This blog post originally appeared on Burgiss.com. MSCI purchased Burgiss — now known as MSCI Private Capital Solutions — in October 2023.
While subscription lines of credit (sub lines) have become an integral part of private capital markets, the discussion of their rise has been more qualitative than quantitative. Like much of the private asset space, data is hard to come by and detailed descriptions of sub lines remain challenging. This is the first in a series of articles that will lay out empirical results on sub lines.
To start off the series, we examine the utilization of sub lines based on holdings data from the Burgiss Manager Universe (BMU). This dataset contains information on fund holdings along with balance sheet items such as cash and liabilities, including sub lines. With this visibility into fund holdings, we can quantify several aspects of how general partners (GPs) use sub lines, including prevalence and magnitude, and determine the implications for limited partners (LPs). In this article, we document the growing ubiquity of sub lines in buyout, debt and real estate funds in contrast to the lagging uptake in venture capital funds.
As a simple starting point for our exploration of sub lines, exhibit 1 charts the trajectory of sub-line usage using all funds per strategy in the BMU holdings data. The results conflate two trends: the rise of sub-line usage and how the composition of funds changes over time. Here, “usage” denotes the number of funds drawing on their sub lines each quarter. Exhibit 1 captures the rise of sub lines, first by real estate funds before the 2008 global financial crisis, and then by buyout and debt funds. While over 30% of funds in these three strategies use sub lines today, only 10% of funds in venture capital use them, as GPs in the space have been less proactive in managing capital calls. The trends in exhibit 1 evince the growing importance of sub lines in private capital, but they also understate their prevalence in some ways. Funds often use sub lines as bridge financing for capital calls, and capital calls are extremely front-loaded in a fund’s life.
The fraction of funds using a sub line in a given quarter
The fraction of funds using a sub line at each age
As exhibit 2 above makes clear, sub-line usage is extremely common in a fund’s first few years. But surprisingly, it is not uncommon for funds that are past — or sometimes long past — their initial investment phase to still carry a sub-line balance. While 25-30% of buyout, debt and real estate funds are utilizing sub lines at age five, we also see some funds making sub-line draws after age 10. For example, exhibit 1 shows that 33% of buyout funds are using a sub line in Q4 2022, but it is important to note that this percentage includes many funds that are long past the age we would expect them to use sub lines. What we are seeing in exhibit 1 is actually an accumulation of old funds that are done with their sub lines, which depresses the share of funds using sub lines and masks the true rise of sub lines. To more clearly assess how sub-line usage is evolving over time, we need to disentangle the trend from compositional changes using a different approach.
The fraction of one-year-old funds using sub lines each year
To avoid changes in composition, exhibit 3 plots the evolution of sub-line usage looking only at one-year-old funds. At age one, funds are far more likely than at any other time to draw on their sub lines, but we can now clearly see the recent rise of sub lines. While real estate funds were the first to experiment with sub lines in 2002, buyout and debt funds soon followed in 2003 and 2007, respectively.
By the end of 2022, approximately 75% of young buyout and real estate funds were utilizing sub lines. However, venture capital funds stand out here for their comparative dearth; instead of using sub lines to make investments and later call the requisite capital from LPs, we observe many GPs for venture capital funds calling a chunk of capital in advance and then investing that money over the next few quarters. This is an interesting difference in cash-flow-management strategies.
The data we have presented on sub-line usage confirms that sub lines are a growing force in private markets. While a GP’s decision to use sub lines is important, it is only part of the story. In our next article in this series, we will explore how intensively (as a percentage of committed capital) GPs are drawing on their sub lines, and present evidence that sub lines are in fact playing a much greater role in cash-flow management than they did in the recent past.