medium · Private Credit fund-structures-returns-economics
A private credit fund uses a subscription line facility to delay capital calls. It holds an investment for 2 years. In Year 1, it uses the subscription line (at a cost of 5%) to fund a $100M deal. In Year 2, it calls the capital from LPs and repays the line. At the end of Year 2, it sells the deal for $130M.
Which statement accurately reflects the impact of this mechanism on fund returns?
- There is no impact on IRR because the investment was held for the same 2-year duration by the General Partner.
- The MOIC is higher because the subscription line interest is tax-deductible for the Limited Partners.
- The IRR is higher than it would be without the line because the LP capital was at risk for only 1 year instead of 2.
- The IRR decreases because the interest paid on the subscription line reduces the total profit distributed to LPs.
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