The fund's balance sheet shows one rung of the debt ladder. Rebuilding the rest from the schedule of investments, and the check that proves it complete.
Add the fund's own net borrowings to its ownership share of each portfolio company's net debt, then divide by the fund's share of enterprise value or EBITDA. An illustrative buyout fund that reports borrowings of 13.8 per cent of its 400.0 NAV carries 494.0 of look-through net debt: 1.24 for every 1 of NAV, 55.3 per cent of enterprise value and 5.72x EBITDA. Nine-tenths of it never appears on the fund's balance sheet.
Worked in full in How to Read a Private Fund's Financial Statements by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A private equity fund's statement of assets and liabilities shows only the debt the fund itself has borrowed: a subscription line, perhaps a NAV facility. The leverage that drives its returns, and its risk, sits one level down, inside the companies it owns, and is netted away in the fair value of each investment. To see it, rebuild the ladder from the schedule of investments up.
| Holding | Ownership | Fair value to fund | Net debt (100%) | EBITDA (100%) |
|---|---|---|---|---|
| Kestrel | 100% | 150.0 | 210.0 | 36.0 |
| Lapwing | 75% | 120.0 | 120.0 | 28.0 |
| Merlin | 60% | 90.0 | 150.0 | 25.0 |
| Nightjar | 90% | 90.0 | 60.0 | 16.0 |
| Investments at fair value | 450.0 |
The fund also holds 5.0 of cash and has drawn 25.0 on its subscription line and 30.0 on a NAV facility, so its net assets are 450.0 + 5.0 − 25.0 − 30.0 = 400.0. The reported measure most investors see is borrowings over NAV: 55.0 ÷ 400.0 = 13.8 per cent.
Step 1: rebuild each company's enterprise value. Gross the fund's fair value up to 100 per cent of the equity and add net debt. Lapwing: 120.0 ÷ 0.75 = 160.0 of equity, plus 120.0 of net debt, gives 280.0 of EV.
Step 2: take the fund's share of EV, net debt and EBITDA. Multiply each by ownership. Lapwing: 210.0 of EV, 90.0 of net debt, 21.0 of EBITDA.
| Holding | EV (100%) | Net debt / EBITDA | Net debt / EV | Share of EV | Share of net debt | Share of EBITDA |
|---|---|---|---|---|---|---|
| Kestrel | 360.0 | 5.8x | 58.3% | 360.0 | 210.0 | 36.0 |
| Lapwing | 280.0 | 4.3x | 42.9% | 210.0 | 90.0 | 21.0 |
| Merlin | 300.0 | 6.0x | 50.0% | 180.0 | 90.0 | 15.0 |
| Nightjar | 160.0 | 3.8x | 37.5% | 144.0 | 54.0 | 14.4 |
| Look-through | 5.14x | 49.7% | 894.0 | 444.0 | 86.4 |
Step 3: add the fund's own net borrowing. 25.0 + 30.0 − 5.0 = 50.0. Total look-through net debt is 444.0 + 50.0 = 494.0.
Look-through net debt = Σ ownership × company net debt + fund borrowings − fund cash
Look-through LTV = 494.0 ÷ 894.0 = 55.3%. Net debt ÷ EBITDA = 494.0 ÷ 86.4 = 5.72x. Debt per 1 of NAV = 494.0 ÷ 400.0 = 1.24.
The check that the ladder is complete: look-through EV less total net debt must equal NAV. 894.0 − 494.0 = 400.0. In Excel, with ownership in B, fair value in C, net debt in D: =SUMPRODUCT(B2:B5,D2:D5)+borrowings-cash.
The fund that reports 13.8 per cent leverage controls 894.0 of enterprise value with 400.0 of equity: 2.23x gross assets to NAV. Company debt is 444.0, 89.9 per cent of the total; the fund's own borrowing is the remaining 10.1 per cent. In leverage terms the portfolio runs at 5.14x EBITDA at company level, and the fund's facilities take it to 5.72x.
Put as a cushion, a fall of 44.7 per cent in enterprise value across the portfolio would wipe out the NAV entirely, since 400.0 ÷ 894.0 = 44.7 per cent. On the reported figure alone an investor would assume an unlevered portfolio with a thin layer of fund debt.
| Case | NAV | Reported borrowings / NAV | Look-through LTV | Net debt / EBITDA | EV fall to wipe out NAV |
|---|---|---|---|---|---|
| No NAV facility | 430.0 | 5.8% | 51.9% | 5.37x | 48.1% |
| NAV facility of 30.0 (base) | 400.0 | 13.8% | 55.3% | 5.72x | 44.7% |
| NAV facility of 80.0 | 350.0 | 30.0% | 60.9% | 6.30x | 39.1% |
| Dividend recaps of 1 turn, base facility | 313.6 | 17.5% | 64.9% | 6.72x | 35.1% |
The last row is the one the fund's balance sheet never shows: recapitalisations that add one turn of EBITDA, 86.4 of debt across the companies, leave the fund's own borrowing unchanged and lift look-through LTV from 55.3 to 64.9 per cent. The reported ratio moves only because NAV shrinks after the distribution.
Whether to include the subscription line is a judgement. It is repaid from investors' undrawn commitments rather than from the portfolio, so many investors exclude it. Without it, look-through net debt is 469.0, an LTV of 52.5 per cent and 5.43x EBITDA. Show both, and say which one is used.
Taking the fund's borrowings over NAV as the fund's leverage. That ratio measures only the top rung of the ladder. The figure that tells an investor how a fall in company values or earnings will hit NAV is the look-through one, and here it is about ten times larger: 1.24 of debt per 1 of NAV against 0.125 of net borrowing at the fund level. Regulatory leverage measures for private equity funds do not, as a rule, look through to the companies' own borrowing either. The arithmetic of why fair value can exceed net assets in the first place is set out in why a fund's investments add up to more than 100 per cent of net assets.
Gross each holding up to EV, take the fund's share of EV, net debt and EBITDA, add the fund's own net borrowing and check that EV less debt equals NAV. On this fund, 13.8 per cent of reported leverage becomes 494.0 of look-through net debt, 55.3 per cent of EV. The leverage ladder sits among the working documents in the free workbooks for this book.
It depends on the purpose. The line is repaid from investors' undrawn commitments, not from the portfolio, so many investors exclude it when measuring risk to NAV. In the illustrative fund, excluding the 25.0 drawn takes look-through net debt from 494.0 to 469.0, and the LTV from 55.3 to 52.5 per cent.
The fund's share of enterprise value, less total look-through net debt, must equal the fund's net assets. In the example 894.0 of EV less 494.0 of net debt gives exactly the 400.0 of NAV. If it does not tie, a holding's net debt, ownership or a fund-level liability is missing.
It adds debt the fund's own balance sheet does not show. A recap adding one turn of EBITDA, 86.4 across the illustrative portfolio, leaves the fund's own borrowings unchanged but lifts look-through LTV from 55.3 to 64.9 per cent and cuts the EV fall that would wipe out NAV from 44.7 to 35.1 per cent.
This article is one calculation from How to Read a Private Fund's Financial Statements. 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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