On Fund IV's own figures — €310 million of net asset value, commitment-method leverage of 140 per cent, a severe quarter with secondary bids 12 points below carrying value — the reverse stress level is 17.2 per cent of net asset value in a single quarter, plus or minus 4.8 points. That is the redemption level at which the fund could not meet its obligations without selling core assets at distressed prices. The fund's gate holds redemptions at 4 per cent, so the gap is 13.2 points.
What the walk actually contains
Fund IV is an open-ended semi-liquid private credit fund with €310 million of net asset
value, quarterly dealing on ninety days' notice, and commitment-method leverage of 140 per cent.
Its portfolio buckets — 11 per cent in cash and short-dated instruments, 9 per cent in liquid
syndicated loans, 24 per cent realisable within six months, 56 per cent realisable only over twelve
months or more — are shares of gross assets, not of net asset value. Read against net asset
value they sum to €310 million and the €124 million of debt-funded assets disappears from
the liquidity profile. Read against gross assets they sum to €434 million and nothing is
missing. Every figure below is 40 per cent larger under the correct reading.
The severe quarter runs secondary bids 12 points below carrying value, a 6 per cent haircut on
the liquid bucket, a 10 per cent markdown on the illiquid book, and 40 per cent of the six-month
bucket realisable inside the notice period.
Fund IV's severe quarter, in € million. Sources positive, uses negative.
Severe quarter
€m
Cash, after the operating buffer
43.1
Interest, net of the non-accrual assumption
7.3
Scheduled amortisation
0.5
Prepayments at the stressed rate
2.6
Liquid bucket, sold at a haircut
36.7
Six-month bucket, the realisable share, sold at a discount
35.8
Facility advance rate taken on every disposal
−36.3
Borrowers drawing on undrawn commitments
−17.1
Fees and facility interest
−3.0
Borrowing-base call on the markdown
−16.5
Net cash available to redeeming investors
53.2
The facility takes its advance rate on the €72.6 million of disposals before the fund sees a
cent. The borrowing-base call is the advance rate applied to the fall in collateral value: it is
the line most models omit, and the one that arrives without anyone selling anything. Against a net
asset value of €310 million, €53.2 million is 17.2 per cent.
The largest single input is a term in the credit agreement
Run the same quarter with no facility and the reverse stress level is 34.2 per cent. At an
advance rate of 25 per cent it is 25.7 per cent. At 50 per cent it is 17.2 per cent. No asset
changed, no investor changed, no redemption assumption changed.
The same portfolio, the same quarter, three financing arrangements.
Financing
Advance rate, per cent
Reverse stress level, per cent of net asset value
No facility at all
—
34.2
Facility on conservative terms
25
25.7
Fund IV as it is documented
50
17.2
Two terms carry it: the advance rate on disposals, and whether a markdown triggers a
borrowing-base call. Both are negotiable at signing, and neither is usually negotiated by the person
who will later have to defend the liquidity file.
The outflow most often left out of the model is larger than the barrier the gate
provides. Fund IV's €38 million of undrawn borrower commitments, drawn at 45 per cent in a
stressed quarter, is an outflow of €17.1 million, or 5.5 per cent of net asset value. The gate
holds redemptions at 4 per cent. Remove the undrawn book from the model and the reverse stress level
rises from 17.2 to 22.7 per cent — five and a half points of resilience that exist only in the
version that forgot them.
The error band, and the line the board gets
A single figure without an error band is not a stress test result, it is an assertion. Vary the
three inputs that matter most across defensible ranges — prepayments from 0 to 6 per cent a
year, the advance rate from 40 to 60 per cent, the undrawn book from €20 million to €60
million — and the half-ranges are 1.7, 3.4 and 2.9 points. Combined in quadrature that is 4.8
points. At two standard deviations the interval runs from 7.6 to 26.7 per cent, which is why the
handbook's approximate figure of 19 per cent for the same fund sits comfortably inside it.
The quarterly line to the board is then three numbers rather than one: reverse stress level 17.2,
gate 4.0, gap 13.2 points. The gate is 0.23 times the reverse stress level and 2.75 standard
deviations below it. A board given those numbers can tell whether anything has moved. A board given
“comfortable headroom” cannot.
Capacity is not policy
The same grid computed in ordinary conditions — no stress discounts, prepayments at the
ordinary rate, borrowers drawing at 15 per cent — supports 37.7 per cent of net asset value if
the whole six-month bucket is counted inside the quarter, and 21.8 per cent if none of it is and the
fund relies on cash, the liquid bucket and contractual flows alone. Both figures are net of the
facility's advance rate on every disposal. Neither reaches the 8 per cent of net asset value per
quarter the fund states as its operating figure.
That is not an error. It is a policy: the fund choosing to operate at roughly a third of the most
conservative capacity its own portfolio supports, and never planning to touch the six-month bucket
to meet a quarterly redemption. It is a good discipline, and it should be written down as a choice
with the computed capacity beside it, because a supervisor who recomputes the grid will get 21.8 and
will want to know why the file says 8.
State the basis of the liquidity buckets. Shares of net asset value and shares of gross assets
differ by the leverage ratio.
Model the facility, not just the assets. The advance rate and the borrowing-base mechanics move
the level further than any assumption about the portfolio.
Put the undrawn book in, and compare it to the gate rather than to the portfolio.
Publish the band with the level, so that “meaningfully below” becomes a measurable
claim.
Separate capacity from policy, and show the distance between them. That distance is the margin
a supervisor is asking about.
The workbooks behind this article
Every figure above is a live formula in the free companion files for
The AIFMD II Handbook. Each workbook ends with a Checks sheet
setting the printed figure beside the computed one. No account and no email address.
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 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.
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.
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.
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.
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 a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
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.