capital (keeping the subscription line outstanding), then sold 12 months later, the IRR calculated from the capital call date would be approximately 30%, despite identical absolute returns.

This dynamic has raised questions about comparability across funds and vintage years. Critics argue that subscription lines artificially inflate IRRs without creating real value, making it difficult for LPs to assess true manager performance. The Institutional Limited Partners Association (ILPA) has advocated for supplemental disclosure of performance metrics calculated from the date of investment rather than capital call, promoting transparency around this issue.

Pros and Cons for Limited Partners

Advantages for LPs

•Enhanced Cash Flow Management: LPs can keep capital fully invested until consolidated calls arrive, reducing "cash drag."
•Reduced Administrative Burden: Fewer capital calls mean reduced processing costs and simplified forecasting.
•Higher Portfolio IRR: LPs can compound returns longer before capital leaves their hands.

Disadvantages for LPs

•Performance Opacity: Challenges determining which managers generate superior returns vs. financial engineering.
•Structural Risks: Leverage at the fund level could force inopportune capital calls during market stress.
•Alignment Concerns: Carried interest calculations may not accurately reflect value creation.

The Path Forward

The private equity industry has responded to these concerns with increased transparency. Many fund documents now specify limits on subscription line usage, caps on facility duration, or requirements to provide alternative performance metrics. Leading institutional investors increasingly demand disclosure of IRRs calculated both with and without the impact of subscription credit facilities.

Capital call facilities represent a double-edged innovation in private equity. They deliver genuine operational improvements and portfolio management benefits while simultaneously complicating performance assessment. For LPs, the key lies in understanding how subscription lines function, insisting on transparent reporting, and evaluating managers based on metrics that reflect actual value creation rather than financial timing strategies.