Subscription Lines Dilemma

Victoria  Ivashina; Terrence  Shu

Case | HBS Case Collection | August 2019

Subscription Lines Dilemma

Abstract

This case follows a fictional managing partner of a private equity firm, as she contemplates whether to utilize subscription lines of credit in her firm’s funds. Subscription lines are revolving lines of credit secured by commitments from a fund’s investors. Private equity firms are increasingly using these lines to boost metrics and profits on their funds, but the benefits to investors are debatable. Because of this, the firm in the case had previously avoided using such lines. However, faced with the growing popularity of the practice in the industry and an increasingly competitive return environment, it is forced to reevaluate this position.

Keywords: Private Equity; Credit; Strategy;

Language: English

Format: Print

5 pages

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Citation:

Ivashina, Victoria, and Terrence Shu. "Subscription Lines Dilemma." Harvard Business School Case 220-025, August 2019.

Examples of successful middle-market private equity investments in emerging markets remain very limited. Among the primary constraints are lack of availability of reasonably priced debt capital, limited exit options for private equity capital, and absence of stable and diversified sources of capital for private equity firms. This case follows the founders of EFM Capital, a private equity firm operating in the Mexican middle market, as they navigate said challenges and deliberate the future of their firm. Students will learn about EFM’s unique business model for integrating acquired companies and will follow the co-founders’ thought processes as they evaluate new opportunities both within Mexico and abroad. This case's simple but rich platform allows students to understand the constraints of the traditional private equity model and discuss challenges of having a professional, systematic approach to private equity investments a market like Mexico.

Teaching Note | HBS Case Collection | April 2020

Oaktree: Pierre Foods Investment

Victoria Ivashina, Michael Harmon, Terrence Shu, Victoria Ivashina, Michael Harmon and Terrence Shu

Teaching Note for HBS No. 219-018. This case is a setting to discuss “loan to own” investment strategy that is often pursued by distressed investors. The aftermath of the 2007 financial crisis left many companies with poor liquidity and limited ability to obtain credit. One of these companies was Pierre Foods, a producer and distributor of processed and precooked protein products that had experienced several years of promising sales growth and held a leading market position. Despite this, 2007 saw Pierre foods adversely affected by a spike in production costs and unsustainably high leverage. This made Pierre Foods an attractive opportunity for Oaktree Capital Management, allowing them to employ its strategy of investing in distressed debt securities with the goal of leading a restructuring during which their debt investment would be converted into a controlling equity stake. The challenge of executing “loan to own” strategy is being able to identify ahead of the restructuring the debt layer that stands to become equity (the so called “fulcrum security”). Overall, this case can be used to understand unique elements of a representative distressed investment. It can also be used as a platform for discussing sources of value and risks associated with distressed investing.

Keywords: distress investing; Investment; Debt Securities; Strategy; Restructuring;

Citation:

Ivashina, Victoria, Michael Harmon, and Terrence Shu. "Oaktree: Pierre Foods Investment." Harvard Business School Teaching Note 220-083, April 2020. View Details

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This case is a setting to discuss “loan to own” investment strategy that is often pursued by distressed investors. The aftermath of the 2007 financial crisis left many companies with poor liquidity and limited ability to obtain credit. One of these companies was Pierre Foods, a producer and distributor of processed and precooked protein products that had experienced several years of promising sales growth and held a leading market position. Despite this, 2007 saw Pierre foods adversely affected by a spike in production costs and unsustainably high leverage. This made Pierre Foods an attractive opportunity for Oaktree Capital Management, allowing them to employ its strategy of investing in distressed debt securities with the goal of leading a restructuring during which their debt investment would be converted into a controlling equity stake. The challenge of executing “loan to own” strategy is being able to identify ahead of the restructuring the debt layer that stands to become equity (the so called “fulcrum security”). Overall, this case can be used to understand unique elements of a representative distressed investment. It can also be used as a platform for discussing sources of value and risks associated with distressed investing.

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Subscription Lines Dilemma

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