Do subscription lines inflate a fund's reported IRR?

How does a subscription line raise a fund’s IRR?

A subscription line is a bank loan secured on investors’ uncalled commitments, so the fund can pay for an investment now and call the money from its limited partners (LPs) months later. The internal rate of return (IRR) starts counting when LPs pay in, so the delay raises it when the line costs less than the fund earns, while the multiple falls by the interest the LPs pay.

The mechanics sit inside a fund’s capital calls and distributions. Dechert, a law firm, describes the facility as bridging the gap between making investments and receiving capital contributions, usually set up as a revolving credit facility, and says the market is estimated at US$900 billion globally (Dechert, August 2024). Use has grown: Callan reports a Preqin analysis in which 13% of private equity funds of pre-2010 vintages used subscription facilities, against 47% of 2010 to 2019 vintages, and adds that some experts cite recent use as high as 90% (Callan, July 2021).

What the line changes is timing. Albertus and Denes write that funds using debt delay capital calls, which boosts performance measures that are sensitive to the timing of cash flows (Journal of Financial and Quantitative Analysis, published online 7 May 2026). MSCI, estimating from Burgiss data, put the median buyout fund’s delay in recent vintages at around 45 days, up from 20 days for the 2015 vintage (MSCI, January 2024).

What does a 12-month subscription line do to a fund’s IRR and multiple?

A 12-month subscription line raises the IRR of our illustrative fund by 1.92 percentage points, from 14.87% to 16.79%, while the multiple falls from 2.00x to 1.86x and the LPs pay $4.5 million of interest. Every input below is an Unmatched Capital example input, not a real fund, and the amounts are in US dollars only for illustration: the arithmetic is the same in any currency.

Example input	Value
Invested on day 0	$60 million
Sale proceeds at the end of year 5	$120 million
All-in interest rate on the line	7.5% a year
Fees, carried interest and tax	Ignored, so the line is the only difference

The interest rate is MSCI’s May 2024 assumption, a risk-free rate close to 5.5% plus a 200-basis-point spread (MSCI, May 2024). It is not a current quote, and a line in another currency would price off that currency’s rates. The table gives four cases, with the delay in calling LPs as the example input.

Delay in calling LPs (example input)	LPs pay in	Interest	LP profit	IRR	TVPI
No line	$60.00m at day 0	$0	$60.00m	14.87%	2.00x
12 months	$64.50m at month 12	$4.50m	$55.50m	16.79%	1.86x
6 months	$62.25m at month 6	$2.25m	$57.75m	15.70%	1.93x
45 days	$60.55m at day 45	$0.55m	$59.45m	15.06%	1.98x

These are Unmatched Capital’s calculations, in millions of dollars. Without a line the LPs pay $60 million at the start and receive $120 million five years later, so IRR is 2 to the power of one fifth, minus 1, which is 14.87%. With the 12-month line the bank pays the $60 million and the LPs repay it at month 12 with $4.5 million of interest ($60 million times 7.5%). They then wait four years for the same $120 million, so IRR is $120 million divided by $64.5 million, to the power of one quarter, minus 1: 16.79%. TVPI (total value to paid-in capital) is $120 million divided by what the LPs paid in.

The sale price is the same in every row and the LPs’ profit is $4.5 million lower in the 12-month case. An LP that kept the $60 million in cash for that year would have earned some of it back: at MSCI’s 5.5% risk-free assumption, about $3.3 million, so its net cost is $1.2 million, the 200-basis-point spread (Unmatched Capital’s calculations). The reported IRR rises because the clock starts a year later, and only because the line costs less than the fund earns: had the $60 million grown at 5% a year to $76.58 million, the same 12-month line would cut IRR from 5.00% to 4.38% (Unmatched Capital’s calculation). The 45-day row, close to the median MSCI found, adds 0.19 percentage points to IRR and costs $0.55 million.

How large is the IRR effect in real funds, and does it fade?

A 2019 academic working paper estimated that subscription lines raised the IRR-based performance of US buyout funds by 6.1 percentage points, and an MSCI model estimate from Burgiss data is about 100 basis points of current IRR for the median recent buyout or real-estate fund. The two come from different samples.

Albertus and Denes, using confidential data on US buyout funds, found that funds with subscription lines invest less equity relative to fund size and delay capital calls; their working paper says the lines raise IRR-based performance by 6.1 percentage points while multiples-based performance falls slightly (Institute for Private Capital, June 2019). The version posted by the Journal of Financial and Quantitative Analysis reports that general partners use fund debt during fundraising to raise their chances of a follow-on fund, and near the hurdle rate to increase carried interest (JFQA, May 2026).

MSCI’s Patrick Warren and Luis O’Shea estimated, by shifting each fund’s capital calls earlier and recomputing, that the median sub line had inflated current IRRs by approximately 100 basis points for recent buyout and real-estate funds. The effect is largest early in a fund’s life, and venture capital was little affected (MSCI, January 2024). Warren’s earlier work found one-year-old buyout, debt and real-estate funds carrying sub-line balances of 7% to 12% of fund size, extremely front-loaded (MSCI, September 2023). Unmatched Capital’s inference is that the uplift is therefore largest in the interim IRR a manager shows while raising its next fund, which fits the JFQA finding.

MSCI’s 100 basis points and our 0.19 percentage points are not like for like. MSCI’s 45 days is a cash-weighted effective delay, and MSCI moves the same calls earlier, which leaves out the interest: measured that way, our fund gains 0.40 points. MSCI adds that the effect is largest when a delay is a large share of a fund’s life to date.

Cleary Gottlieb, a law firm, wrote in 2017, in a piece published by the American Investment Council, the private equity industry body, that the IRR increase is small over a fund’s life because LPs eventually fund the capital, that the multiple is unaffected, and that fewer, larger calls ease administration for both sides.

any such increase would generally not be material over the life of the fund

The JFQA paper also reports a survey of GPs and LPs suggesting that fund debt eases cash flow management and amplifies agency conflicts (JFQA, May 2026). Callan agrees that the effect fades as the line is paid down, but says the IRR may stay elevated against the same fund without a line (Callan, July 2021). Our position is that Cleary and Callan are both right. A final IRR may differ little, the line may ease cash management, and an LP still reads interim IRRs when it decides to commit to the next fund. The multiple, which the Cleary authors say is unaffected, in fact falls by the interest, as the worked example shows, although an LP that earns a return on the cash it has not yet been called for recovers part of that.

What does the interest on a subscription line cost LPs?

LPs bear the interest, and MSCI estimates it took at least 1% of paid-in capital in a quarter of recent buyout and real-estate funds. For an LP committing USD 100 million, MSCI says upward of USD 1 million of paid-in capital went to servicing sub-line debt in those cases (MSCI, May 2024).

MSCI’s estimate combines its earlier measure of how long GPs delay capital calls with observed risk-free rates and a 200-basis-point spread, and leaves out non-interest fees. Venture capital is the exception because sub lines are rare there. MSCI also notes that relatively large LPs may have credit facilities of their own on comparable terms, can better align cash flows with liquidity needs, and face less incentive to extend repayment timelines.

In our example the 12-month line costs $4.5 million, 6.98% of the $64.5 million the LPs pay in. The 45-day line costs $0.55 million, 0.92% of $60.55 million (Unmatched Capital’s calculations), below the 1% MSCI found in a quarter of funds. The interest is the visible part. ILPA’s annual disclosure list, as Proskauer summarises it, also asks for the upfront fee, the unused fee, additional fees and total fees paid (Proskauer, June 2020), and the updated ILPA Reporting Template, according to Citco, a fund administrator, adds subscription line interest to its fee and expense detail (Citco, March 2026).

the short-term IRR boost comes at the expense of longer-term TVPI

Callan also lists larger capital calls, possible unrelated business income tax for some tax-exempt investors, and distributions delayed by line repayment as further costs.

Can a subscription line change when the GP is paid carried interest?

A subscription line can bring forward the date a fund clears its hurdle, because the preferred return normally accrues from the day an LP pays in, not from the day the bank lends. ILPA’s 2017 guidance, as Dechert, a law firm, summarised it, recommends that the preferred return calculation also take into account when the line is drawn (Dechert, July 2017).

Proskauer reports that managers feared this change would make lines prohibitively costly and that very few have adopted it (Proskauer, 2020). Cleary called it ILPA’s most extreme recommendation for the same reason (Cleary Gottlieb, August 2017).

Take the same fund with an 8% preferred return compounded annually from the date LPs pay in, 20% carried interest and a full catch-up (see GP catch-up). These are example inputs and Unmatched Capital’s calculations. With no line, the LPs must receive $88.16 million (60 times 1.08 to the power of 5) before the GP takes any carry. With the 12-month line, they must receive $87.75 million ($64.5 million times 1.08 to the power of 4), which is $0.41 million less, although they paid $4.5 million more. The line costs 7.5%, below the 8% hurdle, so the hurdle falls.

Sell for $88.00 million and the fund with no line has not cleared its hurdle, so the GP takes no carry and the LPs’ IRR is 7.96%. The fund with the line has cleared it by $0.25 million, which the catch-up pays to the GP, and the LPs’ IRR is 8.00%. The sums are small because 7.5% is close to 8%; a cheaper line widens the gap. The JFQA authors report that managers use fund debt near the hurdle rate to increase carried interest; this arithmetic is one way that could pay.

What does ILPA ask funds to disclose about subscription lines?

ILPA’s 2020 guidance, as Proskauer, a law firm, summarises it, asks funds to report net IRR with and without the line, together with the facility’s size, balance, cost and the average number of days each drawdown was outstanding. The Institutional Limited Partners Association (ILPA), the LP trade body, published its first guidance on subscription lines in June 2017 (ILPA, June 2017), followed by its disclosure guidance on 10 June 2020 (ILPA, June 2020).

The 2017 guide recommended quarterly reports showing net IRR with and without the lines, a written policy on their use, and security limited to investor commitments, according to Dechert (Dechert, July 2017). Proskauer’s summary of the 2020 guidance lists the items below.

Item ILPA recommends	Quarterly report	Annual package
Total size and balance of the facility	Yes	Yes
Each LP’s and the GP’s unfunded commitment financed through the facility ($ and %)	Yes	Yes
Average number of days outstanding of each drawdown	Yes	Yes
Net IRR with and without the facility	Yes	Yes, with the calculation method
Cash flow schedule beside the capital account statement	Yes	Not listed
Lead bank, drawdown limit, maximum days, expiry, renewal option, collateral base	Not listed	Yes
Interest rate, upfront fee, unused fee, additional fees, total fees paid	Not listed	Yes
Current use of proceeds, such as bridging capital calls or accelerating distributions	Not listed	Yes

ILPA’s guidance is a recommendation, not a rule, and Proskauer notes that it makes no specific recommendation on format. Introducing its 2020 follow-on guidance, ILPA said transparency had generally improved since 2017 but that disclosures to LPs still varied in quality and consistency (ILPA, subscription lines resource page). In 2025 ILPA published a Performance Template that it recommends for funds commencing operations on or after 1 January 2026 (Katten, February 2025). Citco, a fund administrator, lists IRR calculations with and without the subscription facility’s impact among its contents, with data capture from Q1 2026 and first delivery in Q1 2027 (Citco, March 2026). The with-and-without item rests on Citco’s summary alone.

Do the rules on subscription lines differ by country?

Subscription lines are mostly governed by contract and by investor guidance, but in the European Union and the UK the rules made under the alternative investment fund managers directive (AIFMD) give them a specific treatment when a fund’s borrowing is measured. The studies above also come from particular samples, so none of them shows whether the IRR effect differs by region.

Albertus and Denes use US buyout funds. MSCI describes its Burgiss sample by strategy and vintage and does not state its regional mix, and Dechert’s US$900 billion is a global estimate whose estimator the page does not name. The ILPA guidance above comes from a body with nearly 600 member institutions, about 60% of them US-based and 40% in Europe, Canada and the rest of the world (ILPA).

Article 6(4) of the AIFMD delegated regulation, Regulation 231/2013, tells managers to exclude borrowing arrangements from the calculation of a fund’s gearing if they are temporary in nature and fully covered by contractual capital commitments from investors (legislation.gov.uk, which publishes the text as retained in UK law; A&O Shearman, below, describes the EU text’s condition the same way). A&O Shearman, a law firm, wrote in May 2024 that the gearing limits AIFMD II sets for loan-originating funds likewise leave out borrowing fully covered by investor commitments, without requiring the lines to be temporary (A&O Shearman, May 2024).

Invest Europe’s reporting glossary has no entry for subscription lines. Its nearest entry is “Bridge Finance”, financing at the fund level secured on LP commitments to temporarily finance investments, which it keeps apart from a separate entry for borrowings over and above LP commitments (Invest Europe). A European fund’s documents may therefore say “bridge facility” for the loan this page calls a subscription line.

In the United States the question arises in advertising. SEC staff said in a February 2024 FAQ under the Marketing Rule that gross and net performance must use the same method, so an adviser that excludes a fund’s subscription facility from gross IRR cannot include it in net IRR, and that presenting only a net IRR that includes the facility’s effect, without comparable performance or appropriate disclosure, could breach the rule’s general prohibitions (SEC Marketing Compliance FAQ). These are staff views, not Commission rules.

The EU test asks whether a line is temporary, and the IRR effect on this page grows with how long each drawdown stays outstanding: in our example 45 days adds 0.19 percentage points to IRR and 12 months adds 1.92. The text read does not say how long counts as temporary, and A&O Shearman says AIFMD II’s gearing limits for loan-originating funds do not specify it. Unmatched Capital’s reading is that the rule decides how a line is counted, not how long it may run, so the figure to ask a European manager for is the one ILPA lists above: the average number of days each drawdown was outstanding.

How is a subscription line different from a NAV loan?

A subscription line is secured on investors’ uncalled commitments, while a net asset value (NAV) loan is secured on the assets the fund already holds. Dechert contrasts the two: a NAV facility’s borrowing base depends on regular valuation of the portfolio, and lenders include non-bank lenders, while a sub line depends on the creditworthiness of the investor base (Dechert, August 2024).

The IRR effect described on this page comes from delaying calls on commitments, which is a feature of the sub line. NAV loans raise a different set of questions, covered under secondaries and liquidity.

What should an LP or an investment committee do with a fund’s reported IRR?

An LP should compare funds on net IRR without the line, read it beside the multiple and the cash profit, and ask what the line cost. ILPA’s June 2020 guidance, as Proskauer summarises it, already asks managers to report net IRR with and without the facility every quarter (Proskauer, 2020). The with-line IRR is the LP’s actual return on its own cash flows.

Before relying on a performance report, ask for five things:

1. Net IRR with and without the line, and the method used to calculate each.
2. Net TVPI and DPI beside the IRR. In our example the IRR went up 1.92 percentage points and the fund’s profit went down $4.5 million.
3. The average number of days each drawdown was outstanding, and the facility’s size as a share of commitments.
4. Total interest and fees paid on the line, and where they appear in the expense reporting.
5. Whether the preferred return runs from the day LPs pay in or the day the line is drawn, and how close the fund is to its hurdle.

During a fundraising, put the same questions to the fund you are being asked to back. The JFQA authors found that managers use fund debt in the period when they are raising a follow-on fund. The LP playbook covers how to judge a fund by the cash it returns. This page is general information, not investment or legal advice.