Optimization of Subscription Lines of Credit in Private Equity : An extensive analysis containing several Investment-, Bridge Facility- and Installment Strategies using Monte Carlo Simulations

Abstract: In recent years the use of subscription lines of credit has increased exponentially, from $86.1 millions (2014) to $5.3 billions (2018). The rapid growth of the phe- nomenon of private equity funds using subscription lines of credit when acquiring companies (instead of directly making capital drawdowns from investors), has poor academic coverage. The phenomenon has been claimed by previous research to be a return manipulation technique that only benefits the general partner of the fund. The aim with this research is to increase transparency and to create knowledge about the impact and effects of using subscription lines of credit for both parties involved in a private equity deal. An extensive model is built based on the formula of a Geometric Brownian Motion, different subscription lines of credit strategies are evaluated by the performance of the fund and the returns distributed to each party. This in order to optimize the usage for both parties involved in a private equity fund.  The main result of this thesis is that private equity funds can achieve higher perfor- mance and increase the actual return distributed to both the limited partners and the general partner by using subscription lines of credit. These results go beyond previous research stating that using subscription lines of credit will increase the per- formance in terms of the measure Internal Rate of Return, without increasing the actual return distributed to the limited partners. Through this research strategies have been found that yield higher performance in terms of a several performance measures and at the same time increase the actual return made compared to the case of not using subscription lines of credit.