Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Family Offices Use Credit Lines on Private Equity Commitments
Transcript
- Lucas: So Luna, a lot of our recent episodes have been about tax strategies and deferred gains. But today I want to talk about something that sits underneath a lot of wealthy families' portfolios, and it's rarely discussed outside of family office circles. Luna: I'm intrigued. What's the quiet workhorse you're pulling out from behind the curtain? Lucas: It's the credit line that sits against private equity commitments. Think about this: a family office commits two hundred million dollars to a private equity fund. They don't hand over a check for two hundred million on day one. Instead, the fund calls capital over the first three to five years as it makes investments. Luna: Right, so the commitment is almost like a promise to fund, but the actual cash outlay is staggered. That sounds like it could create a liquidity puzzle if the calls come at awkward times. Lucas: Exactly. And that's where the subscription credit line comes in. It's essentially a revolving line of credit secured by the unfunded commitment. Instead of selling marketable securities or scrambling for cash when a capital call lands, the family office draws on the line, and the lender knows the PE fund will call the capital anyway, so the repayment is almost self-liquidating. Luna: So the line is backed by the promise to pay, not by actual assets. That's a pretty elegant piece of financial engineering, but it must come with a cost. Lucas: It does, and the pricing has gotten more competitive over the years. For a top-tier family office with a strong balance sheet, you might see a subscription line priced at SOFR plus a hundred and fifty to two hundred basis points. And remember, that's on drawn amounts, not the full commitment, so the effective cost is often modest. Luna: That's a really low cost of capital, especially when you compare it to the returns PE funds are targeting, which are often north of fifteen percent. So the spread is attractive. Lucas: It's a genuine arbitrage, but it's not just about the raw spread. The real genius is that it smooths out the cash flow. If a family office has a portfolio of, say, ten PE commitments, the capital calls can bunch up in any given quarter. Without a line, they might have to sell equities or bonds at an inopportune time just to fund a call. Luna: And that's a classic mistake, right? Selling a liquid asset when the market is down just to meet a capital call. That's how you lock in losses. Lucas: Exactly. So the subscription line acts as a bridge, letting the family keep their investments intact until they can raise cash on better terms. It's a tool that's been around for a while, but it's become more mainstream in the last decade, especially since the 2008 crisis when a lot of families realized how vulnerable they were to liquidity crunches. Luna: Right, and that's a lesson that's still relevant in 2026. Markets have been choppy, and having that flexibility is probably more valuable than ever. Lucas: Absolutely. And that's why I wanted to talk about it today. Before we go deeper, I should mention that our conversations here are ad-free, and that's only possible because a few listeners chip in a couple of dollars a month. If you've gotten something out of these episodes, you can support the show at buy me a coffee dot com slash fexingo. It genuinely makes a difference, even a small amount. Luna: Yeah, and it's a nice way to keep this independent. So, back to subscription lines — what are the key terms that a family office should negotiate? Lucas: The first is the borrowing base. Lenders typically advance a percentage of the unfunded commitment, often seventy to ninety percent. The rest is a buffer for them. So if you commit a hundred million, you might get a line of credit up to eighty million. Luna: That makes sense. The lender wants to be sure they can get repaid even if the fund's calls are delayed or the family's financial situation changes. Lucas: Right. The second key term is the maturity date, which usually aligns with the fund's investment period, typically four to six years. After that, the line is expected to be paid down, not extended indefinitely. Luna: So it's a short-term bridge, not a permanent fixture. What about pricing? I assume it's floating. Lucas: Yes, usually floating, tied to SOFR or the secured overnight financing rate, plus a spread. But there's also an undrawn fee, like a commitment fee, often around fifty basis points on the unused portion. That's a cost that's easy to overlook. Luna: Good point. So the total cost isn't just the interest on drawn amounts; it's also the fee for having the line ready. That's something families need to model carefully. Lucas: Exactly. And then there's the question of whether the line is secured by just the unfunded commitment or also by the family's other assets. Some lines are cross-collateralized, which means the lender has a claim on a broader pool of holdings. That can be a risk if the family over-leverages. Luna: And that brings us to the danger zone. What happens if a family over-borrows and the market drops? I imagine that's a double whammy. Lucas: It can be. Imagine a family has a hundred million in commitments but also uses the line to fund other investments, like real estate or a portfolio company. If the market tanks, the value of their collateral drops, and the lender might demand additional collateral or even call the loan. That's a margin call on a private equity commitment, and it can force a fire sale. Luna: That's the nightmare scenario. So the discipline is to use the line for its intended purpose — bridging capital calls — not as a cheap source of leverage for other bets. Lucas: Exactly. And that's a lesson that was reinforced in 2020, when some family offices that had stretched their lines got caught in the volatility. The ones that stuck to the script, using the line only for capital calls, came through fine. The ones that got creative had to scramble. Luna: So it's a tool that rewards discipline. I've also heard about NAV facilities, which are lines secured by the net asset value of the PE investments themselves. How do those differ? Lucas: That's a great question, and it's a related but distinct instrument. A subscription line is secured by the unfunded commitment, so it's essentially a bridge until the capital is called. A NAV facility, on the other hand, is secured by the actual value of the fund's investments — the underlying portfolio companies. Luna: So a NAV facility is more like a traditional asset-backed loan, where the lender looks at the current value of the assets. That might allow for larger advances, but it's also more dependent on valuations. Lucas: Right. NAV facilities have grown a lot in popularity, especially for older funds where the investment period is over and the GP wants to return capital to LPs without selling assets at a bad time. The family office can borrow against the fund's NAV to make a distribution, effectively deferring a sale. Luna: That seems clever, but it also adds leverage to an already leveraged asset class. PE funds themselves use debt at the portfolio company level, so you're stacking leverage on leverage. Lucas: That's the key risk. And regulators have started to pay attention. In 2026, we're seeing more scrutiny from the Fed and the SEC on how much leverage is embedded in the private markets, especially through NAV facilities. They're worried about systemic risk if valuations correct sharply. Luna: So the tool itself is fine, but its widespread use could be a systemic issue. That's a big-picture angle that most people don't think about when they hear about a family office borrowing. Lucas: Exactly. And that's why I think the smartest family offices are the ones who use these lines conservatively. They model the worst-case scenario: what if the fund calls a large chunk at the same time the markets drop and their other assets fall? Can they still meet the call without selling at a loss? Luna: And that requires a pretty detailed cash flow forecast, not just a back of the envelope estimate. It's about having a real understanding of your liquidity across all your commitments. Lucas: Right. And one practical piece of advice I've heard from family office CFOs is to stagger your PE commitments. Don't put all your eggs in funds that call capital at the same time. Instead, have a mix of vintages, so the calls are spread out naturally. Luna: That makes sense. It's like bond laddering, but for private equity capital calls. Lucas: Exactly. And that reduces the need for a huge line, and it also reduces the risk of bunching. I've also seen families set up a separate entity to hold the borrowing facility, just to keep it off the main balance sheet and make it easier to manage. Luna: That's a structural detail that could be important for liability reasons, too. If the family has multiple business lines, isolating the borrowing might protect other assets. Lucas: Yes, that's a common practice. But it also adds complexity, and it's not necessary for every family. The key is to match the tool to the family's size and sophistication. Luna: So for a listener who's just starting to get into PE, what's the takeaway? Should they run out and set up a subscription line? Lucas: No, not at all. For most investors, the simplest approach is to hold a cash reserve specifically for capital calls. A subscription line is really for families who have significant PE commitments and a complex cash flow situation. If you're just starting, keep it simple. Luna: That's a sober note. It's a sophisticated tool, but not for everyone. Lucas: Right. And the families who use it well treat it as part of a broader liquidity framework, not as a magic lever. They know exactly when they'll draw, what it costs, and how they'll pay it back. That's the discipline that separates the durable wealth from the flashy wealth. Luna: Well said. So if someone wants to see if this is right for them, what's the first step? Lucas: Talk to your banker or your family office CFO. Ask them to run a stress test on your PE commitments. See how a severe market drop would affect your liquidity. If that stress test keeps you up at night, then a subscription line might be a useful tool to smooth the path. If not, maybe you're already in a good place. Luna: That's a practical action item. And maybe a good topic for another episode. But for now, I think we've given our listeners a solid look into the mechanics of borrowing against private equity commitments. Lucas: I hope so. It's one of those quiet tools that can make a big difference when used right, and a big headache when used wrong. Thanks for joining us on The High Net Worth Podcast.