Subscription loan facilities in private equity

Detta är en D-uppsats från Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Sammanfattning: Driven by low interest rates and an aim for private equity funds to reach higher performance rankings, the usage of subscription loan facilities has surged in recent years. In one of the pioneering in-depth analyses of these facilities, this paper aims to meet the private equity industry demand for a report that sheds light on the impact on fund performance and the incentives behind these facilities. In an academically backed-up model, we verify and prove previous claims that subscription loans boost fund IRR in positive fund performance scenarios and magnify the negative fund return in negative fund performance scenarios. We elaborate on earlier claims by showing impacts on funds performing at different return levels. We show that fund managers (GPs) only gain money in certain IRR brackets when there is a catch-up in place and we show that having a catch-up is incentive aligning in regard to the loans. Looking at incentives we argue that the GPs care more about the IRR than actual money made since this will enable them to rank higher than other funds. This improves their chance of attracting capital from investors ahead of other PE funds as well as other asset classes. We also show that LPs are always affected negatively in terms of actual money made, suggesting that subscription loan facilities amplify the agency and control problems within the contract theories of private equity, and can be classified as return manipulation according to earlier literature definitions.

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