Equity line interest Rates

Interest on capital lines Interest rates

The use of subscription credit facilities by venture capital funds as a means of investment leveraging Underwriting loan facility or line of sight interest are generally a revolving facility backed by investor equity covenants. The interest rates on the underwriting line are often comparable to those for first mortgage credits. Historically, closed-end fund subscriptions have been used exclusively as bridging credits by retail equity managers to meet investor requirements and to offer greater agility to transact business on demand at short notice and faster than the fund was able to draw down investor equity - the loan would be paid back with investor-returned equity, usually within a few week.

A number of hedge fund companies are now allegedly using underwriting facilities for longer-term credit. The use of drawing facilities in this way can lead to an increased carry interest on the part of the sponsors, as in many cases it is only when they actually pay money into the mutual Fund that an investor will achieve a preferential yield. Moreover, it allows the investor to take up the low interest rates on these credits (compared to the options in a traditional OBO such as uncovered preference principal or junior debt for the basic investment) - in some cases such credits may be similar to semi-permanent principal in the asset allocation pattern.

However, the policy may be disputed by funds because during the term of the subscribed credit, funds are "at risk" for committing principal but receive no repayment for their obligation as such. Investor and regulator alike are beginning to concentrate more on practical issues. The investor begins to ask when the preferential rate of yield will occur when underwriting line facility is used and whether the investor intends to use underwriting line facility as more bridge money for investment portfolios.

However, it is likely that, on the basis of the SEC's general principals, an emphasis will be placed on the appropriateness of the risks, expenses and implications of the practices and conflicts of interest managements made available to shareholders. PWF sponsor (s) should check their funds information on the use of subscriptions in order to make sure that the intended use, expenses and effects of subscriptions are properly communicated to the investor.

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