The Evolving Landscape of Subscription Lines: Rethinking Risks

Explosive growth and continued evolution

Subscription facilities (also known as capital call facilities) are short-term credit lines provided to a fund, secured by the fund’s investors’ (uncalled) capital commitments. It allows the fund to quickly access cash for investments or expenses before calling capital from investors.

These facilities have grown from a niche asset class and is expected to surpass $1 trillion in 2025. This growth has been fueled by:

• Robust growth in private markets. These markets are expected to grow to $20tn by the end of the decade.
• Strong interest from non-bank or alternative lenders offering longer tenors (greater than 1yr) and providing bespoke terms and pricing.
• Regional banks stepping into meet strong demand.
• Increased fundraising and records levels of dry powder.
• Major banks are securitizing subscription lines, enhancing secondary market liquidity and broadening investor participation.
• Rising transaction volumes and accelerated deal timelines are reinforcing the utility of sub-lines in optimizing internal rate of return (IRR) metrics and minimizing capital call friction.

But risks for lenders are also evolving rapidly

The key credit risks arise from two fronts:

1. PD or default risk: Risk of LPs not answering calls on time and in full.
2. Loss given default (LGD) risk: Risk of lenders not being able to fully recover money owed from defaulted LPs.

The main focus for lenders has traditionally been PD risk, with LGD risk often being overlooked, driven by very few historical facility defaults. However, risks are changing rapidly as fundamental characteristics quickly evolve:

• Heightened geopolitical/geoeconomic instability
• Longer facility tenors
• Inclusion of non-institutional (e.g. family offices)
• Inclusion of emerging market investors
• “Looser” limited partner agreements
• Wider adoption across different types of funds
• Extended usage beyond early fund life
• Continued growth of dual-pledge facilities

Credit risk factors can be grouped into two principal groups:

1. Ability of LPs to make payment
2. Willingness of LPs to make payment

The willingness of LPs to answer calls is crucial as it goes beyond looking at the financial capability of LPs. While a borrower may have the financial means to repay a loan (strong ability to pay), they can still selectively default if they lack the commitment to answer (weak willingness to pay). A poor performing fund, for example, may lead to a reduced willingness to answer capital calls.

Stay tuned for the next article in the series, which will cover the key credit risk factors for capital call facilities.