A fund borrows against its portfolio to return cash to investors. The two multiples, worked on the day of the draw and at repayment.
A distribution funded by a NAV loan raises DPI on the day it is paid and lowers TVPI by the cost of the loan over its life. On a fund with $900M paid in, distributing $147M from a $150M NAV loan takes DPI from 0.500 to 0.663, while TVPI slips from 1.722 to 1.719 at once and ends 0.047 lower after three years of interest. Nothing has been sold: the cash is the investors' own portfolio, borrowed against.
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 →
A buyout fund in year six has called $900M and returned $450M. Its portfolio is valued at $1,100M, but exits have slowed and investors are asking for cash. The manager arranges a NAV facility: $150M at an illustrative all-in rate of 8.00 per cent, with interest accruing and compounding annually until it is repaid from exits, and a 2 per cent upfront fee paid from the proceeds. The fund distributes the rest. All figures are illustrative.
| Input | Value |
|---|---|
| Paid-in capital | 900 |
| Distributed to date | 450 |
| Net asset value | 1,100 |
| NAV loan | 150 |
| Upfront fee (2%) | 3.00 |
| All-in rate, compounding annually (illustrative) | 8.00% |
| Repaid from exits after | 3 years |
| Portfolio growth a year, for the comparison | 10% |
DPI is cash distributed over paid-in capital. RVPI is the remaining value over paid-in capital, and the remaining value now has a loan against it. TVPI is the sum of the two.
Before: DPI = 450 / 900 = 0.500; RVPI = 1,100 / 900 = 1.222; TVPI = 1.722
After: DPI = (450 + 147) / 900 = 0.663; RVPI = (1,100 − 150) / 900 = 1.056; TVPI = 1.719
Excel, with paid-in in B1: =(Distributed+Loan*(1-Fee))/B1 for DPI and =(Distributed+Loan*(1-Fee)+NAV-Loan)/B1 for TVPI
DPI rises 16.3 points. TVPI falls by 0.0033, the upfront fee over paid-in capital, because the fund has swapped 150 of portfolio value for 147 of cash and a 150 debt. The investors' wealth has not moved, apart from the fee; only its form has.
Three years later the loan has accrued to 150 × 1.083 = 188.96, of which 38.96 is interest. Assume the portfolio grows 10 per cent a year in both cases, to 1,464.10, and compare the fund with and without the facility before any exit is distributed.
| Line | Without the loan | With the loan |
|---|---|---|
| Distributed to date | 450.00 | 597.00 |
| Portfolio value | 1,464.10 | 1,464.10 |
| Loan with accrued interest | 0.00 | −188.96 |
| DPI | 0.500 | 0.663 |
| TVPI | 2.127 | 2.080 |
The gap is 0.047 of TVPI: 41.96 of value, the 3.00 fee and 38.96 of interest, divided by 900 of paid-in. That is the whole economic cost of the facility to the fund. Whether investors are worse off depends on what they do with 147 received three years early. Repaying 188.96 for 147 is a rate of 8.73 per cent a year once the fee is included, so an investor who earns more than that on the cash comes out ahead, and one who leaves it in a money market fund does not.
| All-in rate | Repaid after 1 year | 3 years | 5 years |
|---|---|---|---|
| 6.00% | 0.013 | 0.035 | 0.060 |
| 8.00% | 0.017 | 0.047 | 0.082 |
| 10.00% | 0.020 | 0.059 | 0.105 |
Time matters more than rate. A facility meant to bridge one year of slow exits that ends up outstanding for five costs nearly five times as much in TVPI. And the borrowing does not wait for the portfolio to perform: if NAV stays flat at 1,100 the loan-to-value goes from 13.6 per cent at the draw to 17.2 per cent at year three, and on a 20 per cent fall in NAV to 880 it reaches 21.5 per cent, while the TVPI with the loan, 1.431, sits below the 1.478 without it.
A DPI target can be reverse-engineered the same way. To show a DPI of 0.75 on 900 paid in, the fund needs 225 of further distributions, which at a 2 per cent fee means a loan of 229.59. When a distribution is sized to a DPI figure rather than to the investors' need for cash, that is worth asking about.
The mistake is reading DPI as realised performance. DPI was adopted by investors precisely because it could not be marked: cash out is cash out. A NAV-funded distribution is cash out that has not been realised, and a DPI of 0.663 built partly on 147 of borrowing says less about exits than a DPI of 0.663 built on sales. The correction is simple: report the distribution separately, keep a pro forma DPI excluding facility-funded distributions, and show TVPI net of the loan with accrued interest. Investors comparing managers on DPI should ask how much of it is borrowed.
The third of the new cases in the free workbook for this case works a borrowed distribution on the book's Atlas fund, including what it does to the IRR. For how the multiples are built in the first place, see how to calculate TVPI, DPI and RVPI, and for the covenant risk of the same facility, how far NAV can fall before an LTV breach.
Yes, immediately, because DPI counts cash distributed over paid-in capital and does not ask where the cash came from. A distribution of $147M on $900M of paid-in capital adds 0.163 to DPI, from 0.500 to 0.663, while no asset has been sold. The borrowing reduces the remaining value instead, so RVPI falls from 1.222 to 1.056.
The fees and interest, divided by paid-in capital. On a $150M loan at 8.00 per cent with a 2 per cent upfront fee, repaid after three years, the cost is $41.96M, or 0.047 of TVPI on $900M paid in. At 10.00 per cent for five years it would be 0.105; at 6.00 per cent for one year, 0.013.
When the investors can earn more on the cash returned early than the loan costs the fund. In the worked case $147M is distributed and $188.96M must be repaid after three years, so investors need a return above 8.73 per cent a year on the money they receive to come out ahead.
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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