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 tend to reduce the amount of equity invested relative to fund size and delay capital calls. Our results suggest that the use of SLCs increases IRR-based performance by 6.1 percentage points, while multiples-based performance slightly declines. 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