Distorting Private Equity Performance: The Rise of Fund Debt

Abstract

This paper studies the emergence of debt financing by private equity funds. Using confidential data on U.S. buyout funds, we document the increasing use of subscription lines of credit (SLCs) as an additional source of capital. We find that funds using SLCs substitute debt for equity by delaying capital calls throughout a fund's life. Our results suggest that the use of subscription lines of credit substantially increases IRR-based performance, while multiples and performance relative to the S&P 500 slightly change. Overall, we provide the first evidence on a new source of capital in private equity and its impact on funds.

Keywords: Private equity, subscription line of credit, internal rate of return, capital call

JEL Classification: E22, G23, G24, G32