Capital-call sub lines, fund size among most negotiated terms: panel

When it comes to terms and conditions, one of the most hot-button issues is disclosure of the use of capital-call subscription lines, conference panelists at Buyouts Insider’s PartnerConnect Midwest conference said.

Perhaps no LPA-related issue gets more attention than this, but that’s because so many firms have started using capital-call credit facilities in a short period.

“In general most managers in our portfolio are pretty open to it; 85-plus% in our portfolio use the lines,” said Matt Autrey, a principal with Adams Street Partners. Autrey spoke on a panel at the Chicago conference.

GPs use these facilities to fulfill the LPs’ capital calls for some time, ostensibly to smooth out the process of drawing capital from the investor base.

Using these facilities can effectively shorten the holding period of an investment for LPs, potentially boosting the internal rate of return and even helping the GP hit its hurdle rate.

There is no standard model for use of such facilities, and GPs range from 30 days to a year before actually collecting capital from LPs.

The Institutional Limited Partners Association has tried to lay out best practices for subscription lines of credit, including capping their duration at 180 days.

GPs are including language in fund contracts about use of subscription lines of credit, including ensuring that the preferred-return calculation is tied to when capital is actually drawn from LPs and not from credit facilities, Autrey said.

Disclosure also includes “clarity around usage of lines of credit in quarterly reports, clarity around returns with and without use of line of credit,” Autrey said.

As well, LPs want to see disclosure about the length of such credit lines, which is generally about 180 days outstanding, Autrey said.

“In the low-interest-rate environment, we’ve seen more funds use that to more efficiently manage cap calls,” Autrey said.

GPs that don’t use these lines get frustrated with their peers that do when they don’t differentiate returns that included the use of capital-call subscription lines with those that didn’t, according to Alicia Cooney, who co-founded placement agency Monument Group and is a partner in the Boston office. Cooney also spoke on the panel.

Disclosure of levered and unlevered returns is another common request from LPs these days, sources have told Buyouts in recent interviews.

Outside of capital-call subscription lines, other big fund issues these days include increasing fund size, and GP commitments, panelists said.

“The biggest hot button is fund size, the hard cap versus the target,” Cooney said. “How can I keep you from raising too much money and what are you going to trade off for that?”

That situation usually involves the most in-demand firms, so negotiations around fund size may also involve give and take around structure of waterfall distribution structure, premium carry interest and other generous terms.

LPs try to clarify whether a GP commitment is in the form of cash out of pocket, or a management-fee waiver, Autrey said.

Some GP commitments are so high, 15 percent or above, that they misalign incentives between the GP and LP, Autrey said. The GP with that amount of its own equity in the fund may have an incentive to hold companies longer than it should, he said.

Allen Latta, managing director with Campton Private Equity Advisors, said on the panel he has become more focused on end-of-life issues as he deals with legacy funds that don’t close.

“One of my pet peeves is management fees in post-extension extensions. … [We’re] talking about a fund that’s 14 years old, 12 years old …,” Latta said.

“GPs that want management fees to continue at that point is always subject to intense negotiations. When we have ability, we’re trying to push to have something put into the LPAs to address that.”