ILPA released new guidance that aims 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.
Institutional Limited Partners Association's new guidance builds on its 2017 recommendations by aiming to create a common reporting standard. The guidance recommends quarterly reports that include the size of the subscription line, its balance, the amount of the investor's and manager's unfunded commitments financed through the facility and the net internal rate of return with and without the subscription line of credit. It also suggests annual reporting that would include additional information such as current use of the proceeds and fees, and how net IRR is calculated with and without the subscription line.
ILPA officials expect the recommendations would be reflected in reporting to LPs starting with the reporting period ending June 30, the guidance said.
ILPA created the guidance with the help of LPs, GPs, academics, consultants and industry advisers. It developed the recommendations due to the need for standardized reporting. The increased use of subscription lines by GPs has made it "significantly more difficult" for LPs to measure their private equity exposure and their portfolio's performance, the updated guidance said. Investors don't know how much of their unfunded fund commitments have been invested or financed using a subscription line of credit rather than capital calls.
The use of subscription lines can inflate reported net IRR, especially early in the life of the fund. The use of subscription lines can also result in multiple capital calls all at once. In a market downturn, investors may have to sell liquid assets at a severe discount because they don't have a clear understanding of how much capital will be called and when. Investors also don't know how much of their private equity portfolios' net asset value is owned to subscription lines, the guidance said.
"LPs have identified instances where actual private equity exposure may be as much as 2-4 percentage points higher when factoring in their pro rata amount outstanding on subscription lines," the guidance said.
