ILPA issues further disclosures for Subscription Lines of Credit

Adhering to the guidance

On 10 June 2020, the Institutional Limited Partners Association (ILPA) released a second batch of guidance on Subscription Lines of Credit, specifically recommending standardised reporting so that the impact of using such facilities is as clear as possible. 

Improved disclosures are requested for June 2020, if not already in place.

A bit of background

The utilisation of credit lines in the private equity industry has significantly increased in recent years, driving many private equity funds to investigate the pros and cons in an effort to benchmark and remain competitive in the market. 

While credit lines provide liquidity that can be quicker to access than drawdowns and is more advantageously priced than preferred return interest, it does involve additional costs, tax and legal concerns, and distorts fund metrics like IRR. 

In practice, investors are not feeling able to rely on their reported share of net asset value (NAV) because:

  • Credit facilities may not be allocated in line with how a capital call would be drawn
  • The promised less frequent capital drawdown activity might have been planned with investment exits in mind that don’t materialise, causing cashflow pressure
  • Investors face institutional cumulative liquidity risk, i.e. the risk of not being able to meet synchronised calls across different credit lines at the same time, or of the GP defaulting on a credit line and the lender calling it in.

What is ILPA recommending?

In response to the increase in difficulty interpreting financial information, ILPA is requesting more explicit disclosures on how credit lines have impacted the fund’s performance:

  • Quarterly capital statement disclosures should be in line with the 2017 recommendations, supplemented by additional information in the schedule of cashflows and schedule of investments
  • Annual disclosures should encompass all quarterly reporting requirements, and go into further detail on characteristics such as the lead bank, facility limit, maximum term, expiration, renewal options, collateral base, all interest and cost features, current usage of utilisations and clear methodology of how IRR is computed both with and without the facility
  • If certain key annual disclosure requirements are not already included in the quarterly reports, they are requested for June 2020 quarterly reporting (and are then expected at the next year end and each subsequent year end)
  • ILPA has provided a template to illustrate the potential layout of the improved disclosures, though this is for guidance only
  • Other recommendations include giving investors more lead time for, and estimates of the size of, upcoming drawdowns to smooth cashflow predictability, and providing sufficient data points for investors to estimate their exposure to the portfolio value (investment fair values, LP share of fund, facility balance).

How can IQ-EQ help?

At IQ-EQ, our fund administration teams have experience of the detailed financial reporting required around subscription lines of credit, so please don’t hesitate to contact me or reach out to your IQ-EQ relationship manager to discuss the new disclosure requirements.

Read the full guidance on ILPA’s website