Subscription line / capital call facility

A subscription line (also called a capital call facility or subscription credit facility) is a revolving credit facility borrowed by a private fund from a bank, secured against the unfunded capital commitments of the fund's LPs. It allows the fund manager to make investments quickly without waiting for a capital call to be processed and settled, bridging the gap between investment execution and LP funding.

Subscription lines improve operational efficiency and can enhance reported IRR metrics by compressing the time between LP capital deployment and fund return measurement, but they also introduce leverage at the fund level and create complexity in LP reporting and fee calculations.

How it works

A bank or group of banks (the facility lenders) provide the fund with a revolving credit line, the limit of which is typically sized as a percentage of the aggregate unfunded commitments of eligible LPs in the fund. Eligible LPs are usually defined as those meeting minimum credit quality standards (investment-grade or quasi-investment-grade institutional investors such as pension funds, endowments, and sovereign wealth funds). Less creditworthy LPs may be excluded from the borrowing base, reducing the facility size.

When the fund makes an investment or faces a cash requirement (such as a management fee payment or an RCF draw from a portfolio company), it draws on the subscription line rather than immediately calling LP capital. The facility draw is recorded as borrowing on the fund's books; the investment is recorded as a funded asset. The fund typically issues a capital call to LPs within 90 to 180 days, uses the LP proceeds to repay the facility draw, and the cycle repeats.

From the LP's perspective, the capital call they receive relates to an investment that may already have been made weeks or months earlier. This delay affects the LP's own internal rate of return calculation (because cash is called later) and their reporting obligations (because they may report fund investments before the capital call that funded them).

The effect on fund-level IRR is a widely discussed and contested aspect of subscription line usage. Because IRR is measured from the date of LP cash outflow (the capital call date), bridging investments through a subscription line delays the first cash outflow and compresses the fund's reported investment period, which mechanically increases IRR. This IRR enhancement does not represent additional investment performance; it is a product of the financing structure. ILPA's guidance recommends that GPs disclose both a facility-adjusted and a non-facility-adjusted IRR to LPs to allow meaningful comparison.

For fund administrators, subscription lines create specific operational tasks. The facility must be drawn and repaid through bank instructions that are reconciled to the fund's cash accounts. Capital calls must include disclosure of whether the call is to repay a facility draw (and for which investment). The outstanding facility balance must be tracked as a liability in the fund's ABOR and disclosed in LP reports. Interest on the outstanding facility balance must be accrued daily and allocated correctly (typically as a fund expense, reducing distributable income).

Management fees are also affected: some fund LPAs calculate management fees on invested capital or committed capital, and the timing of when subscription line-funded investments appear on the fund's books can affect fee calculations if the LPA is not carefully drafted.

Worked example

Stonegate Growth Capital III, a EUR 400 million private equity fund, has a EUR 60 million subscription credit facility secured against the commitments of twelve institutional LPs with investment-grade credit profiles.

In March, the fund agrees to make a EUR 35 million investment in Velox Logistics. The investment requires funding within seven business days of signing. A capital call would take 10 to 15 business days to collect.

The fund draws EUR 35 million from the subscription facility on the investment closing date, funds the Velox investment, and records the draw as borrowing and the investment as a funded asset.

Sixty days later, the fund administrator issues a capital call to all fund LPs for EUR 35 million plus the facility interest accrued during the bridge period (EUR 35M x 3.5% / 6 = approximately EUR 204,000). Capital call proceeds are collected over the following 10 business days. On settlement, the EUR 35 million plus interest is repaid to the bank, and the subscription line balance returns to zero.

The LP receives a capital call for approximately EUR 204,000 more than the pure investment amount, representing the interest cost of the bridge. The capital call documentation explains that the call relates to the Velox investment (previously funded through the subscription facility) and identifies the bridge interest component.

Frequently asked questions

What is the difference between a subscription line and a NAV facility? A subscription line is secured against LP unfunded commitments: the bank's security is the contractual obligation of LPs to contribute capital when called. A NAV facility is secured against the fund's existing portfolio investments: the bank's security is the value of the assets already owned by the fund. Subscription lines are typically used early in the fund's life when LP commitments are the primary source of value. NAV facilities are used later in the fund's life when the investment portfolio is the primary asset and unfunded commitments are largely drawn. Both are forms of fund-level borrowing, but they address different points in the fund lifecycle.

Does using a subscription line affect LP returns? It depends on what measure of return you use. Reported IRR is typically increased by subscription line usage because the LP's cash outflow (the capital call) is delayed. TVPI (total value paid in) is unaffected, as the same capital is eventually invested. If the bridging interest cost is charged to the fund as an expense (which reduces distributable returns), LPs bear a cost. If the IRR enhancement from delayed capital calls offsets the interest cost, the net effect on LP economics is roughly neutral in most scenarios, but the enhancement is a structural artifact rather than investment performance.

What happens if LPs fail to meet a capital call used to repay a subscription line? LP default provisions in the LPA govern what happens when an LP fails to meet a capital call. If the failure is widespread, the fund may not receive sufficient proceeds to repay the subscription line on schedule. The credit agreement between the fund and the bank will include provisions governing facility events of default, which may include LP default rates above a defined threshold. In practice, defaults on subscription lines secured against institutional LP commitments are extremely rare.

How should subscription line usage be disclosed to LPs? ILPA guidance on subscription credit facilities recommends that GPs disclose: the existence and size of the facility, the period during which it was outstanding, the interest cost charged to the fund, and both facility-adjusted and non-facility-adjusted IRR figures. Many LPA provisions now require this disclosure as a matter of contract. Fund administrators should ensure their LP reporting templates include the required subscription line disclosures.

Can a subscription line be used for purposes other than bridging investment capital calls? Yes. Subscription lines are also used to fund management fee payments before they are covered by the next capital call cycle, to fund operating expenses of the fund entity, and, in some structures, to bridge distributions to LPs that are funded by portfolio income before the income is collected from portfolio companies. The LPA and facility agreement should specify the permitted uses of the facility, as some uses (such as bridging distributions) are more controversial than others.

Related terms

Capital call, NAV facility / net asset value lending, Distribution, Delayed draw term loan, Management fee, Golden copy / ABOR

Related pages

Subscription credit facilities: what fund administrators need to know, Swelv for fund administrators