In the wake of the pandemic, demand for subscription lines of credit has exceeded supply in a market estimated at some $500 billion in commitments among some 70-plus lenders.
And demand is set to continue, PERE’s Investor Perspectives 2021 Study findings hint. Just over 50 percent of investors polled expect managers to increase the use of these credit lines in the next 12 months, while 41 percent say usage will stay the same as in the previous 12 months. Only 8 percent believe managers will decrease the use of subscription lines.
“The use of lines of credit has become a standard practice. These facilities allow funds to invest in deals without having to continually call capital, which reduces the admin and number of calls,” says Simon Vardon, global head of real assets at fund administrator Sanne. “Credit lines can have a positive impact on IRRs, so managers can be slightly motivated to use them.”
Vardon adds that the current landscape of “extremely low” interest rates means fund managers can benefit from “fairly cheap” credit lines.
As covid-19 began to roil markets in the US and Europe, however, some of the biggest lenders in subscription credit lines were said to have all but stopped new lending, focusing on assessing their exposures and servicing existing clients, as reported by sister publication Private Funds CFO. Demand overflowed to smaller lenders that started seeing deals they previously could not have competed for. Meanwhile, loan terms and structures have generally shifted significantly in favor of banks, with pricing for top sponsors raising from pre-pandemic levels of around LIBOR plus 150-180 basis points to as much as 225bps. Pricing remains elevated, and some players think it will continue to rise.
Debt liquidity concerns
A significant proportion of surveyed investors – 42 percent – are concerned with the extent to which their managers are using credit lines to fund portfolio investments. One major concern is around difficulties accessing other sources of debt liquidity when managers draw down their credit lines, particularly at a time when lenders remain cautious.
“Credit lines are not being used to bridge longer-term capital requirements, but only as a very short-term working capital facility,” comments Patrick Kanters, managing director of global real assets at APG Asset Management.
“If you draw subscription lines while being exposed to higher leverage levels then of course you might run into an issue where you can’t get access to bank or capital markets debt.”
A high number of investor respondents – 58 percent – are not concerned about the use of credit lines, though. Last year, the Institutional Limited Partners Association released new guidance to create a common reporting standard on private equity managers’ use of subscription lines of credit, which are typically secured by a fund’s uncalled commitments.
“If you look at what ILPA did, the market is reacting in a way so that what a manager can do with those credit lines is more limited, in which case investors seem to accept them,” says Steven Cowins, partner at law firm Greenberg Traurig. “We’re not seeing pushback from investors on credit lines.”