US debt: Macquarie unlocks flexible subscription facilities

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Shaun Gembala

Total capital raised globally by private debt funds reached almost $62 billion in the first half of this year, according to PDI data. Typically, more capital is raised in the second half of the year than the first. This means 2017 is shaping up to set a new record for private debt fundraising. The current record was set in 2013 with approximately $130 billion raised. As the number and size of private debt funds have grown larger and larger, the number of lenders offering subscription credit facilities to these funds has also increased dramatically; innovation, less so.

These facilities are used by investment managers instead of LP capital calls to enable investments to be made more quickly. Traditional subscription lines look solely to the uncalled capital commitments of the fund’s LPs for security. The facility provider will conduct due diligence on LPs and determine the creditworthiness of each. This assessment of quality of the investor base drives availability of credit.

The borrowing base calculation is usually broken down into three categories: included investors; specified investors; and other investors. Included investors are typically investment-grade institutions (A or AA rated) and include insurance companies, endowments, corporate and public pension plans, and sovereign wealth funds. Advance rates may vary on rating but typically these will attract a higher advance rate versus commitment, say 80-100 percent. The next category is specified investors, which are otherwise strong investors with issues that preclude classification as included investors. These may include LPs to whom the lender already has significant exposure. Advance rates will fall between zero percent and the lower band of included investors. Not all facilities will include this category. The third category is other investors, which are not included in the borrowing base calculation, with zero percent advance rate. This may include high-net-worth investors and family offices or unrated/ unfunded pensions.

Investment managers utilising pure capital call and subscription line facilities will sometimes encounter limitations on their ability to borrow due to late-stage liquidity issues, failure to meet pre-determined eligibility criteria or timing restrictions on borrowing periods (such as 90 days). Fund size also tends to be a significant barrier to facility availability. As such, there exists a need in the market for a flexible solution where credit is extended based on a dual assessment of uncalled capital and the assets of the fund.


As a result of the rigidity and other limitations discussed above, a small group of lenders have begun offering a hybrid financing structure which provides both short and long-term liquidity solutions to institutional investors looking to settle specific credit assets into funds. This novel approach utilises standard loan settlement practices common on the trading side of the business – rather than heavily negotiated credit facility documentation – to enhance flexibility and meet defined timing constraints.

This concept of implementing the trading technology and protocols to the liability side of the private debt funds’ balance sheet has proved useful in a multitude of situations during the fund lifecycle.

These include: providing an alternative to traditional capital call facilities; complementing existing capital call and leverage facilities and assisting with ongoing capacity or ineligibility issues; providing a bridge for co-investment and syndication; providing earlier return of capital to LPs; softening the “J curve” in the early stages of a fund ramp (warehouse facility pre-first close); seasoning; and SMAs where it is difficult or uneconomical to establish a traditional facility.

In addition, this structure does not restrict an LP’s freedom of movement. In a recent PDI letter published in May, one issue raised was the possibility that subscription lines may block attempted transfers of LP interests because the uncalled capital commitments of the fund’s LPs have been pledged as security for the subscription line. The alternative hybrid structure contemplated here does not contain any covenants that would place limitations on LP transfers.


This hybrid solution is structured as a purchase and sale transaction on the required funding date. At a predetermined period prior to funding date, typically seven to 10 days, the investment manager will submit an informal borrowing request to the lender. This request identifies the investment manager’s proposed loan investment or investments and specifies the funding amount and timing being requested.

The investment manager will also provide diligence materials for the lender to review (ie, credit memo, draft credit agreement). Based on a review of the proposed credit, the lender will provide approval to the investment manager and prepare the relevant documentation. As mentioned above, the transaction documentation is simple, standardised and only a few pages in length.

On the funding date, the trades will be executed and the lender will fund the purchase at 100 percent advance. A sale from the lender to the fund will be processed on the funding date with a pre-negotiated settlement period.

This hybrid approach also enables the fund to transact and deploy capital during a new fundraise, prior to the first close. This process may assist fundraising efforts with LPs by demonstrating existing investments in the new fund. The hybrid structure may also provide a bridge for co-investment or syndication on larger deals. The lender can provide flexibility in structuring the transaction as a secondary assignment, original assignment, or a participation. Expertise in drafting transaction documents and executing settlement is crucial to providing certainty of close and reducing legal costs for both lender and investment manager.

Private debt can take many forms and private lenders continue to come up with innovative structures to meet the investment-specific risk and return profiles. As such, the bank loans used by investment managers to enable these investments to be made more quickly need to evolve and innovate to accommodate the different fund life-cycle stages, structures and fund-specific requirements.

The benefits of the hybrid approach to subscription line facilities

Collateral credit
The hybrid approach does not rely solely on the investor base. Credit is extended based on dual assessment of investor base and underlying proposed investment. The lender does not have call rights.

Due diligence burden reduced
No direct contact, or additional documentation, is required from LPs.

Capital flexibility
As-needed. It is possible to transact throughout fund lifecycle without pre-existing documentation.

Size flexibility
Ability to accommodate all transaction sizes, large and small.

Late stage capital provider (existing capital call commitments largely drawn)
Ability to provide capital where capital call commitments are largely drawn; may cover follow-on investments and redemptions, etc.

Shaun Gembala is a senior vice-president within the credit market division at Macquarie Group, focusing on credit liquidity solutions. Macquarie’s credit liquidity solutions group assists private debt managers with hybrid financing structures designed to address asset-based funding needs and maximise managers’ flexibility.

This article is sponsored by Macquarie. It appeared in the US Report, published with the September 2017 issue of Private Debt Investor