Private Equity Fund Debt: Capital Flows, Performance, and Agency Costs

Abstract

A subscription line of credit (SLC) is debt issued to a private equity fund and used on a continuing basis. Using new data on U.S. buyout funds, we show that when funds use subscription lines of credit they call less capital. We find that funds using SLCs have substantial distortions in performance measures sensitive to cash flow timing. SLCs are more common among poorly performing funds and increase carried interest along both the extensive and intensive margins. These results highlight the agency costs of SLCs arising from an underlying agency conflict between fund managers and investors.

Keywords: Private equity, buyout fund, subscription line of credit, capital call, performance, agency conflict

JEL Classification: E22, G23, G32