Subscription Line for Private Funds: Borrowing Against Calls

A subscription line for a private fund is a loan the fund (or a borrower SPV it controls) draws, secured by the LPs' uncalled capital commitments, not by portfolio companies. The GP uses it to close an investment or pay expenses before issuing a capital call, then calls capital later to repay the lender. SEC staff describe these facilities as subscription line financing, capital call facilities, capital commitment facilities, bridge lines, or other fund-level indebtedness secured by unfunded capital commitments. (SEC, Marketing Compliance FAQ, Feb. 6, 2024, n.17)

This is general information, not investment, tax, or legal advice. Whether a given LPA permits a facility, and on what terms, is a document-and-counsel question. This page does not quote interest rates, spreads, advance rates, or "typical" tenors.

How a subscription line for a private fund works

Mechanically, four things have to exist at once:

1. Uncalled commitments. Each LP is contractually obligated to fund when called in accordance with the LPA. That remaining obligation is dry powder. It is the collateral thesis. If commitments have been fully called, there is nothing for this facility to lend against.

2. LPA permission. The partnership agreement (or a later amendment or LPAC consent) has to let the fund incur this kind of indebtedness and pledge the right to call capital. Silence is not permission; it is a fight with LPs and with the lender's diligence.

3. A security package the lender will take. Typically: an assignment of the right to issue capital calls, a pledge of unfunded commitments, notices to LPs, and often a power to call in the lender's name after a default. The lender underwrites LP credit — who the LPs are, whether they have defaulted before, whether excuse rights or sovereign immunities sit in side letters — not the portfolio's mark.

4. A use of proceeds the LPA allows. Bridging a deal close, bridging expenses, and (if expressly allowed) bridging a distribution are different permissions. A bridge to a call is the core use. Using the line as a substitute for calling capital for years is a different product, and LPs treat it as one.

The draw pays the seller or the expense. The capital call that follows, on the LPA's notice period, takes out the lender. Interest and unused fees accrue to the fund and flow through the expense line. Who bears those costs — the fund as a whole, the LPs who would have been called, a subset — is an LPA and allocation-policy question, not a market custom this page will invent.

Why GPs draw it

Close timing. The SPA wires this week. The LPA gives LPs ten or fifteen business days' notice. The line covers the gap so the fund is not the party that missed the funding date.

Call batching. Several small closings in a quarter can be funded on the line and taken out with one call. That is an ops convenience. It is also how LPs lose visibility into when cash actually left the fund and entered a deal.

Avoiding a call for a deal that then dies. If the investment falls through after the draw, the GP can repay from a later call, from another source the LPA allows, or from unused commitments as the documents provide. The alternative — calling, then distributing a return of unused capital — is messy for LP cash management.

None of those uses is a return enhancer. They change when LP cash moves. That timing change is exactly what the Marketing Rule FAQ is about.

What LPs watch: IRR, DPI, and the call calendar

A subscription line delays the date LP capital is called. Internal rate of return is a function of the dates and amounts of cash flows. If the fund buys an asset in January on the line and calls the LP in June, the LP's cash outflow starts in June. A Net IRR that starts from the call date can look different from a Gross IRR that starts from the investment date.

SEC staff's position under Advisers Act rule 206(4)-1: if an advertisement presents Gross IRR calculated without the impact of fund-level subscription facilities, it cannot present only Net IRR calculated with that impact. Gross and net must use the same time period, return type, and methodology. Presenting only Net IRR with the impact of the facility, without either a comparable Net IRR without the facility or appropriate disclosure of the impact, would violate the general prohibitions. (SEC, Marketing Compliance FAQ, "Calculating Gross and Net Performance," posted Feb. 6, 2024)

That is an advertising rule, not an LPA rule. It is still the right diligence question for an LP reading a quarterly pack: show me net performance with and without the line, and the dates cash actually moved. DPI (distributions as a multiple of paid-in) can also move if the line funds a distribution before a corresponding call, or if paid-in is delayed. The metrics definitions are IRR, MOIC, DPI, TVPI, RVPI. This page does not retarget those terms.

Other LP diligence, none of which this page converts into a "market" number:

• Facility size versus remaining commitments (the overcollateralization the lender required).

• Who is excluded from the borrowing base (defaulted LPs, excused LPs, LPs with side-letter caps).

• Average days a draw stays out — a bridge versus a substitute for paid-in capital.

• Whether interest and unused fees are above-the-line fund expenses that hit net performance.

• Whether the GP can call to repay the line outside the investment period.

• What happens on an LP default: does the lender step into the call right against the others?

Fund administration is where those facts should appear on the capital account and the notice. If they only appear in a lender deck, the LP pack is incomplete.

Subscription line versus NAV facility

A NAV facility is a different product. It is NAV facility for private funds. Do not describe a late-life draw against remaining commitments as a NAV facility, and do not describe a pledge of Holdco shares as a subscription line. The security agreement tells you which one you have.

Deal-by-deal SPVs rarely sit on a subscription line. There is one call, or a handful, and not enough uncalled commitment or LP diversity for a lender to underwrite. A committed fund with a multi-year investment period is the usual borrower. An SPV that warehouse-funds a deal before a fund close is a different borrowing — often a GP-level or warehouse-level loan — and should be documented as such.

What the LPA should say before anyone draws

If the fund will use a line, the LPA (or a first-close side letter the GP can live with) should address, in words, not in a sliding-scale "market" annex:

• Authority to incur the indebtedness and to pledge call rights.

• A cap: a stated dollar amount, a percentage of remaining commitments, or both — the number is negotiated, not implied.

• Permitted uses of proceeds.

• A maximum time a draw may remain outstanding, if LPs care about that limit.

• Treatment of interest, unused fees, and lender expenses in the waterfall and in expense allocations.

• Reporting: outstanding balance, unused capacity, and performance with and without the facility, on a schedule the LP can audit against the capital account.

• Interaction with excuse, exclusion, and default: an excused LP should not silently remain in the borrowing base.

None of that is a rate. None of it is a promise that a lender will offer a facility. It is the minimum so that when the first draw hits, the LP is not learning the terms from a footnote on a TVPI chart.

Call the line what it is: a bridge against uncalled capital, with a cost the fund pays and a timing effect LPs are entitled to see. If the GP wants longer-dated borrowing against the portfolio, that is a NAV conversation, with a different security package and a different LP consent path.