The static ratio divides liquidity by unfunded commitments and stops. The test that matters adds the calls, the redemptions and the distributions a bad year brings.
An evergreen fund's unfunded commitment coverage should be measured as the next 12 months' sources of cash divided by its uses: liquid assets, available facility, expected distributions and subscriptions, against expected capital calls plus redemptions. An illustrative 1,000 fund with 300 of unfunded commitments looks thin at 0.90x on the static ratio, is comfortable at 2.35x in a normal year, and is 0.96x, 12.2 short, in a stress year with redemptions at the cap.
Worked in full in The Evergreen Fund Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A semi-liquid private equity fund that commits to primaries or buys secondaries with undrawn commitments carries a promise to pay that it cannot defer. Its investors, meanwhile, can ask for their money back every quarter. The unfunded commitment coverage ratio is how a manager, a board or a distributor checks that both promises can be kept at once. It is usually reported as a single static figure, and the static figure answers the wrong question.
| Balance sheet item | Value |
|---|---|
| Net asset value | 1,000 |
| Private portfolio: funds, secondaries, co-investments | 880 |
| Cash | 40 |
| Liquid credit, saleable within a quarter | 80 |
| Undrawn credit facility | 150 |
| Unfunded commitments to underlying funds | 300 |
| Assumption | Base year | Stress year |
|---|---|---|
| Capital called, % of unfunded | 35% | 45% |
| Distributions, % of private portfolio | 12% | 6% |
| Redemptions, % of NAV | 8% | 20% |
| New subscriptions | 60 | 0 |
The stress year is the one evergreen investors fear: distributions halve because exits dry up, underlying managers call faster to fund their own opportunities, subscriptions stop, and redemption requests reach the 5 per cent quarterly cap every quarter, taken here as 20 per cent of opening NAV. That is slightly conservative: each quarter's 5 per cent applies to a NAV already reduced by the previous payments. Those conditions tend to arrive together, which is the point of testing them together.
Static coverage = (liquid assets + undrawn facility) ÷ unfunded commitments = (120 + 150) ÷ 300 = 0.90x
Without the facility it is 0.40x. Neither figure says much. It compares a stock of liquidity with commitments that will be called over several years, and leaves out the two flows that decide the outcome: distributions coming in and redemptions going out.
Coverage = (liquid assets + available facility + distributions + subscriptions) ÷ (capital calls + redemptions)
Base: (120 + 150 + 105.6 + 60) ÷ (105.0 + 80.0) = 435.6 ÷ 185.0 = 2.35x
Stress: (120 + 150 + 52.8 + 0) ÷ (135.0 + 200.0) = 322.8 ÷ 335.0 = 0.96x
In Excel, with the sources in B2:B5 and the uses in B6:B7: =SUM(B2:B5)/SUM(B6:B7). The gap, sources minus uses, is the more useful number for a board: 12.2 short in the stress year.
| Scenario | Sources | Uses | Coverage | Gap |
|---|---|---|---|---|
| Base year | 435.6 | 185.0 | 2.35x | 250.6 |
| Stress year | 322.8 | 335.0 | 0.96x | -12.2 |
| Stress, facility cut to 100 | 272.8 | 335.0 | 0.81x | -62.2 |
| Stress, no distributions | 270.0 | 335.0 | 0.81x | -65.0 |
Redemptions, not capital calls, are the largest use in the stress year: 200.0 against 135.0. That is the difference between an evergreen fund and a closed-end fund of funds, which can be overcommitted on the assumption that its own investors cannot leave. The facility line is fragile too: facilities to evergreen funds usually lend against NAV, so the borrowing base can shrink in exactly the year it is needed, and a drawn facility only moves the shortfall into the following year unless distributions repay it.
Maximum unfunded at 1.00x = (liquid + facility + distributions + subscriptions − redemptions) ÷ call rate = (120 + 150 + 52.8 + 0 − 200) ÷ 45% = 272.9
That is 27.3 per cent of NAV. At 300 the fund is 27.1 over its stress capacity.
| Unfunded commitments | Coverage | Gap |
|---|---|---|
| 200 | 1.11x | 32.8 |
| 250 | 1.03x | 10.3 |
| 300 | 0.96x | -12.2 |
| 350 | 0.90x | -34.7 |
The remedies cost money. Holding enough extra liquidity to reach 1.20x in the stress year takes 79.2 more in the sleeve, about 5.94 a year, 59 basis points of NAV, if the sleeve earns 7.5 points less than the portfolio. The alternatives are slowing new commitments, selling secondaries, or relying on the gate, which is the tool that protects remaining investors but is the one the fund's distributors least want used. How the sleeve itself is sized for redemptions alone is in how big an evergreen fund's liquidity sleeve should be.
The 20 per cent redemption figure assumes the fund pays every request up to the cap. If requests exceed the cap, the gate prorates them and uses stay at 200.0; the stress is in honouring the cap, not in what lies beyond it.
Reporting the static ratio and calling 0.90x prudent because commitments "will not all be called at once". That is true, and it ignores the other side: the redemptions the static ratio leaves out are larger than the calls it worries about. The second mistake is counting the facility at its headline size and distributions at their base-year rate in a stress test, which is how the 0.96x becomes 0.81x the first time the assumptions are challenged.
Measure coverage as 12-month sources over uses, with redemptions at the cap, distributions halved and the facility at its stressed availability, and solve for the unfunded commitments the fund can carry: here 272.9 against the 300 it has. The Evergreen Fund Handbook covers the design, liquidity and valuation of semi-liquid private markets funds, and the free workbook and blank model set for the book lets you rerun the liquidity side of this test on your own fund.
At least 1.00x in a stress year, measured as sources over uses including redemptions at the cap; many managers aim higher to leave room for error. In the illustrative case reaching 1.20x would take 79.2 more of liquidity, costing about 59 basis points of NAV a year at a 7.5 point return gap between the sleeve and the portfolio.
Yes, but at the amount actually available in a stress, not the headline commitment. Facilities to evergreen funds usually have a borrowing base tied to NAV, so the room shrinks when values fall. In the illustrative case cutting availability from 150 to 100 takes stress coverage from 0.96x to 0.81x and the shortfall from 12.2 to 62.2.
Solve the stress test for the commitment level at which coverage is exactly 1.00x. With 120 of liquid assets, a 150 facility, 52.8 of stressed distributions, 200 of redemptions and 45 per cent of unfunded commitments called in the year, the illustrative fund can carry 272.9, so its 300 is 27.1 too much.
This article is one calculation from The Evergreen Fund Handbook. 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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