Subscription Lines, NAV Facilities and the Credit Behind Private Funds
Julian R. Sterling
Four Excel workbooks. Every figure the book prints reproduces exactly — with one
flagged exception, which is the most useful thing in the pack. They are free. Nothing is
gated behind a sign-up, and no email address is asked for.
Everything described below is inside it, with the read-me.
Chapter 4
The borrowing base, and why it is not availability
The Northbridge subscription facility to the decimal. Four investor groups and four
levers between an uncalled commitment and a dollar of borrowing capacity —
exclusions, concentration caps, advance rates, the lender’s reserve —
applied in that order, because the order changes the answer. 950 million of uncalled
commitment becomes 665.5 million of base value, then 650.5 after the reserve.
Then the sheet that justifies the file. The base is 650.5 and the facility is 250, so
availability is 250 and 400.5 million of hard-won eligibility buys nothing. Run the
chapter’s stress — the largest investor downgraded, the dollar up 8 per
cent against 100 million of commitments — and the base falls 29.3 million while
availability does not move by a cent. Then raise the facility until the base binds,
and the same two events start costing real money.
The chapter gives the case and withholds the number. Buy at 100, sell at 120 a year
later: 20 per cent without a facility. Run it with a line for six months, call 102 at
month six, distribute 120 at month twelve, and the chapter says the IRR is
much higher and stops. It is 38.41 per cent.
And the half that usually goes missing: the money multiple falls from 1.200 to 1.176,
because the interest is real and the timing is not. Investors are two dollars poorer
and the headline is eighteen points better. The calculator sheet prices each point of
IRR in cents of interest — and shows that the later the capital is called, the
cheaper each point becomes, right up to the column where the holding period reaches
zero and the formula refuses to print anything at all.
NAV facility underwriting, and the number that does not reconcile
800 million of reported equity NAV becomes 650 million of lending value once a
restricted asset is excluded, a concentrated one is haircut and a tax reserve comes
off. Nineteen per cent never reaches the lending value, and the ratio the lender runs
sits 3.7 points above the one on the cover page.
Then Atlas Portfolio Fund II. Chapter 10 states that in its downside the
portfolio falls to approximately 431 million; applying its own three haircuts to its
own three buckets gives 455.3. The file adopts neither quietly — it computes,
prints the book’s figure beside it, and names the 24.3 million difference,
because here it changes an answer. At 455.3 the further decline the chapter asks for
leaves the loan to value at 29.3 per cent, inside the line. At 431 it takes it to
30.9, through it.
NAV_Facility_Underwriting.xlsx · XLSX · 15 KB
Appendix H · Chapters 8, 9 and 14
The coverage the book asks for
Chapter 8 builds the bridge from reported NAV to adjusted eligible NAV, and Chapter 9
then computes every Atlas ratio without it. Carried through the bridge on the book's
own two rates — a 25 per cent concentration haircut and a tax reserve of 2.5 per cent,
both from Chapter 8's worked example — each ratio moves. The base case is
21.4 per cent and not 19.4, the downside 28.6 and
not 26.4, the further decline of paragraph 515 31.8 and not 29.3. The gap is a
little over two points at every state, and it runs the same way at each, because a deduction
can only shrink the denominator.
The test the chapter calls the most useful is the mildest one it runs.
Paragraph 495 proposes minus fifteen per cent across the portfolio, no exits for eighteen
months and 200 basis points of extra cost. Two pages earlier, paragraph 514 has already taken
Orion down 45, Vector 30 and the rest 15. On value the combined test leaves
527.0 against 455.3 — 71.7 higher, and
3.4 points of lower loan-to-value on the covenant base.
What it breaks instead is the cash, and the chapter never separates the two.
Its other two limbs are cash limbs; neither touches value. Paragraph 495 then asks whether the
fund can remain compliant and repay without a forced sale, as though that were one
question. Under its own test it is two, and they answer differently: the ratio stays
comfortable and the recurring stream stops paying the interest.
And there is no interest rate anywhere in the book. Paragraph 483 defines
coverage as receipts over cash interest and fees. Paragraph 495 adds 200 basis points to a
base it never states. Chapter 12 asks a borrower to compare margins. The only cost of funds
implied in three hundred pages is Chapter 7's subscription line — 120 drawn for twelve
months at a cost of 8, which is 6.67 per cent, and a NAV facility
prices above that, never below. So the file does not assert a rate. It inverts the question
and gives the rate at which coverage reaches 1.00 times, for any recurring yield you put
in. Twelve quarters, a covenant staircase placed against the book's own four states, and the
hundred million of Northbridge uncalled commitment that Chapter 3 and Chapter 14 do not agree
on. Fourteen controls, eight of which reproduce the book before anything is questioned.
In the borrowing-base file, set the facility to 700 million and run the stress again. A
downgrade that cost nothing a moment ago now costs 29 million of availability, and
nothing about the investors changed. The crossover between the two regimes is the number
a treasurer should know before signing, and almost nobody computes it.
In the IRR file, walk along the calculator row by row and watch the cost of a point of
headline return fall as the capital call moves later. That is not a quirk of the example.
It is the shape of the arithmetic, and it points in an uncomfortable direction.
Conventions used throughout
Amber fill
an input — you may edit these
Grey fill
a formula — do not overtype these
Checks sheet
twenty-five controls across the three files, each stating its own verdict
Twenty-three of the twenty-five read PASS. Two are designed not to: one names the 24.3
million that does not reconcile in Chapter 10, the other names the divergence it
causes. A file that had quietly picked one of the two numbers would have looked tidier
and taught less.
Opening the files
The workbooks open in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. They
use no macros and no add-ins, so nothing needs to be enabled or trusted. If your
spreadsheet asks to update links on opening, decline — there are none.
Also by Julian R. Sterling
The other books with companion files. The full list of titles is on the
author page.
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 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.
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