The reported NAV of an LP interest is net of the fund's borrowing against commitments, and the buyer will repay it. Price the property, not the net figure.
A drawn subscription line sits inside the reported NAV as a liability that the buyer will repay through capital calls, so the discount has to be struck on NAV gross of the line, with the line and its interest then deducted from the price. On an illustrative interest with £46,000,000 of underlying property value and £6,000,000 of line drawn, a 12 per cent economic discount means paying £34,300,000 for a reported NAV of £40,000,000, a headline discount of 14.25 per cent. Applying 12 per cent to the reported NAV instead overpays by £900,000.
Worked in full in The Real Estate Secondaries Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Real estate funds use subscription lines to close acquisitions before calling capital, and many carry a drawn balance across quarter ends. The reported NAV of an LP interest is then net of the LP's share of that borrowing, while the matching capital call has not yet happened and sits in the unfunded commitment. A buyer who takes over the interest takes over the obligation to meet that call. Nothing about the property changes; the headline discount does.
| Input | Value |
|---|---|
| Interest's share of property value, net of asset-level debt | £46,000,000 |
| Interest's share of the subscription line drawn | £6,000,000 |
| Reported NAV of the interest | £40,000,000 |
| Line interest rate, all in | 6.0% |
| Months until the fund calls capital to repay the line | 6 |
| Discount the buyer requires on the underlying property value | 12% |
| Growth in property value, a year / years to realisation | 4% / 4 |
Any other unfunded commitment is left out: it is the same in both versions of the fund, and its treatment is worked separately in how unfunded commitments change a secondary price.
Compare the same fund in two states. In fund A the last acquisition was paid for with called capital. In fund B it was paid for with the line, and the call is six months away. The buyer ends up owning the same share of the same buildings either way.
Economic price = (1 − discount) × property value = 88% × 46,000,000 = 40,480,000
Interest until repayment = 6,000,000 × 6.0% × 6 / 12 = 180,000
Price with the line drawn = economic price − line − interest until repayment = 40,480,000 − 6,000,000 − 180,000 = 34,300,000
Headline discount = 1 − price / reported NAV = 1 − 34,300,000 / 40,000,000 = 14.25%
| Line | Fund A, called | Fund B, line drawn |
|---|---|---|
| Reported NAV, £ | 46,000,000 | 40,000,000 |
| Price paid at closing, £ | 40,480,000 | 34,300,000 |
| Capital call to repay the line, with interest, £ | 0 | 6,180,000 |
| Total paid by the buyer, £ | 40,480,000 | 40,480,000 |
| Price as a share of reported NAV | 88.00% | 85.75% |
The two prices buy the same thing for the same total outlay. Quoted as a discount to NAV they look 2.25 points apart, which matters when a seller's board has been given a discount limit, or when a buyer's committee compares bids across funds.
The property is worth £53,813,494 at realisation after four years of 4 per cent growth. Both versions return 1.33 times the money paid. The IRR differs slightly, 7.38 per cent in fund A and 7.52 per cent in fund B, because in fund B the buyer pays £6,180,000 six months later. The line's 6.0 per cent cost is below the buyer's return, so deferring the payment flatters the IRR a little without changing the multiple, which is the same effect on the fund's own reported IRR set out in what a subscription line actually does to the IRR.
| Line drawn, £ | Share of property value | Months to repayment | Reported NAV, £ | Correct price, £ | Headline discount | Naive overpayment, £ |
|---|---|---|---|---|---|---|
| 0 | 0.0% | 6 | 46,000,000 | 40,480,000 | 12.00% | 0 |
| 3,000,000 | 6.5% | 6 | 43,000,000 | 37,390,000 | 13.05% | 450,000 |
| 6,000,000 | 13.0% | 6 | 40,000,000 | 34,300,000 | 14.25% | 900,000 |
| 6,000,000 | 13.0% | 12 | 40,000,000 | 34,120,000 | 14.70% | 1,080,000 |
| 10,000,000 | 21.7% | 6 | 36,000,000 | 30,180,000 | 16.17% | 1,500,000 |
| 15,000,000 | 32.6% | 12 | 31,000,000 | 24,580,000 | 20.71% | 2,700,000 |
The headline discount rises with the line because the same pounds of discount are divided by a smaller reported NAV. A line left drawn for a year, which some real estate funds now do as a quasi-permanent facility, adds a full year of interest that the reported NAV has not yet borne.
Applying the target discount to the reported NAV. At 88 per cent of £40,000,000 the buyer pays £35,200,000, then meets the £6,180,000 call, for a total of £41,380,000. The overpayment of £900,000 is the discount that should have been earned on the line, 12 per cent of £6,000,000 or £720,000, plus the £180,000 of interest still to accrue. The buyer's true discount on the property falls to 10.04 per cent, its multiple to 1.30 and its IRR to 6.92 per cent.
On the asset tape, ask for the line balance by LP at the reference date, the expected call date and the line's margin and fees. If the line is secured on the uncalled commitments, the transfer agreement should also confirm that the buyer, not the seller, meets the repayment call, which is what the price assumes.
Gross the NAV up for the drawn line, apply the discount to the property, and take the line and its future interest off the price. Here that turns a 12 per cent economic discount into a 14.25 per cent headline one on the same deal. The discount actually paid, worked down from the reported NAV, is in the free workbook for this case.
Yes. The drawn balance is a liability of the fund and reduces NAV, while the capital that will repay it is still uncalled. In the illustrative case £46,000,000 of property and £6,000,000 of line give a reported NAV of £40,000,000, and the buyer of the interest must meet a £6,180,000 call, including interest, six months after closing.
Because the same discount in pounds is divided by a smaller, net NAV. A 12 per cent discount on £46,000,000 of property is £5,520,000; set against a £40,000,000 reported NAV, after deducting the line's £180,000 of future interest, it reads as 14.25 per cent. With £15,000,000 drawn for a year it reads as 20.71 per cent.
Slightly, if the line costs less than the buyer's return, because part of the price is paid later. In the illustrative case the same economic price returns 7.38% when the fund has called capital and 7.52% when the buyer repays the line six months after closing. The multiple is 1.33 in both.
This article is one calculation from The Real Estate Secondaries Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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