Part 1: Your peers are using sub lines, are you? Flatten the J curve with Hazeltree
The concept of subscription lines has been around for decades. However, longer dated sub lines are all the craze right now because they can have a material impact on net IRR in the early years of the fund’s life and with rates at historic lows.
Longer dated sub lines allow GPs to call capital from LPs once a deal has already appreciated in value (6-12 months after the initial investment). The overall impact to IRR of an aggressively managed subscription line amounts to somewhere between 250 and 1500 basis points. But manual processes present significant challenges to realizing this value. On longer dated sub lines, each draw on the line to fund a deal has its own maturity date and as the fund gets deployed and uncalled capital is reduced, that can reduce the capacity of the sub line and trigger loan covenants. If this process isn’t proactively monitored, you could find yourself short on cash when a deal is closing. The current banking portals are limited – all they show, at best, is the outstanding loan balance and the available capacity. This is not enough information to accurately forecast future cashflows. Firms struggle to gather the right information to tell a complete story about the health of their organization, from a liquidity standpoint. Ask yourself one question, are you aggressively managing your subscriptions lines?