Subscription Lines (Capital Call Facilities)
Definition
Subscription lines are revolving credit facilities secured by fund investors' (Limited Partners') uncalled capital commitments. General Partners draw on facilities to fund investments and expenses, then repay by calling capital from LPs. Typical structure: facility size of 15-25% of total fund commitments, pricing at SOFR+125-200 bps, 3-5 year revolving period matching fund investment period. Example: $1B fund commitment obtains $200M subscription facility. GP draws $50M to fund deal, repays with LP capital call 3-6 months later. Benefits: timing flexibility, reduced call/distribution churn, and IRR enhancement from delayed capital calls.
Why it matters
Subscription lines have become nearly universal in private equity (95%+ of funds) and increasingly common in private credit funds (70%+). They fundamentally change LP cash flow patterns—instead of calling capital immediately for each investment, GPs aggregate multiple investments and call quarterly or semi-annually. This creates smoother capital deployment for LPs but also inflates reported IRRs by 200-400 bps through denominator manipulation (capital deployed later in measurement period). During 2020 COVID crisis, subscription lines proved critical—funds drew full facilities maintaining investment pace while waiting 6-9 months before calling stressed LPs (avoiding forced sales or defaults). However, subscription lines create leverage at fund level—if portfolio performs poorly, fund must repay facility from capital calls or asset sales before distributing to LPs. Understanding subscription mechanics explains why many funds show 20%+ IRRs during investment period (leverage benefit) that normalize to 15-17% after repayment.
Common misconceptions
- •Subscription lines aren't permanent capital—they're short-term bridge financing. Every dollar borrowed must be repaid from LP capital calls within 12-18 months typically.
- •IRR inflation from subscription lines isn't fraud—it's mechanical. LPs understand the effect but many GPs don't adequately disclose magnitude of IRR boost from financing versus operational performance.
- •Subscription lines don't eliminate LP capital call risk. If LP defaults on capital call, lender steps into LP's position through foreclosure. Lender becomes fund investor—undesirable for all parties.
Technical details
Facility structure and advance rates
Advance rate calculation: Facility size = Total Fund Commitments × Advance Rate (typically 15-25%). Lower advance rates for funds with: concentrated LP base, high retail/HNW investor mix, non-institutional LPs, funds of funds as investors, or jurisdictions with uncertain legal enforcement. Higher advance rates (25-30%) for: 100% institutional LPs (pensions, endowments, sovereigns), diversified LP base (50+ investors), and strong GP track record.
LP concentration limits: Lenders impose concentration limits—no single LP can represent >20-25% of borrowing base. Prevents over-reliance on one investor. Example: $1B fund with $200M facility, $300M commitment from single sovereign wealth fund. Only $50M of that commitment (25%) counts toward borrowing base. Remaining $150M excluded.
Eligibility criteria: Not all LP commitments are 'eligible' for borrowing base. Exclusions include: commitments from fund-of-funds (secondary credit risk), commitments from GPs/affiliates (not arm's length), commitments from investors in sanctioned jurisdictions, and any LP that has previously defaulted on calls. Result: borrowing base often 50-75% of headline facility size.
Facility sizing example: $1B fund commitments. $150M from GP/affiliates (excluded), $100M from FoFs (excluded), $50M from sovereign in sanctioned jurisdiction (excluded). Remaining $700M × 20% advance rate = $140M borrowing base. Facility sized at $140M despite $1B commitments.
Draw and repayment mechanics
Draw process: GP identifies investment opportunity requiring $30M. Draws $30M from subscription facility via notice to lender (typically 2-3 business days). Funds wired to fund account, then deployed to portfolio company. No LP capital call required at investment date. Facility outstanding grows from $50M to $80M.
Mandatory repayment triggers: Most facilities require repayment within 180-365 days of draw through LP capital call. Example: $30M drawn January 1. By July 1 (180 days), must call capital from LPs to repay facility. If not repaid, event of default. This 'use limitation' prevents perpetual leverage.
Capital call waterfall: When GP calls capital, proceeds first repay subscription facility, then fund other uses. Example: GP calls $50M capital. $30M outstanding on facility → $30M goes to repay lender, $20M available for investments or reserves. LPs never see the $30M—flows directly from capital call to lender repayment.
Elective repayment: GPs can repay facility anytime from: (1) LP capital calls, (2) portfolio company distributions or dividends, (3) asset sales or exits, (4) fund-level cash reserves. Most GPs minimize cash drag by using facility up to maturity limits then calling capital, rather than calling capital immediately.
IRR enhancement mechanics and disclosure
Mathematical IRR boost: Fund invests $100M immediately calling capital day 1 = 20% annual return = $20M profit after 1 year. IRR = 20%. Same fund uses subscription line: invests $100M on day 1 but calls capital on day 180 (6 months later). $20M profit after 1 year / capital deployed for only 6 months = 43% IRR. Reality: same economic outcome but IRR doubled through delayed capital deployment.
Magnitude of effect: Studies show subscription line usage boosts reported IRRs by 200-600 bps depending on usage intensity. Fund using facility for 50% of capital with average 9-month delay shows ~300 bps IRR inflation. Some funds show 500+ bps boost. This is mechanical, not alpha generation—pure leverage/timing effect.
TVPI vs DPI transparency: Total Value to Paid-In Capital (TVPI) unaffected by subscription lines—shows value relative to actual capital called. Distributions to Paid-In Capital (DPI) is realized cash-on-cash return—also unaffected. These metrics provide clearer picture than IRR for funds using subscription lines extensively. Sophisticated LPs focus on TVPI/DPI, not IRR.
Regulatory scrutiny: SEC 2023 guidance requires private fund advisers to clearly disclose subscription line usage and impact on performance. Must show performance with and without subscription line effects. European regulators (FCA, AMF) similarly requiring transparency. Pushback against 'manufactured' IRRs through financial engineering versus operational excellence.
Risk scenarios and LP defaults
LP default mechanics: LP fails to fund $10M capital call. Fund notifies lender. Lender has right to 'step in' acquiring defaulted LP's commitment. Lender becomes LP with $10M commitment. Fund must follow partnership agreement default remedies: forfeiture of LP's interest, forced sale to other LPs, or reduced allocation. Messy process—lenders don't want to be LPs.
Concentrated LP risk: Fund with 40% concentration in single corporate pension. Company enters bankruptcy, pension plan defaults on capital calls. $80M of $200M facility suddenly uncollectible. Lender reduces facility capacity immediately. Fund faces liquidity crisis—outstanding borrowings exceed reduced borrowing base. Must sell assets or find replacement LP.
Cross-default considerations: Subscription facility defaults if fund breaches other obligations—fund-level covenants, key person provisions, management fee delinquencies. Creates interconnected risk: fund operational issues trigger financing default even if LP commitments remain strong. Many 2020 funds negotiated covenant amendments when key persons left during lockdowns.
Fund termination scenarios: If fund dissolved early (GP removal, strategic wind-down), subscription facility faces immediate repayment. Outstanding $50M borrowing requires capital call from remaining LPs. If LPs refuse to fund capital call (not funding new investments), lender can force wind-down selling portfolio at depressed values. Occurred in several 2009 fund situations where LPs wanted to preserve capital but lenders demanded repayment.