The instruments, which typically consist of revolving credit facilities to funds secured by capital commitments rather than assets, are coming into favour worldwide – especially with private equity and real-estate funds.
Speaking at the Third Annual Subscription Credit Facilities Symposium in New York on January 15, Mayer Brown partner Zachary Barnett noted that the value of the product to investors was particularly evident during the global economic downturn.
"Funds were still able to access liquidity and take advantage of new opportunities and/or fund ongoing investments during a period when their investors may not have been looking forward to responding to capital calls,” he said.
Funds have realised the benefit of fast access to liquidity. Whereas a typical fund might take 12 to 15 business days to receive proceeds from a capital call, a fund making use of the subscription credit facility can receive proceeds from a subscription loan the same day it is authorised, he said.
Then there is the matter of lenders' safety and comfort. Here again, the product has special advantages. A typical subscription facility lender is more concerned with the credit quality of the investor pool than the type of assets in which the fund has invested, said Barnett.
“Lenders can diversify risk through a pool of investors that are rated or otherwise creditworthy. The bank is lending against the unfunded commitments and obligations of the rated investors and/or creditworthy in the pool,” he said.
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