Subscription Lines Explained: How PE Funds Borrow on a Promise

Fund finance explained for fund tax preparers: how a private equity fund raises its money, the subscription lines and NAV loans it borrows on, what that does to IRR and the manager's carry, and the tax side on the K-1. Part 2 of our private equity series. New to PE funds? Start with Part 1: "Private Equity Explained: How $40 Becomes $70"    • Private Equity Explained: How $40 Becomes $70   It opens with Silicon Valley Bank, where about 60% of the loans were credit lines to venture and private equity funds, then walks through fundraising, closes, equalization and side letters, capital calls, the sub line and its borrowing base, a worked IRR example ($100 in, $150 out, 14.5% vs 18.4%), the 8% hurdle, NAV loans and NAV-funded distributions, and why it matters for investment interest, UBTI and every K-1. Related terms: subscription line, capital call facility, NAV facility, borrowing base, ILPA, DPI. Time Index: 00:00 The SVB Story 01:04 Where Part 1 Left Off 01:26 Fundraising 02:06 Closes and Side Letters 03:05 Why Funds Borrow 03:24 The Sub Line 04:09 $360M From $0 05:12 What It Does to IRR 06:21 The Hurdle and Carry 07:28 Is It Risky? 08:00 NAV Loans 09:10 A $100M Payout 09:57 Hybrids and GP Loans 10:17 The Tax Side 11:26 Recap Read more: https://us-taxdesk.com/glossary/priva... UBTI, in our glossary: https://us-taxdesk.com/glossary/ubti Carried interest, in our glossary: https://us-taxdesk.com/glossary/carri... The full US fund tax glossary: https://us-taxdesk.com/glossary Previous: Private Equity Explained: How $40 Becomes $70    • Private Equity Explained: How $40 Becomes $70   Next in the series: The Loan Making Wall Street Investors Furious    • NAV Loans Explained: The Loan Making Wall ...   Playlist: Tax Talk Decoded: US Fund Tax Explained    • Tax Talk Decoded: US Fund Tax Explained   Also in: Private Equity and Fund Tax Explained    • Private Equity and Fund Tax Explained   Sources Federal Reserve, memorandum on Silicon Valley Bank recession readiness (1 Dec 2022): https://www.federalreserve.gov/superv... Bloomberg Law, "SVB Depositors, Investors Tried to Pull $42 Billion Thursday" (10 Mar 2023): https://news.bloomberglaw.com/banking... ILPA, Subscription Lines of Credit and Alignment of Interests (June 2017): https://ilpa.org/wp-content/uploads/2... ILPA, Guidance on Disclosures Related to Subscription Lines of Credit (June 2020): https://ilpa.org/wp-content/uploads/2... Proskauer, ILPA guidance on NAV facilities (July 2024): https://www.proskauer.com/alert/ilpa-... IRS, Partner's Instructions for Schedule K-1 (Form 1065), box 13 code H: https://www.irs.gov/pub/irs-pdf/i1065... IRC § 163(d) (investment interest) and § 514 (debt-financed income) Educational content only, not tax, legal or investment advice. Talk to a CPA or tax attorney about your own situation. Free glossary, plain-English explainers and in-depth articles on US fund tax: https://us-taxdesk.com Get new explainers by email: subscribe at https://us-taxdesk.com Found this useful? Buy us a coffee: https://ko-fi.com/ustaxdesk Follow us on X: https://x.com/US_TaxDesk Subscribe to US Tax Desk:    / @us-taxdesk   US Tax Desk explains US fund tax for professionals in private equity, private credit and real estate. Tax Talk Decoded is our series of animated explainers on the terms you meet at work. Music: It's Getting Late, My Love by Trio Leo (Epidemic Sound) #USTaxDesk #FundTax #PrivateEquity