Blog/Private Equity
A fund buys a business for $100m and sells it three years later for $200m. If the general partner called limited partner capital on day one, the LPs measure a three-year hold. If instead the fund drew on a subscription line, held the borrowing for twelve months and then called capital, the LPs measure a two-year hold on the same doubling of money. The asset performed identically. The reported internal rate of return did not. Subscription Line IRR Inflation describes that gap between portfolio value creation and fund-level treasury timing, and it is a common reason two managers with similar deals can report visibly different headline numbers.
A subscription line, also called a subscription credit facility or capital call facility, is a revolving credit facility extended to a private fund and secured by the uncalled capital commitments of its LPs. The lender looks through to the creditworthiness of the investor base rather than to the portfolio companies.
Because IRR is an annualised, timing-weighted measure, pushing the LP cash outflow later while holding the inflow constant raises the rate mechanically. The fund may have owned the asset since month zero, but the LP cash-flow schedule says the money was at risk for a shorter period.
Multiples behave differently. MOIC, TVPI and DPI compare dollars returned or held with dollars invested. Delaying the call from month zero to month twelve does not change the numerator or denominator in any meaningful way. It changes elapsed time, which multiples ignore.
| Item | No subscription line | With subscription line |
|---|---|---|
| Funding of the acquisition | LP capital called at signing | Facility draw at signing, LP call later |
| Start of the LP IRR clock | Investment date | Capital call date |
| Portfolio outcome | Unchanged | Unchanged |
| Reported IRR | Lower, longer measured hold | Higher, shorter measured hold |
| MOIC and TVPI | Reflects cash multiple | Flat or slightly lower after interest |
| Financing cost | None at fund level | Interest and commitment fees borne by the fund |
The facility is a treasury instrument. GPs use it to fund investments and expenses quickly, bridge the gap between signing and the receipt of LP cash, batch several deals into a single capital call and smooth administrative workload for both the fund and its investors.
Three distinctions matter for anyone reading a track record:
The interest and fees are real costs paid by the fund, which means LPs bear them. Every basis point of facility cost reduces net proceeds and therefore drags on the multiple, even while the delayed capital call can improve the rate.
Take the illustrative case above and lay out the two schedules. The assumptions are a $100m equity cheque at month zero, a $200m exit at month 36, no other fund cash flows, and a subscription line drawn at month zero and repaid from an LP capital call at month 12.
Case A, no facility. LPs pay $100m at month zero. LPs receive $200m at month 36. The measured hold is three years on a 2.0x multiple.
Case B, twelve-month facility. The lender funds $100m at month zero. The GP calls capital at month 12 to repay the draw, so LPs pay out at month 12 rather than month zero. LPs receive the exit proceeds at month 36, reduced by twelve months of interest and fees on the drawn balance. The measured hold is two years on a multiple slightly below 2.0x.
Compress a 2.0x outcome from three years into two and the annualised return rises materially. The exact figure depends on the interest rate applied and the precise dates, so recalculate with XIRR against actual cash-flow dates rather than relying on a rule of thumb. The direction is not in doubt. The rate improves, the multiple erodes by the cost of the borrowing, and the underlying business is exactly the same business.
Auxilia Mathematica has said from professional experience that ordinary use of these facilities moves IRR by only one to two percentage points. Extended borrowings held for a year or more sit well outside that pattern.
The debate is not whether subscription lines have a purpose. They do, and LPs can benefit from faster closings and fewer unpredictable capital calls. The problem is that the same instrument that makes a fund easier to administer can also improve the number a GP takes into its next fundraise.
Short bridging draws repaid within a quarter are treasury management. Draws deliberately held for twelve or eighteen months, on assets the fund already owns, are a decision about the reporting clock. Umbrex notes that overreliance can create liquidity mismatch and investor perception problems, and both risks compound in a fund that has funded a large share of its portfolio on the facility.
Two further consequences deserve attention in the LPA review. Deferred capital calls change the shape of the J-curve, softening the early paper losses that would otherwise show up in the first reporting periods. Where the preferred return hurdle is calculated on an IRR affected by facility timing, the sequencing of carry can move too. Confirm how the waterfall treats borrowed funds before assuming the economics are unchanged.
Sponsors have compared fund-level gross IRR measured from credit line draw dates against investor-level net IRR measured from later capital call dates. McDermott Will & Schulte’s commentary on the SEC Marketing Rule notes that gross and net performance must be calculated and presented using the same methodology over the same time period, and that SEC staff regarded the mismatched approach as problematic even where the methodology was disclosed.
The practical instruction for analysts is direct. When you see a gross and a net IRR side by side, establish which cash-flow dates each one uses before comparing them. Primum Law also reports that ILPA’s reporting template encourages disclosure of IRR both with and without subscription line impact, though the primary ILPA guidance is not reproduced here.
Before underwriting a track record, ask for disclosures that separate investment performance from facility timing:
Run two parallel cash-flow schedules for every fund you diligence. The first uses actual acquisition and disposition dates at the fund level. The second uses capital call and distribution dates at the LP level. Calculate XIRR on both. The difference is the timing benefit, isolated and quantified.
Then layer in the facility mechanics: draw date, repayment date, drawn balance, applicable rate, commitment fees and accrued interest. Sensitise the duration outstanding across ninety days, one hundred and eighty days, twelve months and eighteen months to see where the rate enhancement starts to cost more in multiple than it delivers in optics.
For manager comparisons, normalise before ranking. A fund that draws for two weeks and a fund that draws for a year are not producing comparable quartile positions. Young funds warrant the most caution because early IRRs carry the least realised cash and the most timing sensitivity.
Decompose the return before you credit the manager. If EBITDA growth, multiple expansion, deleveraging and cash yield do not account for the headline IRR, the residual is capital call timing, and timing does not compound into an LP’s portfolio the way earnings growth does.
An investor who allocates on unadjusted IRR will systematically overpay for managers who run their facilities hardest, and will discover the error only when DPI arrives and the multiple fails to match the rate.
P.S. If evaluating GP track records is part of your job, check out our Premium Resources for financial models, fund databases and Excel skill tests to help you advance your career.
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