Dr. Christoph Jäckel, a Director of Montana Capital Partners AG, wades into the discussions about fund credit facilities with some new research he published in Private Funds CFO. His findings? A credit line increases IRR for most funds by only one percentage point.
Of course, it’s a bit more complicated than that. The average in his findings was 4%, but that was inflated by a few, very well-performing funds. The study looks at funds from 1990 to 2007 using quarterly cash flow data from Prequin. As for the equity multiple, he only found a small effect.
This is all against the back-drop of the ILPA guidance encouraging more disclosure on the use of credit lines. Around the same time, Howard Marks of Oaktree Capital took a deep but practical dive into the use of lines.
Another research study in the works by James Albertus and Matthew Denes found that use of credit lines increased performance by 6.1%. They used a different data set with a focus on data from 2014 to 2018. Unlike the Jäckel study, they only report the average effect, so it could be skewed by highly successful funds, similar to his report. As with Jäckel, they found an effect on the equity multiple, but it was small. They also note that younger funds skewed the data, presumably since the short time frame would have relatively more on the credit line and less returned to investors.
What about compliance? It has become an industry best practice to disclose in performance marketing that the fund used a credit line and the performance would be different without use of the line.
Sources:
- How big is the impact of credit lines on fund performance really?
- Distorting Private Equity Performance: The Rise of Fund Debt
- ILPA Issues Guidance for Limited Partners on Subscription Lines of Credit Used by Private Equity Funds
- The Positives and Negatives of A Subscription Credit Line
- Dr. Christoph Jäckel