Subscription Credit Lines and IRR Distortion

A private-equity fund doesn't wait for an investor's wire transfer to close a deal. Instead it borrows against investors' unfunded commitments through a subscription credit line — a short-term loan from a bank, repaid within months once the fund actually calls the cash. This delays the moment investor money is deemed "invested," and because IRR is measured from the date cash actually leaves an investor's account, that delay mechanically boosts the reported return.

The distortion is purely about timing. If a fund draws a credit line for six months instead of calling capital immediately, and returns the money a year later, the same dollars are now earning a return over a shorter measured period — so the annualized IRR looks higher, even though the total dollars gained are identical. A fund that returns $130 on $100 called immediately over three years has a lower IRR than the same $30 gain earned over a period that starts two months later, purely because IRR compounds over less time.

This is why institutional investors increasingly ask for two IRR figures: one calculated from the date capital was called (the standard, credit-line-flattered number) and one calculated as if capital had been called on day one of the fund, ignoring the credit line entirely. The gap between the two is sometimes called the "IRR uplift," and it can run several percentage points for funds that lean heavily on subscription lines — a difference that matters enormously when funds are ranked and compensated on IRR alone.