January 4, 2018

In June, the Institutional Limited Partners Association (“ILPA”) issued a “Guidance for Limited Partners on Subscription Lines of Credit Used by Private Equity Funds” calling for increased disclosure and limitations of the practice, which can allow general partners to artificially inflate Internal Rate of Return (“IRR”) and collect additional carried interest payments, and potentially exposes limited partners to extra upfront fees, interest costs, liquidity risks and legal risks, according to the ILPA.

GreenOak Real Estate has used subscription lines of credit, which Financial Times called “private equity’s dirty finance secret,” in connection with at least two of its latest funds, GreenOak Europe II and GreenOak Asia II. Law firm Haynes and Boone, LLP, which advertises itself as a “global leader in the representation of commercial and investment banks acting as agents and lead arrangers in capital commitment subscription financings,” reported GreenOak’s usage of the controversial practice in 2017.

Subscription lines of credit allow a general partner to borrow against limited partner capital commitments without calling capital.[i]  “This sleight of hand artificially raises the fund’s apparent performance but it does nothing to increase the actual returns earned by investors,” said Jennifer Choi, managing director of industry affairs at ILPA.[ii]

GreenOak limited partners should review the ILPA’s Guidance, available here, and should ask GreenOak the following questions, in addition to others posed in the Guidance:

  • To what extent has GreenOak used subscription financing with GreenOak Europe II and GreenOak Asia II? Has GreenOak used subscription financing in connection with other funds?
  • Do any GreenOak prospectuses or limited partnership agreements disclose the firm’s policy with respect to its use of subscription financing?
  • Has the use of subscription financing artificially inflated GreenOak fund IRRs or quartile rankings? Will GreenOak provide IRR and quartile data with and without the impact of subscription financing so limited partners can accurately compare the firm’s performance to that of its peers?
  • Has the use of subscription financing allowed GreenOak to collect additional carried interest payments?
  • What if any fees or interest costs have limited partners faced due to subscription financing?

[i] https://ilpa.org/wp-content/uploads/2017/06/ILPA-Subscription-Lines-of-Credit-and-Alignment-of-Interests-June-2017.pdf

[ii] https://www.ft.com/content/48d107b2-5fed-11e7-91a7-502f7ee26895


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