Defined Benefit
Insurance Assets

GPs Take ‘Credit’ for Higher IRRs

GPs Take ‘Credit’ for Higher IRRs
3 min 48 sec

Subscription credit facilities are lines of credit used to finance activities—such as new investments, fees, or expenses—that would otherwise be funded by capital calls from the investors (limited partners, or LPs) in a private markets fund. These “sub lines” give the fund’s manager (the general partner, or GP) the flexibility to call capital less frequently by combining multiple cash flows into a single capital call, and they also can delay initial capital calls until a large capital outlay is required. This increases the internal rate of return (IRR) as it shortens the effective investment period. Because these sub lines are backed by investors’ capital commitments, though, they do not allow the GP to invest a greater amount of capital than those commitments.

Subscription lines have been popular with real estate funds for many years, but they are becoming increasingly common in private equity and private credit funds. Originally these credit lines were only used for short-term cash needs. Over the last few years, they have evolved into longer-term financing for new investments for many private markets funds. Callan discussed the topic in 2017, but the significant expansion in credit line usage since then merits a renewed examination. According to a recent analysis by Preqin, only 13% of private equity funds in pre-2010 vintage years used subscription facilities, while 47% in the 2010-19 vintage years did. (Given the “private” nature of private markets, different data sources vary widely, and some experts cite recent usage as high as 90%.) The increase in popularity was similar for private credit funds, with only 25% of pre-2010 vintage year funds using subscription facilities versus 44% of vintage 2010 and onwards. In the same analysis, approximately half of real estate funds utilized subscription facilities in both pre-2010 vintages and vintage 2010 and onwards.

As more funds adopt subscription facilities, particularly credit lines that are kept outstanding for longer periods, both GPs and LPs and their consultants are spending more time thinking about the benefits and drawbacks of these products, some of which we have highlighted below:


  • In normal circumstances, funds with a credit facility may experience a shorter and shallower J-curve because the credit facility can significantly lift the IRR, especially early in a fund’s life. This impact will be reduced as the fund matures and the credit line is paid down, but may still remain elevated compared to the same hypothetical fund that did not utilize the credit line. It’s worth noting that if the portfolio has early impairments funded by the credit line, the leverage effect of the credit line will magnify those losses.
  • GPs and LPs will have a reduced administrative burden from fewer capital calls.
  • GPs are able to quickly draw capital from one source to close new deals, rather than calling capital over a period of several days from multiple LPs.


  • It becomes more difficult for LPs to assess performance on an IRR basis between funds and benchmarks because credit facilities can artificially boost IRRs, especially as the duration of the credit facilities increases.
  • Net TVPI (Total Value (distributions + net asset value) divided by Paid-In capital) will be reduced due to interest and fees related to the subscription facility—in essence the short-term IRR boost comes at the expense of longer-term TVPI.
  • LPs can experience delayed cash distributions due to the repayment of credit lines and GPs taking carry much sooner in the fund’s life.
  • LPs have an additional layer of analysis to determine their true level of exposure in their private markets programs. LPs may also become unintentionally levered if their exposure does not correctly capture the impact of the credit line, especially if unfunded commitments are invested elsewhere.
  • Some tax-exempt investors may realize unrelated business income tax, especially in longer-dated subscription facilities.
  • Capital calls will be larger, which could present liquidity challenges, especially in times of stress.

The performance impact of credit facilities is starting to appear in U.S. private equity pooled returns. Callan examined the average multiple of invested capital (MOIC) and average IRRs by vintage year from the Cambridge database. Over the last 10 years, the average MOIC for U.S. buyout funds has steadily declined while net IRR has largely increased.

U.S. Buyout Average MOIC and IRR by Vintage Year

As these credit lines become more popular, standardization in reporting would benefit both GPs and LPs. In June 2020, ILPA updated its guidance for enhanced transparency and reporting around subscription credit facilities. As use of credit lines grows, investors will benefit from greater transparency and Callan will continue to gauge the impact of such facilities on private markets performance.

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts
Defined Benefit

Tough Environment Leads to Losses for Hedge Fund Managers

Joe McGuane
Joe McGuane analyzes hedge fund and MAC performance in 2Q22.
Defined Benefit

Private Equity Shows Persistence Amid Volatile Markets

Gary Robertson
Gary Robertson provides an analysis of private equity activity in 2Q22, from fundraising to exits to returns.
Defined Benefit

Private Credit Interest Still High Despite Illiquidity Premium Close to Zero

Catherine Beard
Catherine Beard analyzes the performance of private credit in 2Q22 and explains what is happening with its illiquidity premium.
Defined Benefit

Recession—Are We There Yet?

Jay Kloepfer
Jay Kloepfer analyzes the U.S. and global economies in 2Q22 and explains why we are not technically in a recession.
Defined Benefit

The Fading Unicorn: How Volatility, Inflation, and Rate Hikes Impact Venture Capital

Ashley Kahn
Ashley Kahn explains the impact of rising inflation, interest rate hikes, and market volatility on venture capital portfolios.
Defined Benefit

Bubbles Bursting Everywhere

Janet Becker-Wold
Janet Becker-Wold explains how recent bubbles inflated and what their popping means for institutional investors.
Defined Benefit

Few Bright Spots as Markets Continue to Drop

Kristin Bradbury
Kristin Bradbury recaps how the global markets performed in 2Q22.
Defined Benefit

Global Challenges Mount

Kristin Bradbury
Kristin Bradbury analyzes the global economy in 2Q22.
Defined Benefit

Do Active Core Plus Fixed Income Managers Add Value With Sector Rotation?

Kevin Machiz
Kevin Machiz examines the added value of active core plus fixed income managers vs. a DIY portfolio.
Defined Benefit

Alignment of Interests: Best Practices to Make Sure Investors and Their Managers Are in Sync

Jan Mende
Jan Mende discusses how institutional investors can make sure their interests are aligned with their private markets investment managers.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.