Although the use of subscription lines of credit has become ubiquitous in the private equity world, UPS Group Trust wants to make sure fund managers provide transparency around performance.
Brady Hyde, portfolio manager of private equity investments at UPS, recently told Private Equity International that if general partners abuse fund finance, the limited partner will bypass the manager.
“I’d rather not have subscription lines but they are pretty much used by every GP at this point,” he said, adding that he typically pays close attention to the cash flow of the underlying assets to understand their performance without the impact of a credit line.
“If you can get comfortable that the underlying assets still have a sufficient performance, we would do the deal,” he said. “But if there’s a point where managers start using a subscription line to improve IRR and allow them to go over the hurdle so now they’re in the carry, that to me is a massive problem. We wouldn’t invest with the manager.”
Hyde noted that he has seen an increase in the use of fund finance in the last couple of years. “It’s become prevalent in almost every fund we do,” Hyde said, but he noted that despite the theoretical and hypothetical issues that could arise, he hasn’t seen any misuse so far.
UPS has a $3 billion private equity portfolio, including $1.8 billion in net asset value, representing 5 percent of total assets.