Distorting Private Equity Performance: The Rise of Fund Debt

51 Pages Posted: 27 Jun 2019 Last revised: 25 Nov 2019

See all articles by James F. Albertus

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Date Written: November 7, 2019

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

Suggested Citation

Albertus, James F. and Denes, Matthew, Distorting Private Equity Performance: The Rise of Fund Debt (November 7, 2019). Available at SSRN: https://ssrn.com/abstract=3410076 or http://dx.doi.org/10.2139/ssrn.3410076

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Matthew Denes (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://sites.google.com/site/matthewdenes

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