Has anyone used a capital call line to close a deal?

September 20, 2018

by a searcher from Carnegie Mellon University - Tepper School of Business

Is it worth the fee or should have just waited for investors' funds?

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Reply by a searcher
from The University of Texas at Austin in Dallas, TX, USA

While at Goldman Sachs I helped Private Equity companies with Capital Call Lines, subscription lines. Some of the largest players are Goldman Sachs and Wells Fargo, but all the larger global banks provide these for institutional PE funds. For background, a normal minimum loan size for an institutional line would need to be ~$150mm with an average outstanding of $45mm. The committed fund size of the sponsor would need to be $300mm or greater. Capital Call lines are a standard in many funds now because it allows funds to increase their IRR stats since they can fund, in many cases, the first year of acquisition of a 4 year acquisition period via the line. Since the IRR calculation starts only after investor funds have been called. Using the line allows a fund to get a head start and inflates the IRR calculation, but not the multiple on called capital. This technique is why the largest family offices I met with no longer like blind pool funds. Many regional banks have also provide subscription lines, in DFW area I'm aware of, Frost, Bth, Texas Capital Bank and others providing them to sponsors whose committed fund size of $30mm+. They essentially underwrite the LP credit quality and give you an advance on their ability to fund, Much like an asset based loan and valuing the collateral and A/R. So LPs which have committed funds (pensions, endowments, other PE fund), and large family offices get a higher advance rate than a pool of HNW individuals. For a HWN pool of LPs the lender may want a personal financial statements from each. I'm guess a Mezz fund, or in real estate (hard money lender) not a bank is providing capital funds for a searcher deal, the fees I'm guessing for these types of lenders (vs banks) might be 2-3% of loan size at closing for a fee, 6 month term at 2x interest rate of commercial bank, (15-20% target IRR for hold period for mezz of hard money lender). So if you have make a "cash" offer and get a discount greater than the cost of the funding then, it may be worth funding using a facility like this, but if one of your LP fails to fund, which happens even for sponsor with committed funds, and I'd image more so for searcher. I could see the economics for the search go sideways, quickly.

Reply by an intermediary
from Cornell University in Santa Cruz, CA, USA

As someone on the sell side - having that capability would be valuable in a couple of instances I have seen. One of Search Funds main weaknesses when making an offer is that closing is usually sloooooow compared to a bidder with committed funds.

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