Subscription Credit Facilities
and Fund Finance Strategies

Abstract

Panelists provided an expansive overview of the typical subscription credit facility transaction structure, key participants and terminology for such facilities, and related fund finance transactions. The typical comingled private equity fund is structured in the form of a limited partnership. The general partner of the fund, an affiliate of the fund’s sponsor, manages all aspects of the fund, including the selection of investments. The limited partners of the fund, the investors, make capital contributions up to the amount of their capital commitments as and when called by the general partner to permit the fund to make its investments. Unfunded commitments provide the security and source of repayment for a subscription credit facility. Unlike most securitization structures, such a facility does not employ a special purpose vehicle but rather is structured in the form of a loan directly to the fund, secured by its unfunded commitments as well as the general partner’s rights to issue capital calls. Credit performance for subscription credit facilities was good throughout the financial crisis and in 2013, although some credit issues are arising and lenders are likely to pay increasing attention to the quality of assets and asset-level mitigants to make up for shortcomings in investor diversity, less-than-ideal partnership agreements, and other perceived credit weaknesses.