Distortion or Cash Flow Management? Understanding Credit Facilities in Private Equity Funds

38 Pages Posted: 12 Aug 2019

See all articles by Pierre Schillinger

Pierre Schillinger

Technische Universität München (TUM) - TUM School of Management

Reiner Braun

Technische Universität München (TUM) - TUM School of Management

Jeroen Cornel

BlackRock, Inc

Date Written: August 7, 2019

Abstract

Credit facilities in private equity, often referred to as “subscription lines” (SL), have become a topic of interest, sparking debates not only among researchers but also among practitioners. In this paper, we are the first to analyze their potential thoroughly by quantifying the impact on both final fund performance and fund rankings. In addition, we are the first to academically describe and explain the key terms of SL in detail. Based on our simulations, we find that standard SL have moderate effects on final fund performance as well as fund rankings and constitute mainly a cash flow management tool. However, if used more extensively, SL have the potential to increase time-sensitive return measures substantially and can thereby also alter fund rankings. Consequently, if not properly understood by investors, extended SL could distort future fundraising outcomes. In addition, the higher reported performance may mislead investors with regard to the BO industry’s true skill and return opportunities.

Keywords: Private Equity, Leveraged Buyout, Institutional Investors, Subscription Lines of Credit, Fund Debt, Fund Simulation, Returns

JEL Classification: G11, G17, G23, G30, G32

Suggested Citation

Schillinger, Pierre and Braun, Reiner and Cornel, Jeroen, Distortion or Cash Flow Management? Understanding Credit Facilities in Private Equity Funds (August 7, 2019). Available at SSRN: https://ssrn.com/abstract=3434112 or http://dx.doi.org/10.2139/ssrn.3434112

Pierre Schillinger (Contact Author)

Technische Universität München (TUM) - TUM School of Management ( email )

Germany

Reiner Braun

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, Deutschland 80333
Germany
+498928925181 (Phone)
+498928925188 (Fax)

HOME PAGE: http://www.ef.wi.tum.de/

Jeroen Cornel

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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