Lenders fund most of the partners' commitment to their own fund. For the partners, it is a leveraged and usually recourse position, and the arithmetic cuts both ways.
A GP commitment loan lends the partners most of each capital call on their own commitment, with interest rolled up and repaid from the GP interest's distributions. It works as leverage: when the fund returns more than the loan rate the partners' IRR rises sharply, and below it the IRR falls faster than the fund's. On an illustrative $20.0m GP commitment with 75 per cent of every call borrowed at 8.00 per cent, a 2.00x fund turns a 14.04 per cent IRR into 22.83 per cent on the partners' own cash; at 1.30x the same structure turns 5.11 per cent into −3.05.
Worked in full in The Fund Finance Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Investors expect the general partner to commit 1 to 2 per cent of the fund, and the partners rarely have that much cash at the stage of their careers when a fund is raised. Banks and specialist lenders fill the gap. The loan is small next to the fund, but the arithmetic for the individual partner is that of a highly levered position, and it is worth computing before signing.
| Input | Value |
|---|---|
| Fund commitments | 1,000 |
| GP commitment, 2.0 per cent | 20.0 |
| Called in equal instalments, years 0 to 4, each | 4.0 |
| Share of each call funded by the loan | 75% |
| Loan interest, compounded and rolled up | 8.00% |
| Fund multiple on the GP commitment | 2.00x |
| Distributions, years 5 to 9, share of total | 10, 20, 25, 25, 20% |
The GP commitment usually bears no management fee or carried interest, so its multiple sits close to the fund's gross return. All distributions on it are swept to the lender until the loan is repaid; the partners keep the rest. Each year the partners put in $1.0m and the loan draws $3.0m.
Loan balancet = balancet−1 × (1 + r) + advance × callt − repaymentt
Repaymentt = min(balance before repayment, distributiont)
Partner cash flowt = distributiont − repaymentt − (1 − advance) × callt
In Excel, one row per year, then =IRR(PartnerFlows) beside =IRR(Distributions-Calls).
| Year | Distribution | Repayment | Loan after | Partner flow |
|---|---|---|---|---|
| 0 | 0.00 | 0.00 | 3.00 | −1.00 |
| 1 | 0.00 | 0.00 | 6.24 | −1.00 |
| 2 | 0.00 | 0.00 | 9.74 | −1.00 |
| 3 | 0.00 | 0.00 | 13.52 | −1.00 |
| 4 | 0.00 | 0.00 | 17.60 | −1.00 |
| 5 | 4.00 | 4.00 | 15.01 | 0.00 |
| 6 | 8.00 | 8.00 | 8.21 | 0.00 |
| 7 | 10.00 | 8.87 | 0.00 | 1.13 |
| 8 | 10.00 | 0.00 | 0.00 | 10.00 |
| 9 | 8.00 | 0.00 | 0.00 | 8.00 |
The loan peaks at $17.60m at the end of the call period, 88 per cent of the commitment, and is cleared in year 7. Interest over its life is $5.87m. Unlevered, the commitment returns $40.0m on $20.0m: a 2.00x multiple and a 14.04 per cent IRR. Levered, the partners put in $5.00m and take out $19.13m: 3.83x and 22.83 per cent. Their profit is $14.13m instead of $20.00m, because the lender earned the difference.
| Fund multiple | Unlevered IRR | Levered IRR | Partners receive | Interest | Loan unpaid |
|---|---|---|---|---|---|
| 1.0x | 0.00% | n/a | 0.00 | 7.87 | 2.87 |
| 1.3x | 5.11% | −3.05% | 4.03 | 6.97 | 0.00 |
| 1.6x | 9.33% | 11.85% | 10.59 | 6.41 | 0.00 |
| 2.0x | 14.04% | 22.83% | 19.13 | 5.87 | 0.00 |
| 2.5x | 18.94% | 32.52% | 29.46 | 5.54 | 0.00 |
The crossover is at a fund multiple of 1.500, where the commitment's own IRR equals the 8.00 per cent loan rate and both IRRs are 8.00 per cent. Below 1.342 the partners do not get their own $5.00m back. At 1.0x they receive nothing, and the loan is still owed $2.87m; if the facility has recourse to the partners, as these loans usually do, their loss is $7.87m on a fund that returned its capital.
The advance rate is the main lever. At 50 per cent the partners put in $10.0m and earn 17.37 per cent at 2.00x; at 90 per cent they put in $2.0m and earn 33.71 per cent, but at 1.3x they receive nothing and still owe $1.14m. A cheaper rate helps less than it seems: 6 per cent instead of 8.00 lifts the base IRR only to 24.91 per cent.
Comparing the loan rate with the fund's net return to investors. The relevant return is the commitment's own, usually free of fees and carry and therefore higher, and the relevant risk is the downside table above, where the partner is a leveraged, often recourse, borrower on an illiquid position. The second mistake is ignoring what the structure does to alignment: investors who look through to how much of the GP commitment is the partners' own cash will see $5.00m, not $20.0m. The management company's own borrowing capacity is a separate calculation, set out in how much a GP can borrow against its management fees.
A GP commitment loan is worth having when the fund beats the loan rate, here a 1.500 multiple, and costly below it. Model the loan year by year, sweep the distributions, and read the levered IRR beside the unlevered one and the recourse exposure at 1.0x. The free workbooks for this book run the same discipline on facilities at fund level, from borrowing base to NAV loan coverage.
A loan to the partners of a fund manager, or to their investing vehicle, that funds part of each capital call on the GP's commitment to its own fund. It is repaid from the distributions on that commitment and is often secured on the GP interest with recourse to the partners. On an illustrative $20.0m commitment, a 75 per cent advance leaves the partners funding $5.00m themselves.
When the commitment returns less than the loan rate. With 75 per cent of calls borrowed at 8.00 per cent, the crossover is a 1.500 fund multiple, an 8.00 per cent IRR. At 1.3x the partners' IRR is -3.05 per cent against 5.11 unlevered, and at 1.0x they receive nothing and still owe $2.87m.
It depends on how fast the fund distributes, because interest rolls up until distributions repay the loan. On an illustrative $20.0m commitment with $15.0m drawn over five years at 8.00 per cent, the loan peaks at $17.60m and costs $5.87m of interest at a 2.00x fund, rising to $6.97m at 1.3x as repayment slows.
This article is one calculation from The Fund Finance Professional. 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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