Policy, Pacing, Manager Selection and Portfolio Management
Julian R. Sterling
One Excel workbook. Chapter 3 says of co-investment and secondaries that
“Chapter 14 owns those mechanics”. Chapter 14 does not own them — it
disposes of the question in one clause and performs no arithmetic at all. This closes the loop,
on the book’s own figures. It is free. Nothing is gated behind a sign-up, and no email
address is asked for.
This book computes almost everything it asserts — the gross-to-net bridge, the pacing
multiplier, the build-up path, fourteen tables. Chapter 14 is the exception, and it is
the chapter about moving money between instruments. It contains one price, one budget
percentage and one per-deal cap, and no arithmetic.
The saving is 37 basis points. On the chapter’s own fifteen per cent
budget the blended cost falls from 2.54 to 2.17 per cent of net asset value — about 4.4
a year against a cost line of 38, a ninth of it, bought with a decision process, two staff, a
five-day standard and under three executions a year. Real, and some distance from
“meaningfully lowers the blended cost of the whole portfolio”. Halving the cost
line would take 53 per cent of commitments in co-investment and 58 per cent
of net asset value in single assets — what the chapter warns against two paragraphs
earlier.
And “of any scale” points the wrong way. Most of the incremental
cost is fixed, so below roughly 20 a year of budget the overhead eats the saving. There is a
minimum viable scale; the chapter asserts the opposite.
Priced as risk, the whole fee advantage is a 22.8 per cent loss rate. A
primary dollar returns 1.544× net; a free co-investment at the same gross returns
2.000×. Break-even is a 1.544× gross multiple — 9.08 per cent a year against
14.87. One deal in four going to zero erases it, and the chapter itself warns twice about
adverse selection in syndicated deals.
Which makes deal count the binding constraint, not the budget and not the cap.
At a cap of one third of a fund commitment, a 15 per cent budget buys 2.7 deals a
year, so one total loss is 37 per cent of the cohort — well
above break-even, and about three and a half years of the entire saving. You need at least
4.4 deals, so a cap near 8 rather than 13. Meanwhile the chapter warns about
deals sized at “three or four times a typical fund commitment” — 120 to 160
— against an annual budget of 35.7. It is warning about a failure its own policy cannot
fund.
The last sheet is the one the book most needed. A co-investment is drawn in full at close, so
it carries 7.73 NAV-years per dollar committed against 6.30 for a primary
— 23 per cent more. An investor running Chapter 14’s policy and
Chapter 5’s commitment budget lands 3.4 per cent over target
without a single new decision, and 15 per cent over if the holds run to seven years. Two
policies from the same book, unreconciled. Twenty-two checks, four of which test the file
against the book rather than against the appendix.
Change the co-investment hold period from five years to seven and watch the overshoot against
Chapter 5’s target go from 3.4 per cent to 15. The investor does not choose that
input — the sponsor does — which is what makes it an exposure rather than a dial.
Then set the per-deal cap to a fifth of a fund commitment instead of a third and watch the deal
count cross the break-even line. Same budget, same staff, a programme that can absorb a failure.
What the arithmetic does not settle
The whole risk argument rests on co-investments having a loss rate no better than the fund deals
they sit beside. If a manager’s syndicated deals show a total-loss rate under ten per cent
and gross multiples within a tenth of the retained book, the concentration objection collapses,
break-even is never approached, and the chapter’s sentence stands as written. That test is
worth running before this appendix is believed, and it is the one that could show it to be wrong.
It also cannot price access — a co-investment sometimes buys a seat rather than a return,
and no multiple captures that.
Conventions used throughout
Amber fill
an input — you may edit these
Grey fill
a formula — do not overtype these
Checks sheet
twenty-two controls — four of them test the file against the book, not against the appendix
Every figure is illustrative. The plan, the funds, the deals and the hold periods are invented;
the parameters are chosen so the arithmetic ties back to Chapters 3, 5 and 6 rather than
because they describe any particular market.
Opening the file
The workbook opens in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. It uses 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 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.
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