Pipeline coverage computed the way investors test it: stage conversion, leverage and the year-one equity plan, with the probability the named deals deliver.
Pipeline coverage is the probability-weighted equity in a fund's named deal pipeline divided by the equity it plans to invest in its first year. On an illustrative 300 million real estate fund that plans to invest 84.0 million of equity in year one, a pipeline with a headline of 500.0 million of gross asset value, 1.67 times the fund, weights to 45.3 million of equity: coverage of 0.54x, and a 3.7 per cent chance of reaching the year-one target from the deals already named. To show full coverage at the same stage mix, the headline would need to be about 927 million.
Worked in full in Raising a Real Estate Fund by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
At first close an investor is buying a blind pool, and the pipeline is the closest thing to evidence that the strategy can be executed at the size raised. Every manager shows one. The test is not its headline, which is easy to inflate with deals that were merely seen, but how much equity it is likely to produce, at what pace, against what the fund has promised to invest. The calculation takes four inputs the manager already has: the fund's investable equity, its target pace, its leverage, and its own historical conversion rate at each stage.
| Input | Value |
|---|---|
| Fund commitments | 300 |
| Fees and expenses over the fund's life | 12% |
| Reserves for capital expenditure | 8% |
| Share of investable equity planned in year one | 35% |
| Loan to value | 55% |
| Conversion: exclusivity / bid or LOI / under review | 70% / 25% / 8% |
| Stage | Deals | GAV | Conversion | Weighted GAV | Weighted equity |
|---|---|---|---|---|---|
| Exclusivity | 2 | 63.0 | 70% | 44.1 | 19.8 |
| Bid or LOI | 4 | 127.0 | 25% | 31.75 | 14.3 |
| Under review | 10 | 310.0 | 8% | 24.8 | 11.2 |
| Total | 16 | 500.0 | 100.65 | 45.3 |
Investable equity = commitments × (1 − fees and expenses − reserves)
Year-one equity target = investable equity × year-one share; year-one GAV = equity target ÷ (1 − LTV)
Coverage = Σ(GAV × stage conversion) × (1 − LTV) ÷ year-one equity target
In Excel: =SUMPRODUCT(C2:C17,D2:D17)*(1-LTV)/Target with each deal's GAV in column C and its stage conversion in column D
Step 1: what the fund has to invest. 300 × (1 − 12% − 8%) = 240.0 of investable equity. A pace of 35 per cent in year one is 84.0 of equity. At 55 per cent loan to value each unit of equity buys 1 ÷ 45% of property, so the fund needs 186.7 of acquisitions in its first year.
Step 2: weight the pipeline. The two deals in exclusivity contribute 63.0 × 70% = 44.1, the four bids 127.0 × 25% = 31.75, and the ten under review 310.0 × 8% = 24.8. Weighted GAV is 100.65 and weighted equity 45.3. The 16 deals are expected to produce 3.20 closings.
Step 3: coverage. 45.3 ÷ 84.0 = 0.54x. The pipeline is expected to fund about half of the first year.
Step 4: the probability. Treating the 16 deals as independent and enumerating every combination of outcomes, the chance that the named deals deliver the full 84.0 of equity is 3.7 per cent. The chance of reaching half of it, 42.0, is 53.7 per cent. Deals sourced after first close will add to this; the test is what the manager can show today.
The weighted gap is 186.67 − 100.65 = 86.02 of GAV. Closing it with new deals at the review stage needs about 1,075 of additional GAV under review; at the bid stage, 344. At the present mix the headline pipeline would have to be 927, 3.09 times the fund, before an investor could call it covered. A manager who quotes “500 million of pipeline for a 300 million fund” is telling the truth and still describing half a year of work.
| Case | Year-one GAV needed | Weighted equity | Coverage |
|---|---|---|---|
| LTV 50% | 168.0 | 50.3 | 0.60x |
| LTV 55% | 186.7 | 45.3 | 0.54x |
| LTV 60% | 210.0 | 40.3 | 0.48x |
| LTV 65% | 240.0 | 35.2 | 0.42x |
| Conversion 0.75 times history | 186.7 | 34.0 | 0.40x |
| Conversion 1.25 times history | 186.7 | 56.6 | 0.67x |
More leverage makes the same pipeline cover less, because each deal absorbs less equity and the fund needs more property to invest the same commitments. Conversion is the input investors challenge most: a team that quotes better rates than its own record shows will be asked for the record, and the deal log behind it.
The mistake is dividing the headline pipeline by the fund. 500.0 against 300 sounds like 1.67x; in equity terms the unweighted pipeline is 225.0, or 2.68 times year one, which sounds even better. Neither number weights for stage. The second mistake is counting deals that were only seen. A deal belongs under review only if the team has underwritten it; otherwise its conversion rate is not 8 per cent but close to zero. The same funnel logic, applied to investors rather than deals, sizes the fundraise itself, as in how many investors you must contact, and the deployment test sits beside the other sizing tests in the right size for a real estate fund.
Weight every named deal by its stage's historical conversion, convert to equity at the fund's leverage and divide by the year-one equity plan: 45.3 ÷ 84.0 = 0.54x here, with a 3.7 per cent chance of hitting the plan from today's deals. Present that number before an investor computes it. The book's working documents include bottom-up sizing, the deployment model and pipeline coverage, all on the free companion page for the book.
Multiply each deal's gross asset value by the historical conversion rate of its stage, convert the total to equity at the fund's loan to value, and divide by the equity the fund plans to invest in its first year. Illustratively, 100.65 of weighted GAV at 55 per cent LTV is 45.3 of equity against an 84.0 plan, or 0.54x.
Because each deal then uses less equity, so the fund needs more property to invest the same commitments. The same 500.0 pipeline covers 0.60x of the year-one equity plan at 50 per cent LTV and 0.42x at 65 per cent, since the property needed rises from 168.0 to 240.0.
Enough weighted equity to cover the first year's investment plan from deals the team has actually underwritten. On the illustrative mix of stages, covering 84.0 of equity needs about 927 of headline GAV, 3.09 times the fund. A smaller pipeline is not disqualifying, but it should be presented with its coverage, not its headline.
This article is one calculation from Raising a Real Estate Fund. 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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