Our firm is looking into alternative ways to "draw capital" for deals and starting to do research into credit lines given based on committed contributions from LPs in the fund. Has anyone had experience with this approach? Also, have any LPs been reluctant to post their unfunded commitments as collateral for fears that the fund may never draw down their full commitment and use the credit facility in lieu of investor capital?
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I'm only a first year but we do a good amount of subscription facilities with good sponsors who have high credit rated LPs. A lender will get more comfortable with Stanford as one of the capital commitments vs the Los Angeles Carpenters Union for example. Hope that helps.
and what would be a non starter in regards to the LP mix? For example, would a sponsor not qualify for a facility if high net worths make up 80-90% of the LP base?
I think it might depend on the lender's risk profile. The borrowing base is made up of 'Included Investors' (institutional credit rated entities) and 'Eligible Investors' (HNW individuals). The ratios that someone would advance on would be something like 80% of Included Investor capital commitments and 50% of Eligible Investor capital commitments. Just throwing numbers out there since I don't know the exact ratio we do (or if we even lend on Eligibles.) So you might run into an issue where you guys get a smaller sub facility. Hopefully someone else chimes in.
Surfing Pirate, can you educate me on what you consider (apart from the credit rating) when you decide on whether to and how much to lend against a capital commitment?
Which lenders are doing these facilities???? We are exploring this idea at the moment. Any further insight would be very helpful.
Almost every institutional fund uses these credit facilities. Contact SVB, First Republic, Wells Fargo, or almost any major bank and they can hook you up pretty cheap since it's fairly commoditized. You need a primarily institutional investor base as mentioned above. LPs get fussy if you actually use the subscription line to juice your IRR by delaying draws to them, but for most funds it makes sense to manage the cash flows through a subscription line rather than trying to round up all the cash from 30 LPs each time. Rather, a good approach is to just use the sub line for deals and pay it down once a quarter or so, such that LPs have regularity to their cash flow timing, easing the administrative hassle of always having to be at the ready for a capital call.
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