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%.
Worked in full in The Fund Finance Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
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.
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 |
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.
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 | — |
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.
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 |
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.
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.
This article is one calculation from The Fund Finance Professional. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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