Banking and Treasury Management for Private Equity Funds: Subscription Lines and Cash Management

Private equity funds operate complex banking and treasury operations that extend far beyond basic checking accounts. From establishing multi-jurisdictional banking relationships to structuring subscription credit facilities that can total hundreds of millions of dollars, fund managers must navigate a sophisticated landscape of cash management, regulatory compliance, and strategic financing decisions. The banking infrastructure a fund establishes directly impacts its operational efficiency, its ability to execute transactions quickly, and ultimately its returns to limited partners.

Banking Relationship Establishment

Private equity funds typically establish banking relationships during the fundraising phase or immediately after the initial closing. The general partner selects one or more banks to serve as the fund's primary banking providers, a decision that involves evaluating several factors beyond standard commercial banking criteria.

Large funds with assets under management exceeding $1 billion often work with multiple bulge bracket banks or specialized fund finance institutions. These relationships provide access to subscription credit facilities, capital call management systems, and dedicated relationship teams familiar with fund structures. Mid-market funds managing $250 million to $1 billion might establish relationships with regional banks or boutique fund finance providers that offer more personalized service and competitive pricing. Smaller funds below $250 million often prioritize cost-effectiveness and may work with a single bank that can provide both operating accounts and modest credit facilities.

The selection process typically considers the bank's experience with fund structures, its ability to provide subscription facilities, its operational capabilities for capital call processing, its global reach for funds with international investment strategies, and the competitiveness of its fee structure. Many funds also evaluate whether the bank has expertise in their specific sector focus, as this can facilitate smoother transaction execution when portfolio company financing is required.

Account Structure

Private equity funds establish multiple bank accounts to segregate different types of cash flows and comply with operational and regulatory requirements. The account structure directly reflects the fund's legal and operational framework.

The primary operating account serves as the main repository for unfunded capital commitments that have been called from limited partners. Funds use this account to pay for investments, cover fund expenses, and make distributions. Large funds often maintain operating accounts in multiple currencies to reduce foreign exchange conversion costs when making international investments. A fund investing across Europe and Asia, for instance, might maintain separate EUR and USD operating accounts to minimize currency conversion fees.

Subscription facility accounts operate separately from operating accounts. When a fund draws on its subscription line of credit, the proceeds typically flow into a designated account that is pledged as collateral for the facility. The lender maintains control rights over this account, and fund managers cannot freely transfer funds without adhering to the facility's covenants and draw/repayment procedures.

Distribution accounts serve as temporary holding accounts when the fund makes distributions to limited partners. Some funds establish these accounts to create a clear audit trail for distribution transactions, particularly when distributions involve multiple currencies or complex calculations based on different limited partner share classes.

Expense accounts are maintained by some larger funds to segregate ordinary course operating expenses from investment-related cash flows. This segregation simplifies accounting and makes it easier to track expenses against the fund's management fee budget.

Subscription Credit Facilities

Subscription credit facilities, also called capital call facilities or subscription lines, have become standard tools in private equity fund management. These facilities allow funds to borrow against the unfunded capital commitments of their limited partners, providing immediate liquidity without requiring capital calls.

Funds use subscription facilities for several strategic purposes. They bridge timing gaps between identifying investments and calling capital from limited partners, allowing funds to move quickly on transactions without waiting for capital call notice periods to expire. They fund short-term working capital needs, including organizational expenses, due diligence costs, and broken deal expenses. They also smooth capital call timing, reducing the frequency of capital calls and allowing funds to batch calls, which limited partners generally prefer. Additionally, subscription facilities can enhance internal rates of return by reducing the amount of time that limited partner capital is deployed, though this practice has drawn scrutiny from investors concerned about return inflation.

Subscription facilities are structured as revolving credit agreements secured by the fund's right to call capital from limited partners. The loan documents grant the lender a security interest in the fund's capital call rights, typically including detailed procedures for how the lender can directly call capital from limited partners if the fund defaults. The facility operates similarly to a corporate revolver, with the fund drawing and repaying amounts as needed during the investment period.

Facility sizing typically ranges from 15% to 30% of total limited partner commitments, though this varies based on fund strategy and lender appetite. A $500 million fund might establish a $100 million facility (20% of commitments), while a larger $2 billion fund might secure a $500 million facility (25% of commitments). Growth equity funds that make staged investments over time often maintain larger facilities relative to their commitment base, while buyout funds that deploy capital more quickly might maintain smaller facilities.

Subscription facilities include specific covenants that differ from traditional corporate credit facilities. The most critical covenant is the borrowing base calculation, which limits draws to a percentage of the unfunded commitments from eligible limited partners. Lenders exclude commitments from limited partners who present credit concerns, lack sufficient creditworthiness, or are domiciled in jurisdictions where enforcing capital call rights would be difficult. A facility might exclude commitments from limited partners rated below investment grade or from limited partners in jurisdictions without established legal frameworks for enforcing capital calls.

Other common covenants include restrictions on the fund's ability to excuse limited partners from capital calls, requirements that the fund maintain minimum levels of unfunded commitments relative to the facility size, and restrictions on the purposes for which borrowed funds can be used. Some facilities prohibit using subscription line proceeds to pay general partner management fees or organizational expenses, limiting draws to investment-related purposes.

Pricing for subscription facilities typically consists of an interest rate based on SOFR plus a spread ranging from 150 to 300 basis points, depending on the fund's size, strategy, and the creditworthiness of its limited partner base. Facilities also include unused commitment fees, typically 25 to 50 basis points annually on the undrawn portion of the facility. Large, established funds with institutional-quality limited partners command better pricing, while first-time funds or those with less established investor bases pay higher spreads.

Cash Management Practices

Effective cash management ensures that private equity funds maintain appropriate liquidity for known commitments while maximizing returns on uninvested cash balances. Fund managers must balance these competing objectives while adhering to restrictions in the fund's governing documents.

Funds typically maintain cash reserves based on their near-term capital deployment expectations and their outstanding deal pipeline. A fund in active deployment mode might maintain higher cash balances to ensure it can move quickly on transactions, while a fund nearing the end of its investment period might maintain minimal balances since new investment activity has slowed. Most funds maintain sufficient cash to cover 90 to 180 days of operating expenses, though this varies based on the predictability of the fund's expense base.

Limited partnership agreements typically restrict how funds can invest uninvested cash. These restrictions aim to ensure that the fund maintains liquidity and avoids taking inappropriate risks with capital that limited partners committed for private equity investments, not for treasury management. Common restrictions limit cash investments to bank deposits, money market funds, investment-grade commercial paper, Treasury securities, and other short-term, highly liquid instruments. Some agreements impose maturity restrictions, prohibiting investments with maturities exceeding 90 or 180 days.

Large funds with consistently substantial cash balances sometimes establish sweep arrangements that automatically move excess balances above a target operating level into money market funds or other permitted investments. These arrangements maximize interest income while maintaining necessary operational liquidity. A fund might establish a sweep that maintains $10 million in its operating account and automatically moves excess balances into a money market fund, generating additional basis points of return on cash that would otherwise earn minimal interest.

Treasury Operations

Treasury operations encompass the day-to-day management of fund cash flows, including capital call processing, investment funding, expense payments, and distribution execution. The sophistication of these operations scales with fund size and complexity.

Capital call processing represents one of the most critical treasury functions. Funds must coordinate the timing of capital calls with investment needs, ensure proper notice to limited partners, track incoming wire transfers from potentially hundreds of limited partners, follow up on late payments, and apply default provisions when limited partners fail to fund. Large funds often use specialized fund administration software that automates much of this process, generating capital call notices, tracking responses, and reconciling incoming wires against expected amounts.

Investment funding procedures ensure that acquisition proceeds reach the correct recipients at the correct time. For large buyout transactions, this might involve coordinating multiple wire transfers totaling hundreds of millions of dollars on a specific closing date. Funds establish dual-control procedures requiring multiple authorized signatories to approve outgoing wires above certain thresholds, reducing the risk of fraud or error.

Distribution processing requires calculating each limited partner's distribution entitlement based on the fund's waterfall provisions, preparing distribution notices, executing wire transfers to limited partners, and providing tax reporting information. The complexity increases for funds with multiple share classes, side letters that affect distribution timing, or carry provisions that require making distributions to the general partner alongside limited partner distributions.

Foreign exchange management becomes relevant for funds making international investments or receiving distributions from foreign portfolio companies. Funds typically establish policies for when to hedge currency exposure, though most private equity funds maintain minimal hedging programs since the long-term nature of their investments makes hedging costs prohibitive. Funds might execute spot conversions when funding foreign investments rather than maintaining permanent currency hedges.

KYC/AML Requirements for Fund Accounts

Banks impose extensive know-your-customer and anti-money laundering requirements on private equity funds opening accounts. These requirements reflect regulatory obligations under the Bank Secrecy Act, USA PATRIOT Act, and similar regulations in other jurisdictions.

The account opening process requires the fund to provide its limited partnership agreement and all amendments, certificates of formation and good standing for the fund and general partner entities, lists of authorized signatories with documentation of their authority, beneficial ownership information identifying individuals who own 25% or more of the general partner, and detailed information about the fund's investment strategy and expected transaction patterns. The bank uses this information to establish a customer risk profile that determines the level of ongoing monitoring the account will receive.

Beneficial ownership requirements have become particularly complex for private equity funds. Banks must identify and verify the natural persons who ultimately own or control the fund, looking through corporate structures to identify individuals. For funds with institutional limited partners, this can create verification challenges since the ultimate beneficial owners might be thousands of pension beneficiaries or mutual fund shareholders. Banks typically accept reasonable verification procedures that identify controlling persons at the institutional investor level rather than attempting to identify every underlying beneficiary.

Ongoing monitoring requirements obligate funds to report material changes in their beneficial ownership, investment strategy, or operations. Funds must also respond to periodic reviews where the bank requests updated documentation or information about specific transactions that fell outside expected patterns. A fund that typically makes investments in the United States but suddenly wires funds to an unfamiliar jurisdiction might trigger a review requiring explanation of the transaction's business purpose.

Bank Fee Structures

Private equity funds pay various fees to their banking providers, creating an expense line item that can range from modest amounts for smaller funds to hundreds of thousands of dollars annually for large, complex funds.

Monthly account maintenance fees typically range from $50 to $500 per account, depending on the account type and the bank's pricing structure. Wire transfer fees apply to both incoming and outgoing wires, with outgoing domestic wires typically costing $15 to $35 and outgoing international wires costing $35 to $75. Funds making frequent distributions or capital calls can accumulate substantial wire transfer fees. A fund making quarterly distributions to 200 limited partners pays $3,000 to $7,000 in wire transfer fees per distribution cycle.

Subscription facility fees include upfront arrangement fees, typically 25 to 100 basis points of the total facility commitment, and ongoing agency fees if the facility is syndicated among multiple lenders. A $100 million facility might include a $500,000 arrangement fee at closing and $50,000 in annual agency fees. These fees are typically treated as fund expenses rather than offset against the management fee.

Foreign exchange conversion fees apply when funds convert currencies, typically structured as a spread over the prevailing interbank rate. Banks might charge 25 to 100 basis points depending on the currency pair and transaction size. Funds can negotiate these spreads, particularly for large or frequent conversions.

Some banks charge account analysis fees that calculate a target balance the fund should maintain to offset its activity-based fees. If the fund's average balance falls below this target, the bank charges fees for the difference. Funds typically negotiate to eliminate these provisions or establish very low target balances, since private equity fund accounts often maintain substantial balances that far exceed any reasonable analysis target.

Multi-Bank Relationships

Many private equity funds maintain relationships with multiple banks, diversifying their operational and credit relationships while accessing different institutions' strengths.

Large funds often split their subscription facility among multiple banks, creating a syndicated facility where one bank serves as administrative agent and others serve as participants. This structure allows funds to access larger facility sizes than any single bank would provide, diversifies credit exposure so the fund is not dependent on one lender, and allows funds to maintain relationships with multiple banks that might provide portfolio company financing. A $500 million subscription facility might include three banks each providing $166 million of commitments.

Some funds maintain operating accounts at multiple banks for operational redundancy. If one bank experiences system outages or operational problems, the fund can continue operating through its other banking relationships. This redundancy is particularly valuable for larger funds where inability to execute wire transfers could jeopardize transaction closings.

Geographic diversification drives some multi-bank relationships. Funds with international investment programs might maintain relationships with banks in different regions, each providing local currency accounts and local market expertise. A global fund might maintain relationships with a U.S. bank for dollar-denominated operations, a European bank for euro-denominated operations, and an Asian bank for operations in Asia-Pacific markets.

The complexity of managing multiple bank relationships must be weighed against the benefits. Each additional banking relationship creates additional operational overhead, requires separate account reconciliations and reporting, and involves additional KYC/AML compliance processes. Smaller funds often find that the administrative burden of multiple relationships outweighs the benefits.

Key Takeaways

• Private equity funds establish banking relationships based on the bank's fund finance expertise, subscription facility capabilities, operational infrastructure, and fee competitiveness, with larger funds typically maintaining multiple bank relationships while smaller funds prioritize simplicity
• Fund account structures segregate different cash flows through operating accounts, subscription facility accounts, distribution accounts, and expense accounts, with the complexity scaling based on fund size and international scope
• Subscription credit facilities sized at 15% to 30% of commitments provide liquidity for timing gaps and working capital needs, structured with borrowing base covenants that limit draws to eligible limited partner commitments
• Cash management practices balance maintaining appropriate liquidity for near-term needs with maximizing returns on uninvested cash within the restrictions imposed by limited partnership agreements
• Treasury operations handle capital call processing, investment funding, distribution execution, and foreign exchange management, with sophistication scaling based on fund size and transaction volume
• KYC/AML requirements obligate funds to provide extensive documentation at account opening and report material changes, including beneficial ownership verification that can be complex for funds with institutional investors
• Banking fees include account maintenance, wire transfers, subscription facility arrangement and interest costs, and foreign exchange spreads, totaling amounts that range from modest for small funds to hundreds of thousands annually for large funds
• Multi-bank relationships provide larger subscription facility access, operational redundancy, and geographic diversification, though the administrative complexity must be weighed against these benefits