The two limbs of a hybrid fund facility worked across a fund's life, with the year the NAV limb takes over, the year the facility size stops binding, and the stresses.
A hybrid facility's borrowing base is the advance rate on eligible uncalled commitments plus the advance rate on eligible NAV, recomputed every time either changes. On an illustrative $1,000M fund, lending 65 per cent against 90 per cent of uncalled capital and 25 per cent against 85 per cent of NAV, the base falls from 546.7 at year 0 to 215.3 at year 6, because each capital call removes more from one limb than the investment adds to the other. A 300.0 facility is fully available only until year 3.
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 →
Hybrid facilities exist to bridge the gap between a subscription line, which lends against investors' promises, and a NAV facility, which lends against the portfolio. Fund managers like them because one facility serves the whole life of the fund. The catch is that the two limbs do not replace each other one for one, and the borrowing base has a shape over time that the term sheet does not show.
| Input | Value |
|---|---|
| Total commitments | 1,000.0 |
| Eligible share of uncalled commitments (after exclusions and caps) | 90% |
| Advance rate on eligible uncalled | 65% |
| Eligible share of NAV (after excluded and concentrated assets) | 85% |
| Advance rate on eligible NAV | 25% |
| Facility commitment | 300.0 |
| Investment period | 4 years |
Borrowing base = Uncalled × 90% × 65% + NAV × 85% × 25%
= Uncalled × 0.585 + NAV × 0.2125
Availability = MIN(Borrowing base, Facility) − Drawn
In Excel: =MIN(Uncalled*EligU*AdvU + NAV*EligN*AdvN, Facility)
The two effective rates tell the story before any year is computed. A dollar of uncalled capital supports 0.585 of borrowing; once it is called and invested, the same dollar of NAV supports 0.2125. Calling capital always shrinks the base unless the portfolio grows to 2.75 times what was invested, which no portfolio does in its first years.
| Year | Called | Uncalled | NAV | Uncalled limb | NAV limb | Base | Available on 300.0 |
|---|---|---|---|---|---|---|---|
| 0 | 10% | 900.0 | 95.0 | 526.50 | 20.19 | 546.69 | 300.0 |
| 1 | 35% | 650.0 | 360.0 | 380.25 | 76.50 | 456.75 | 300.0 |
| 2 | 55% | 450.0 | 600.0 | 263.25 | 127.50 | 390.75 | 300.0 |
| 3 | 70% | 300.0 | 780.0 | 175.50 | 165.75 | 341.25 | 300.0 |
| 4 | 80% | 200.0 | 820.0 | 117.00 | 174.25 | 291.25 | 291.2 |
| 5 | 85% | 150.0 | 760.0 | 87.75 | 161.50 | 249.25 | 249.3 |
| 6 | 85% | 150.0 | 600.0 | 87.75 | 127.50 | 215.25 | 215.3 |
Three things come out of the table. The NAV limb overtakes the uncalled limb in year 4, when the fund has called 80 per cent and the portfolio is near its peak. The base falls every single year, by 331.4 or 60.6 per cent over six years, even though the NAV more than doubles between years 1 and 3. And the 300.0 facility stops being the binding limit in year 4: from then on, availability is the base, not the commitment.
If the fund drew the full 300.0 in year 3 and kept it outstanding, it would be in deficiency by 8.8 in year 4, 50.7 in year 5 and 84.7 in year 6, without a single asset losing value. A deficiency has to be cured by repayment or, while uncalled capital remains, by a capital call; the arithmetic of that cure is worked in how big a capital call cures a borrowing base deficiency.
| Year | Base case | NAV −20% from year 3 | Uncalled excluded after year 4 | NAV advance 30% |
|---|---|---|---|---|
| 3 | 341.3 | 308.1 | 341.3 | 374.4 |
| 4 | 291.2 | 256.4 | 291.2 | 326.1 |
| 5 | 249.3 | 217.0 | 161.5 | 281.6 |
| 6 | 215.3 | 189.8 | 127.5 | 240.8 |
A 20 per cent fall in NAV costs the base only about 33 in year 3, because the NAV limb carries an effective rate of 0.2125 and the uncalled limb does not move: in proportion to its base, the hybrid is far less exposed to valuations than a pure NAV facility. The more dangerous lever is contractual. Many hybrids cut or remove the advance on uncalled capital after the investment period, when the remaining commitments can be called only for follow-ons, fees and expenses. Excluding it takes year 5 from 249.3 to 161.5. Combine the two stresses and the base is 129.2 in year 5, a shortfall of 170.8 against a fully drawn facility. Negotiating a 30 per cent NAV advance instead of 25 lifts year 5 by only 32.3, to 281.6, which tells a borrower where its negotiating effort is better spent.
Size the facility to the trough, not the peak. A hybrid sized at 300.0 looks conservative against a year 0 base of 546.7. It is the year 4 to 6 base that decides whether the fund can actually use it when the portfolio needs follow-on capital.
The common mistake is to add the two limbs at their best values: the uncalled limb at closing, 526.5, and the NAV limb at its peak, 174.2, for a capacity of 700.8 that never exists at any single date. Uncalled capital and NAV are two states of the same money. The base must be projected year by year from the fund's own call and NAV forecast, and the facility sized against the lowest point that falls inside its term.
The book's borrowing base workbook, which applies exclusions, caps, advance rates and the reserve in order and separates base from availability, is in the free workbook for this case. The subscription line version of the uncalled limb is worked in how to calculate a subscription line borrowing base.
A loan to a fund secured on both its uncalled investor commitments and its portfolio. Early in the life the commitments do the work; later the NAV does. In the worked case the uncalled limb is 526.50 and the NAV limb 20.19 at year 0, and by year 4 the NAV limb, at 174.25, has overtaken the uncalled limb at 117.00.
Because each capital call removes more from the uncalled limb than the resulting investment adds to the NAV limb. A dollar of uncalled capital supports 0.585 of borrowing here, and a dollar of NAV only 0.2125. Calling 100 and investing it at cost takes 58.5 out of the base and adds back 21.25, so the base drops even when nothing is lost.
Lenders often cut or remove the advance on uncalled capital once the fund can call only for follow-ons and expenses. If the uncalled limb is excluded after year 4, the base falls to 161.5 in year 5 and 127.5 in year 6, against 249.3 and 215.3 with it, which can turn a fully drawn 300.0 facility into a large deficiency.
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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