Key Takeaways

Over the past ten years, subscription line of credit (sub line) balances for private capital funds have grown substantially relative to fund size.
While Venture Capital funds are warming up to sub lines, the Venture Capital asset class remains far behind Buyout, Debt, and Real Estate when it comes to using debt for cash flow management.
Sub line intensity is extremely front-loaded in a fund’s life, but older funds continue to use sub lines to consolidate fees into fewer capital calls.

In our previous article, Subscription Lines of Credit, Part One: The Rise (and Rise) of Sub Lines, we documented the growing ubiquity of sub lines in private capital—particularly for Real Estate, Buyout, and Debt funds—and provided evidence that approximately three quarters of Buyout and Real Estate funds are drawing on sub lines in their first years of life. In this article, we use the same holdings data from the Burgiss Manager Universe (BMU)[1] to explore how intensively funds draw on their sub lines—that is, the size of the sub line balance relative to total Limited Partner (LP) commitments. Sub line intensity is a critical determinant of how sub lines will affect IRRs, which we will address in our next article.[2] As with the rapid proliferation of sub lines, we find that funds have substantially increased their sub line balances relative to fund size, indicating an increase in the size of sub line draws or a willingness to carry a balance over longer timeframes.[3]

To measure sub line intensity, we use a fund’s sub line balance as a fraction of fund size (total LP commitments) and plot its trajectory in figure 1.[4] The most recent sub line intensity for Buyout funds is roughly eight times that of Venture Capital funds. The peak for Real Estate funds—just shy of 6%—is larger still, but Debt funds are, fittingly enough, the clear leaders when it comes to reliance on sub lines, with the average Debt fund reporting a sub line balance exceeding 6% of fund size at the end of 2022.[5] Notably, we observe a recent apparent collapse in sub line intensity for Real Estate funds, which reflects a decline in sub line balances among young funds. Venture Capital funds also experienced a decline in sub line intensity around the same time, likely corresponding to the downturn in deal activity after a very busy 2021. While it is too soon for the data to reflect the fallout from the collapse of Silicon Valley Bank in March 2023, we will keep an eye on it in the coming months.

*Fig. 1: Mean sub line balance as a fraction of fund size over time*

As stated in our earlier article on sub line prevalence, this broader look at asset class-level sub lines is just part of the story. Funds draw most heavily on their sub lines during their investment periods, as demonstrated in figure 2. In contrast to our findings on sub line usage, sub line intensity decays quite quickly; this makes sense because funds can continue to use fund lines for small fees, but the big investments are behind them by age five.[6] However, this means that figure 1 understates the rise of sub lines because it reflects a growing number of older funds that are past their most sub line-intensive years.

*Fig. 2: Mean sub line balance as a fraction of fund size at each age*

To address the changes in fund age composition that complicate figure 1, we turn to one-year-old funds in figure 3. Sub lines clearly took off first with Real Estate funds, starting in the early 2000s. While Debt and Buyout funds started using sub lines around the same time (per our previous research), Debt funds jumped headlong into sub lines; in contrast, Buyout funds were slower to ramp up in intensity. Venture Capital funds remain far behind, almost an order of magnitude behind Debt funds in 2022. As of the most recent data, the average one-year-old Buyout, Debt, and Real Estate funds are all carrying sub line balances in the range of 7–12% of fund size. Compared to ten years ago, that means there was a nearly 50% increase in sub line intensity for Debt funds, a 100% increase for Real Estate funds, and a nearly tenfold increase for Buyout funds.[7]

*Fig. 3:* *Mean sub line balance as a fraction of fund size for one-year-old funds each year*

Conclusion

Over the past decade, sub lines have become a critical tool for cash flow management across Buyout, Debt, and Real Estate funds. While Venture Capital funds are increasingly exploring sub lines, they lag far behind other private market strategies. This shift toward using sub lines more intensively represents a major change in the timing of capital calls, with important implications for LPs. In our next article in the Subscription Lines of Credit series, we will turn our attention to the consequences of the rise of sub lines for returns and carried interest.

[1] The BMU has since inception cash flow data for over 13,000 private capital funds and visibility into more than 230,000 of their underlying holdings through the end of Q1 2023. In this article, we focus on the set of funds where we have holdings data since inception, including balance sheet items; this allows us to have an unbiased look at sub line balances.

[2] The other important determinant is how long the General Partner (GP) carries the sub line balance. Carrying a very small balance for an extended period of time is considered low intensity and would have a minimal impact on IRRs; a similar impact on IRRs would occur for GPs who carry a large balance (high intensity) that they quickly repay.

[3] Disentangling these two factors is slightly tricky; we plan to revisit this in depth in a forthcoming article.

[4] Because sub line balances are detailed in a fund’s quarterly reports, we are unable to observe any sub line draw that is executed and extinguished entirely within a single quarter. Thus, the estimates in this article represent a lower bound of sub line prevalence.

[5] Among Debt funds, Senior Debt funds took up sub lines the earliest and with the most intensity; Distressed and Mezzanine funds have exhibited a more measured rise.

[6] Real Estate funds stand out in this regard; we observe a small but nontrivial fraction of ten-year-old Real Estate funds reporting sub line balances, some of which are quite large, but most of which correspond to fees.

[7] Also notable is the retreat in Real Estate and Buyout fund sub line intensities in 2020. Real Estate sub line balances declined throughout 2020 and into the first quarter of 2021 as funds called capital and delayed investments. By comparison, Buyout funds reverted to their pre-2020 trend more quickly; Buyout sub line balances rebounded in Q4 2020, exceeding their 2019 peak.

Subscription Lines of Credit, Part Two: A Question of Balance(s)