Increasing popularity of private equity credit lines

Recently, we have observed an increase in the use of credit lines or bridging loans at our real-estate and private equity clients. These loans helps managers defer calling capital or returning money earlier to investors. Typically these loans are short-term loans are based on capital commitment or portfolio net asset value.  There are pros and cons for both GPs and LPs:

General Partner:
  1. Pros:
    • Improve fund performance (IRR) by calling capital later and returning the money earlier to investors.
    • Gives additional breathing time for the fund managers to do the detailed due-diligence before investing.
    • Avoid generating multiple capital calls.
  2. Cons:
    • Since loans are liabilities, during recession/high interest periods these loans may become risky.
    • LPs may be dissuaded by visible signs of high leverage or high market interest rates.
Limited Partners:
  1. Pros:
    • Avoid receiving multiple capital call letters.
  2. Cons:
    • During low interest period, GP’s may prefer to use loans instead of calling capital from investors.
Despite the risk of higher interest rate and defaults, during low interest period, loans can be a win-win for both GPs and LPs as far as proper expectation is set by the GPs.  Additional language to permit the use of credit lines may be required in funds’ limited partnership agreements.
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