The IRR rises by eighteen points and the multiple falls, on the same asset. Both numbers are correct, and the price of a point of headline return is not constant.
A fund buys an asset for 100 and sells it a year later for 120. Without a facility that
is a 20% return. Run the same deal with a subscription line for the first six months, call 102 from
investors at month six to repay principal and interest, and distribute 120 at month twelve. The
annualised IRR is 38.41%.
Almost every explanation of subscription lines stops at “much higher”. It is
worth printing the number, because the size of it is the argument: same asset, same buyer, same
20 of gross gain, and the headline return has nearly doubled.
Why it happens, in one line
The holding period is six months, not twelve. 120 against 102 over half a year annualises to
38.41%. Nothing about the asset changed; the measurement window did.
Without the facility
With a six-month facility
Called from investors
100 at month zero
102 at month six
Distributed
120 at month twelve
120 at month twelve
Investor holding period
12 months
6 months
Money multiple
1.200×
1.176×
Annualised IRR
20.00%
38.41%
Net cash to the investor
20
18
Same asset, same buyer, same 20 of gross gain.
And the multiple goes the other way
This is the half that gets left out. Without the facility investors put in 100 and got back
120: 1.20 times. With it they put in 102 and got back 120: 1.176 times.
The IRR rose by 18.4 points while the multiple fell by 0.0235. Investors are
2 poorer and the marketing document is eighteen points better. Nothing improper has happened and
both numbers are correct — which is exactly why a report has to separate asset return,
leverage effect, fee drag and timing effect rather than presenting one number.
The price of a point of headline return
Two dollars of interest bought 18.4 points of IRR, so a point of headline return cost about
11 cents per hundred invested. That is a number worth having, because it makes
the trade explicit rather than rhetorical. It is also not constant.
Months on the line
Interest accrued
Capital called
Investor holding period
Money multiple
Annualised IRR
Cost per point of IRR
0
0.00
100.00
1.00 yr
1.2000×
20.00%
—
3
1.00
101.00
0.75 yr
1.1881×
25.84%
17.1c
6
2.00
102.00
0.50 yr
1.1765×
38.41%
10.9c
9
3.00
103.00
0.25 yr
1.1650×
84.24%
4.7c
12
4.00
104.00
zero or negative
—
not a quantity
—
15
5.00
105.00
zero or negative
—
not a quantity
—
18
6.00
106.00
zero or negative
—
not a quantity
—
Cents of interest per hundred invested, per percentage point of headline return.
Read the last column down. Run the line three months and a point of IRR costs 17.1 cents.
Run it nine months and it costs 4.7. The later the capital is called, the
cheaper each point of headline return becomes — interest accrues in a straight
line while the annualisation effect explodes as the remaining holding period shrinks toward
zero.
That is the uncomfortable part, and it is arithmetic rather than an accusation. A manager
optimising for the headline is pushed toward calling capital as late as the facility permits, and
the arithmetic keeps rewarding him for it right up to the point where the holding period reaches
zero and the measure stops meaning anything. The last rows of the table are the reductio: hold
the line twelve months on a twelve-month deal and the investor’s holding period is zero. An
IRR on a zero holding period is not a small distortion. It is not a quantity.
A worked case, and the components that are not numbers
Take a fund that draws 120 for twelve months at a cost of 8, over a period in which the
investments rose 25, and a manager who calls the facility accretive. Both the manager and a
sceptical investor can be right, and the way to see it is to lay out the components rather than
argue about the verdict.
The four components a report should separate
$m
Operational benefit — one capital call instead of three
not a number
Asset appreciation over the period
25
Financing cost
−8
Net economic effect
17
Risk carried — twelve months of drawn debt
not a number
Timing effect on investor IRR
real, and not economic value
120 drawn for twelve months, 8 of cost, 25 of appreciation.
The net economic effect is 17, and the financing cost took 32% of the appreciation. Two of
the six lines deliberately carry no figure: the operational benefit of one capital call instead
of three is real and nobody prices it, and twelve months of drawn debt is a risk that did not
materialise but still had a price the accounts never show. A report that assigns those a number
is inventing one; a report that omits the lines entirely is pretending they are zero.
What to ask for, and what to publish
If you are an investor: ask for the IRR both ways — as reported, and recomputed on the
date capital would have been called without the facility. The gap is the timing effect, and it is
the only honest way to compare a manager who uses a line with one who does not. Ask for the
multiple next to it, because the multiple is the number the facility cannot flatter.
If you are the one reporting: publish the four components. It costs a row each and it
forecloses the argument. The alternative is a headline that is correct, incomplete, and
impossible for the reader to unpick — which is the more serious failure, because it is the
harder one to catch.
None of this is an argument against subscription lines. They shorten the administrative
burden, they let a manager transact quickly, and the operational benefit is real. It is an
argument against reporting one number when the mechanism moves two in opposite directions.
The workbook behind this article
Every figure above is a live formula in the companion file for
The Fund Finance Professional, which also holds the calculator at seven facility lengths, the price of a point of IRR, and the four-component breakdown of the worked case. It is free, and it needs no account and
no email address.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.
If this book helped — or didn’t — a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.