Question for you experts out there on fund returns. I'm trying to get show a IRR return bridge for a private credit fund and question to relates to leverage. If a fund is levered 1:1, how would I calculate how much bps the leverage is? What is the formual to get from say coupon of 10% to a levered gross return? Say the leverage facility cost is 2%. How does this change if the fund is levered 0.75:1?
Can someone kindly assist?
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Let's keep it simple. Say the private credit fund has deployed 100 of capital paying 8% (roughly the IRR these guys pile up at), they get 8% in cash annually. Now these 100 are financed with 50 of equity from LPs and 50 of debt paying 2%, making it a cost of 1 per annum. So on a Net basis the fund makes 8-1=7, but 7 not on 100 of capital but on 50 of capital aka a 14% IRR. Now plug in your numbers and see how that changes.
Another one, what is the difference between an IRR vs the yield in a credit fund? on an unlevered basis, it seems to generally be 1%-2% between the IRR and the yield but not sure what this takes into account of other than IRR takes into account time value of money.
Upfront fees / OID, prepayment premiums, amortization, and various ticking fees (i.e. DDTLs or Revolvers) can create a discrepancy between yield (assuming you mean coupon?) and total IRR in credit funds
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