A subscription facility sized from the deal pipeline and the capital call cadence, with the stress case of two large deals closing in the same quarter.
Size a subscription line to the largest balance the fund will carry between two capital calls, plus a buffer, not to a percentage of commitments. For an illustrative 1,500 million buyout fund deploying 670 million in its busiest year and calling capital quarterly, the peak is 194.5 million and the line should be about 214.0 million, 14.3 per cent of commitments. Call semi-annually and the same deals need 378.4 million; call monthly and 155.7 million is enough.
Worked in full in The Fund Finance Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The facility size is set once, at closing, and it is often set by convention: a round share of commitments that the lender is comfortable with, commonly somewhere around 10 to 25 per cent. The real constraint is operational. The line bridges deals until the next capital call settles, so the size it needs is the sum of what closes between calls, and that depends on two things the CFO controls, the call cadence and how lumpy the deal schedule is allowed to be.
| Input | Value |
|---|---|
| Commitments | 1,500 |
| Deals closing in the year (months 1 to 12) | 60, 0, 85, 40, 120, 30, 0, 95, 55, 0, 140, 45 |
| Total deals in the year | 670 |
| Fees and expenses drawn on the line, a month | 1.5 |
| Buffer over the projected peak | 10% |
Every deal and every month's fees are drawn on the line. At the end of each call period the fund calls capital for the whole balance and repays the line when the call settles, before the next month's deals. In total the fund calls 688 million in the year, 45.9 per cent of commitments.
Balancem = balancem−1 + dealsm + feesm, reset to zero after each call
In Excel, with deals in column B and a call flag (1 in a call month) in column C: =IF(C2=1,0,D2)+B3+$F$1 in D3, carried down, where F1 holds the monthly fees. Column D is the balance before each repayment, and its maximum is the peak.
| Quarter | Month 1 | Month 2 | Month 3: call |
|---|---|---|---|
| Q1 | 61.5 | 63.0 | 149.5 |
| Q2 | 41.5 | 163.0 | 194.5 |
| Q3 | 1.5 | 98.0 | 154.5 |
| Q4 | 1.5 | 143.0 | 189.5 |
Facility = peak balance × (1 + buffer) = 194.5 × 1.10 = 214.0, or 14.3% of commitments
The average month-end balance is 105.1, so the line is 49 per cent used on average. The buffer covers deals that close earlier or larger than planned, a currency move on a non-base-currency deal, and a call that settles late because an investor pays late.
| Calls a year | Peak balance | Average drawn | Facility with 10% buffer | Share of commitments |
|---|---|---|---|---|
| 12, monthly | 141.5 | 57.3 | 155.7 | 10.4% |
| 4, quarterly | 194.5 | 105.1 | 214.0 | 14.3% |
| 2, semi-annual | 344.0 | 181.1 | 378.4 | 25.2% |
| 1, annual | 688.0 | 353.1 | 756.8 | 50.5% |
The size scales almost with the period between calls, and so does the IRR effect investors are increasingly asked to look past. Few lenders will commit half of a fund's commitments, and facility terms commonly limit how long each advance may stay outstanding or require periodic clean-downs, while ILPA guidance asks managers to disclose facility size and use to their investors, so a fund that wants to call once a year is not really asking a sizing question: it is asking to use the line as leverage. Under quarterly calls the size follows from deal flow. Under monthly calls the line barely needs to exceed the largest single deal, here 140 million.
Deal timing is not in the fund's control. Move the 140 million deal from month 11 to month 6, into the same quarter as the 120 million deal, and the second quarter needs 334.5 million. The 214.0 million line falls 120.5 million short, and the fund has to issue an unscheduled call in the middle of the quarter, with the notice period that requires, at exactly the moment two signings need cash.
Covering that case means a line of 368.0 million, 24.5 per cent of commitments. Whether it is worth it is a price question. At an illustrative 35 basis point commitment fee on the undrawn amount, the quarterly-sized line costs 0.38 million a year in commitment fees; the stress-sized line costs 0.92 million, 0.54 million more. Against that, an emergency call with ten business days of notice can cost a signed deal. Most funds settle in between: size to the two largest deals in the pipeline closing in one quarter, and keep an ad hoc call in reserve.
Sizing on the year's total deployment or on a market rule of thumb, rather than on the balance between calls. The year's 670 million of deals say nothing about the line on their own: spread evenly, quarterly calls would need about a quarter of it; bunched, almost half. The second mistake is forgetting fees and expenses drawn on the line between calls, 1.5 million a month here, which are small individually but accumulate when calls are infrequent. The pricing of the headroom is worked in the all-in cost of a subscription line, and the collateral that must support the size in the borrowing base calculation.
Project the balance between calls from the deal pipeline, take the peak, add a buffer: 214.0 million here under quarterly calls, against 378.4 million semi-annually. Then decide, as a priced choice, whether to cover two large deals in one quarter. The Fund Finance Professional treats the borrowing base and availability as separate questions, and the free workbooks for the book show how much of a base a facility actually uses.
Whatever the peak balance between capital calls requires; the percentage is an output. In the illustrative fund, quarterly calls on a 670 million deployment year need 214.0 million, 14.3 per cent of 1,500 million of commitments, while semi-annual calls need 25.2 per cent and monthly calls 10.4 per cent.
Yes, almost in proportion. Moving from quarterly to semi-annual calls raises the peak balance in the example from 194.5 to 344.0 million and the facility from 214.0 to 378.4 million. Annual calls would need 756.8 million, which is leverage rather than a bridge.
The fund must call capital early, with the notice period its LPA requires. If two deals of 120 and 140 million close in the same quarter, the illustrative quarterly-sized 214.0 million line is 120.5 million short; covering that case needs 368.0 million, costing about 0.54 million a year more in commitment fees at 35 basis points.
This article is one calculation from The Fund Finance Professional. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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