Perpetual Capital, Liquidity and the Semi-Liquid Fund
Julian R. Sterling
One Excel workbook, and it settles an argument the industry has been having without
arithmetic. It is free. Nothing is gated behind a sign-up, and no email address is asked for.
Chapter 20 says a closed-ended fund reporting 17 per cent and an evergreen
fund reporting 10 may be delivering identical outcomes, and that comparing them
on committed capital narrows the gap substantially and sometimes reverses it. That is
right, and it is the evergreen manager’s strongest argument. It is also almost
never made with numbers attached.
Here are the numbers. A closed-ended fund at 2.30× reports a
16.99 per cent internal rate of return. Run the same fund
against the investor’s whole commitment — uncalled capital in cash at the
same rate the evergreen sleeve earns — and it delivered
10.42 per cent. Against an evergreen fund netting 8.64, the
gap falls from 8.35 points to 1.78. Four fifths of the apparent
advantage was never an advantage; it was the arithmetic of measuring one fund on the
money it happened to be using and the other on all the money the investor had to set aside.
Solve for the point of indifference and you get the sentence worth carrying out of the
whole exercise. A closed-ended fund advertising 13.25 per cent does not
beat an evergreen fund netting 8.64. It ties with it. Every point below that is
a loss to the evergreen fund, measured on the capital the investor actually committed.
Evergreen_vs_Drawdown.xlsx · XLSX · 21 KB
The other four things it computes
What the sleeve costs. A 20 per cent sleeve earning 4.20 against
a private portfolio earning 12.40 drags 164 basis points a year. Nobody
collects it, it appears in no expense ratio, and it costs more than the management fee. It
is the price of the redemption option, and Chapter 20 is right that it is the figure
investors most want and most rarely receive.
What the share class costs. The same portfolio, on the same day: the
institutional class nets 8.64 per cent and the retail class 7.55. A gap of
109 basis points, and 22 units of terminal wealth on a stake of 100 over
ten years. Note the trap in the fee table — the retail class pays a
smaller performance fee, precisely because it earned less.
What the PME hides. The conventional Kaplan-Schoar public market equivalent
is 1.45×. Computed on committed capital, where the uncalled drag is visible, it is
1.14×. The standard measure overstates by 0.31 turns — a larger
distortion than most of the methodological arguments it gets deployed to settle.
What the volatility hides. A 6.50 per cent standard deviation
computed from appraised NAVs, with a first-order autocorrelation of 0.45, unsmooths to
12.96 per cent. The reported figure understates variability by
half, and every Sharpe ratio built on it is roughly twice what it should be.
What to try first
Change the cash rate. It moves both sides of the comparison at once — the evergreen
sleeve earns it, and the closed-ended investor’s uncalled capital earns it. Drop it to
one per cent and the committed-capital argument swings hard back toward the closed-ended
fund. Which is exactly what happened to this argument through the 2010s, and why it
is a better argument now than it was then. Worth knowing which way the wind is
blowing before building a pitch on it.
What the arithmetic does not settle
Two caveats, both of which cut against the evergreen fund, and both of which anyone using
this argument will be asked about. A mature allocator does not leave uncalled capital in
cash — distributions from earlier vintages fund later calls, and once a programme is
self-funding the drag largely disappears; the comparison here describes an investor with one
commitment, not a running allocation. And all of it assumes the evergreen fund’s gross
return is the same asset return as the closed-ended fund’s. If the need for liquidity
pushes it toward larger, more intermediated deals, the comparison shifts before any of the
arithmetic begins.
Conventions used throughout
Amber fill
an input — you may edit these
Grey fill
a formula — do not overtype these
Checks sheet
twenty-seven controls, each stating its own verdict
Every figure is illustrative, as everything in the book is. What is not illustrative is the
shape of the result, which holds for any plausible set of inputs. The workbook was verified
by headless recalculation rather than by trusting the formulas as written; all twenty-seven
checks pass.
Opening the file
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asks to update links on opening, decline — there are none.
Articles on this book
One of the calculations in this workbook, worked out in full.
All articles.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
Pricing StrategyA list price of 148.00, a pocket price of 112.51, and the nine deductions in between — with what one point of price is actually worth.
Also by Julian R. Sterling
The other books with companion files. The full list of titles is on the
author page.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
The CBAM Compliance HandbookWhat 2027 really costs, how big the buffer should be, and the term the surrender formula counts twice.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Distressed Debt InvestorWhere the fulcrum security actually breaks, and what an 80-cent recovery is worth once composition and time are priced.
The Real Estate Debt InvestorThe margin against the return on capital, the floor priced, and what prepayment protection buys.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
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