Yield Horizon

Transaction diligence at KPMG, a global bank balance sheet at Citco, then nine years inside the treasury and structuring function of a major alternatives manager — covering European private equity and private debt strategies across Luxembourg, Dublin and Amsterdam platforms. The through-line is the plumbing: how capital is raised, financed, moved and accounted for.

Term	In this example	What it means
LP capital	60% at 8.00%	Money from the fund's investors — pension schemes, insurers, wealthy families. "LP" means limited partner. They are promised a minimum return, called the preferred return, before the fund manager earns anything. Here that promise is 8% a year. It is the most expensive money in the mix.
Subscription line	30% at 5.20%	A bank loan secured against investors' unfulfilled promises to pay. Cheap, short-term, and used to move quickly on a deal before asking investors for cash. Sometimes shortened to "sub line".
NAV facility	10% at 9.10%	A bank loan secured against the companies the fund already owns. "NAV" is net asset value — what those holdings are worth. More expensive than a subscription line because the bank is taking more risk.

Term	What it means
Measurement
Basis point (bps)	One hundredth of one percent. 100 bps = 1%. Used because in finance the difference between 8.00% and 11.96% matters enormously, and "396 basis points" is clearer than "than ‘three point nine six percent".
Annualised	A cost expressed as if it ran for a full year, so figures covering different periods can be compared. A 90-day cost is annualised by scaling it: 90 ÷ 365.
Marginal cost	The cost of the next unit, rather than the average across everything so far. It matters because decisions are always about what to do next, and the next euro can cost quite a lot more than the average euro already spent.
The decision
Hurdle rate	The minimum return an investment must promise before the fund will consider it. Traditionally a fixed number set when the fund launched — typically 6% to 8% — and left unchanged for years.
ICC	Internal Cost of Capital. What this model produces: the true, current, all-in cost of deploying the next euro. It replaces the fixed hurdle rate with a figure that reflects what is actually happening in the fund today.
IRR	Internal rate of return — the annualised profit a deal is expected to make, as a percentage. If a deal's IRR is 14.2% and the ICC is 11.96%, the deal earns 2.24 percentage points more than the money costs.
Spread	The gap between two rates. Here, the deal's expected return minus the cost of the capital funding it. A positive spread means the deal creates value; a negative one means it destroys value however profitable it looks in isolation.
Investment committee (IC)	The group inside the fund that approves or rejects proposed investments. The ICC figure is designed to go into the paperwork they review.
The costs the hurdle rate misses
Drag	A cost that reduces returns without anyone deciding to incur it. It arises from timing — money sitting still, borrowed too early, or charged fees while doing nothing — rather than from the price of anything.
Invisible cost	Drag that a static hurdle rate never sees, because it arises from timing rather than pricing: capital sitting idle, facilities drawn early, and currency sourced at a premium. Some of it is invoiced, but most of it is not. Nobody bills a fund for the profit it failed to make while capital sat waiting, yet that loss is as real as any interest payment. In the worked example these costs total 469 bps, about 39% of the fund’s true cost of capital.
Called capital	Money the fund has formally requested from its investors and now holds. From the moment it is called, the 8% preferred return starts accruing — whether or not it has been invested in anything.
Idle capital	Called capital that has arrived but not yet been invested. It is costing 8% a year and earning perhaps 3.2% in a deposit account. The difference is pure loss, and it is the largest of the invisible costs.
Deployment	Actually investing the money in a company. "Undeployed" means the cash is sitting in an account rather than working.
Commitment fee	A small charge banks levy on the unused portion of a loan facility — payment for keeping the money available. Here 0.50% a year.
Facility interest	The interest paid to a bank on borrowed money during the period before it is put to work. Real, invoiced, and usually the only part of the waiting cost anyone records.
Carried interest	Confusingly, "carry" in private equity means something else entirely: the fund manager's share of the profits, typically 20% of gains above the preferred return. It is not a cost of capital and plays no part in this model. Mentioned here only so the term is not mistaken for facility interest.
Opportunity cost	The value of the thing you did not do. If capital sat in an account for 75 days instead of earning 14% in an investment, that forgone 14% is an opportunity cost. It never appears in the accounts, which is precisely why it gets ignored.
Fund mechanics
LPA	Limited partnership agreement — the contract between the fund manager and its investors. It sets the preferred return, the fees, and what the manager may do with cash that is waiting to be invested.
Management fee	An annual charge, here 1.50%, paid to the fund manager for running the fund. Charged either on the total investors committed, or on the value of what the fund currently holds.
Commitments vs AuM basis	Two ways of calculating that fee. On a commitments basis it is charged on the full amount investors promised, so it does not change with deployment. On an AuM basis (assets under management) it is charged on current holdings, which means the fund pays fees on capital sitting idle. Describe all three bases (commitments, called capital, NAV) and note that only commitments carries no marginal drag.
GP	General partner — the firm managing the fund and making the investment decisions. The client for this work.
Hedging / FX	Protecting against currency movements when investing abroad. A euro fund buying a US business can either borrow dollars directly or borrow euros and use a currency contract. The two routes cost different amounts, and the model picks the cheaper.

Neither should be assumed. Both change the answer materially.
Condition	What must be confirmed	Where
Multi-currency draw	The credit agreement supports drawing in the target currency, at transparent per-currency pricing.	Credit agreement
Idle cash placement	The LPA permits called-but-undeployed capital to be held in interest-bearing accounts.	Limited partnership agreement

Input	Value	Unit	Basis / source
1 Fund parameters
Fund size (commitments)	750,000,000	EUR	LPA / final close documentation
Current NAV	520,000,000	EUR	Latest reported NAV
Called capital (cumulative)	600,000,000	EUR	Cumulative drawn from LPs
Fund base currency	EUR		LPA
2 Capital source mix
LP capital — mix %	60.0%	%	Deployment plan / treasury forecast
LP capital — cost (pref rate)	8.00%	%	LPA preferred return
Sub line — mix %	30.0%	%	Deployment plan / treasury forecast
Sub line — all-in cost	5.20%	%	Credit agreement: SOFR/EURIBOR + margin
NAV facility — mix %	10.0%	%	Deployment plan / treasury forecast
NAV facility — all-in cost	9.10%	%	NAV facility agreement
Mix check	100.0%	%	If this is not 100%, weighted cost is under- or overstated
3 Idle capital
Called capital sitting idle	200,000,000	EUR	Treasury cash position report
Days idle	90	days	Call date to expected deployment date
LP preferred return rate	8.00%	%	LPA preferred return
Undrawn facility amount	100,000,000	EUR	Undrawn portion of credit facilities
Commitment fees on undrawn facilities	0.50%	%	Credit agreement commitment fee. Charged on the undrawn amount, not on idle cash.
Overnight / term deposit yield	3.20%	%	Treasury sweep rate at measurement date
Toggle: LPA permits idle cash placement?	YES	Y/N	Must be confirmed against the LPA. Set NO if unconfirmed.
4 Drawn but undeployed capital — subscription facility
Amount drawn, not yet deployed	60,000,000	EUR	Facility drawdown log vs deployment log. Drawn against uncalled commitments, so it sits inside the EUR 750m envelope and is repaid by a future call.
Days drawn and undeployed	75	days	Drawdown date to actual deployment date
Facility interest rate on drawn amount	5.20%	%	Subscription facility all-in rate. Re-link to the NAV facility rate (9.10%) for any portion drawn against NAV rather than commitments.
Forgone deployment return	14.00%	%	Judgement input: fund target IRR or realised portfolio IRR
5 FX sourcing
Investment currency	USD		Currency of the target investment
Foreign-currency deployment amount	30,000,000	EUR eq.	Derived as 40% of the EUR 75m deployment
Proportion of deployment requiring FX	40.0%	%	Set to 0% if the deal is base-currency only
Toggle: multi-currency facility available?	YES	Y/N	Must be confirmed in the credit agreement. Set NO if unconfirmed.
Path A — native-currency tranche rate	5.65%	%	Credit agreement: target-currency tranche pricing
Path B — base-currency tranche rate	5.20%	%	Credit agreement: base-currency tranche pricing
Path B — forward points (annualised)	0.68%	%	FX forward quote; embeds cross-currency basis
IRS carry cost (floating → fixed)	0.45%	%	Net cost of swapping floating to fixed
IRS notional as % of deployment	30.0%	%	Share of deployed capital carrying IRS exposure
6 Management fee
Toggle: fee basis	COMMITMENTS	Commit / Called / NAV	Commitments = no marginal fee on the next unit. Called capital = fee rate × fresh-call share. NAV = full fee rate.
Management fee rate	1.50%	%	LPA management fee provision
7 Drag allocation basis — non-working capital
Called capital sitting idle (LP-funded)	200,000,000	EUR	Linked from section 3
Drawn, not yet deployed (subscription facility)	60,000,000	EUR	Linked from section 4
Capital called or drawn but NOT deployed	260,000,000	EUR	The population these drags arise on. Non-overlapping: one pool is LP-funded, the other facility-funded. The model errors if this is ever set to commitments, NAV or cumulative called capital.
8 Deal assessment
Deployment amount for this deal	75,000,000	EUR	Proposed investment size
Expected deal IRR (gross)	14.20%	%	Deal team underwriting model
Required spread over ICC to proceed	1.00%	%	House policy: minimum ICC clearance margin

Component	Value	Unit	Logic
Component 1 — Weighted cost of next unit deployed
LP capital contribution	4.80%	480 bps	60.0% of funding × 8.00% preferred return = 4.80%. The largest single cost, because LP capital is both the biggest slice and the most expensive.
Subscription line contribution	1.56%	156 bps	30.0% of funding × 5.20% all-in rate = 1.56%. Cheaper than LP capital, which is why sub lines are drawn first.
NAV facility contribution	0.91%	91 bps	10.0% of funding × 9.10% all-in rate = 0.91%. The most expensive source per euro, but only a tenth of the mix.
Component 1	7.27%	727 bps	4.80% + 1.56% + 0.91%. An annual rate: the blended cost of holding this funding mix for a year.
Component 2 — Net idle capital drag · measured over 90 days
Preferred return accruing on idle capital	3,945,205	EUR	EUR 200m idle × (90 ÷ 365) × 8.00% preferred return. The preferred return accrues to LPs from the day capital is called, not the day it is invested — so 90 days of waiting costs real money.
Forgone deployment return on idle capital	6,904,110	EUR	EUR 200m idle × (90 ÷ 365) × 14.00%. The return this capital was not earning. Charged here on exactly the same basis as Component 5 charges it on drawn capital: the forgone return belongs to the deployment opportunity, not to the funding source. Omitting it from idle capital whilst charging it on facility draws — as most models do — makes LP capital look cheaper than borrowing.
Commitment fee on undrawn facilities	123,288	EUR	EUR 100m undrawn × (90 ÷ 365) × 0.50%. Charged on the undrawn portion of the facility, not on the idle cash balance — a distinction most models get wrong in the fund’s favour.
Less: interest earned on placement	(1,578,082)	EUR	EUR 200m × (90 ÷ 365) × 3.20% deposit rate. Earned only where the LPA permits idle cash to be held in interest-bearing accounts. If it does not, this line is zero.
Net idle drag	9,394,521	EUR	EUR 3,945,205 + EUR 6,904,110 + EUR 123,288 − EUR 1,578,082. What 90 days of idleness actually costs the fund.
Component 2	3.61%	361 bps	EUR 9,394,521 ÷ EUR 260m non-working capital = 3.61%. A one-off cost per euro of capital called or drawn and not yet deployed.
Component 3 — FX / IRS sourcing cost (optimised) · premium form
Path A — direct native-currency draw	5.65%	%	Native-currency tranche rate
Path B — base-currency draw + hedge	5.88%	%	Base tranche rate 5.20% + forward points 0.68%, which embed the cross-currency basis
Selected path cost	5.65%	%	Lower path, only where a multi-currency draw is confirmed available
FX premium over base-currency tranche	0.45%	45 bps	5.65% selected path − 5.20% base-currency tranche. This premium is the only incremental cost: the base-currency draw is already priced inside Component 1, so charging the full path rate here would double-count it.
FX sourcing cost	0.18%	18 bps	0.45% premium × 40% of deployment requiring FX = 0.18%
IRS carry cost	0.14%	14 bps	0.45% carry on swapping floating to fixed × 30% notional coverage = 0.14%
Memo: optimisation saving vs hedged path	0.09%	9 bps	(5.88% − 5.65%) × 40% FX proportion. What the path choice is worth at fund level.
Component 3	0.32%	32 bps	FX premium 18 bps + IRS carry 14 bps. Set the FX proportion to 0% and this component falls away entirely.
Component 4 — Marginal management fee drag
Fee basis (selected)	Commitments	—	Commitments \| Called capital \| NAV
Component 4	0.00%	0 bps	The fee the next unit of deployment adds: nil on a commitments basis, because the fee does not move with deployment. On a called-capital basis it is 1.50% × the 60% fresh-call share = 0.90%. On a NAV basis it is the full 1.50%. The fee level a fund pays is a separate matter — see the basis diagnostic on the Output tab.
Component 5 — Drawn capital opportunity cost · subscription facility, measured over 75 days
Combined annualised rate	16.00%	1,600 bps	5.20% subscription facility rate + 14.00% forgone deployment return − 3.20% deposit yield earned whilst the cash sits. You pay interest on the borrowing and lose the return the money would have made if invested, offset only by what the balance earns on deposit. Same construction as Component 2.
Drawn capital opportunity cost	1,972,603	EUR	EUR 60m drawn × (75 ÷ 365) × 16.00%. The 75 days run from the drawdown date to the date the money was actually deployed.
Memo: sub line interest alone	641,096	EUR	EUR 60m × (75 ÷ 365) × 5.20%. This is the only part the bank invoices for, and the only part most treasury systems record.
Memo: negative carry against idle cash	246,575	EUR	EUR 60m × (75 ÷ 365) × (5.20% − 3.20%). Borrowing on the subscription facility whilst holding EUR 200m of idle cash earning the deposit rate. No framework required to see this one — it is arithmetic on two rates the treasurer already knows.
Component 5	0.76%	76 bps	EUR 1,972,603 ÷ EUR 260m non-working capital = 0.76%. A one-off cost per euro of capital called or drawn and not yet deployed.
Marginal ICC — total
Marginal ICC	11.96%	1,196 bps	Sum of components 1–5. Components are rounded to the nearest basis point; the total is computed on unrounded figures.
Typical static hurdle (reference only)	8.00%	800 bps	The proxy this framework replaces — shown for contrast, not used in any calculation
ICC vs static hurdle	+3.96%	+396 bps	Positive = the static hurdle understates true cost of capital

Measure	Value	Note
Deployment amount	75,000,000	Proposed investment size
Marginal ICC	11.96%	Live cost of deploying the next unit of capital
Expected deal IRR (gross)	14.20%	Deal team underwriting model
Spread over ICC	2.24%	Deal IRR less marginal ICC
Spread over ICC (bps)	224	Same figure in basis points
Required spread (house policy)	1.00%	Minimum ICC clearance margin
Recommendation	PROCEED	Proceed only where spread over ICC meets or exceeds house policy minimum
Memo: all-in cost of non-working capital	18.44%	Annualised. LP preferred return + commitment fee on undrawn facilities + subscription facility interest + forgone deployment return, less deposit yield earned on placement, divided by capital-years non-working (EUR 200m for 90 days + EUR 60m for 75 days). Independent of any allocation base. Cash elements alone — excluding the forgone deployment return, a judgement input — total 4.44%.
Memo: management fee basis differential	3,450,000	Annual fee on a commitments basis (EUR 11.25m) less the lowest available basis, NAV (EUR 7.80m). A negotiating fact borne by the fund, not a marginal cost of deployment — deliberately excluded from the ICC above.
Memo: every run is on the record		Each committed run is stored in an append-only ledger with its inputs, data cut and checksum, so any past ICC can be reproduced exactly. When the number moves between runs, the Delta Bridge attributes the change to market, volume and assumption effects, with no unexplained residual. Balances can be rebuilt daily from lender interest statements and drawdown records, and are cross-checked against the interest actually charged.

Component	Contribution	Share of total ICC
1 Weighted cost of next unit deployed	7.27%	60.8%
2 Net idle capital drag	3.61%	30.2%
3 FX / IRS sourcing cost (optimised)	0.32%	2.6%
4 Marginal management fee drag	0.00%	0.0%
5 Drawn capital opportunity cost	0.76%	6.4%
Total	11.96%	100.0%

Condition	Setting	Note
Non-working capital base	260,000,000	EUR 200m called and idle (LP-funded) + EUR 60m drawn on the subscription facility. Non-overlapping, and both inside the EUR 750m commitment envelope. Drags are spread across the capital they arise on — not commitments, NAV or cumulative called capital.
Multi-currency facility draw available?	YES	Must be confirmed in the credit agreement
LPA permits idle cash placement?	YES	Must be confirmed in the LPA
Management fee basis	COMMITMENTS	Commitments basis carries no marginal fee drag — see the fee basis diagnostic
Forgone deployment return	14.00%	Not a market-observable rate. Defaults to fund target IRR; confirm the house basis.

2016 – 2025

Oaktree Capital Management

Senior Vice President, European Principal Group

London

Financial , structuring and liquidity strategy for approximately EUR8.5bn across principal, private equity and debt opportunity funds.

Built the internal cost of capital benchmarking frameworks that became ClarityStack™, aligning financing strategy with expected investment returns and liquidity profiles
Led negotiation, structuring and implementation of subscription line and NAV facilities supporting investment activity and working capital efficiency
Negotiated financing and risk documentation including ISDAs, CSA thresholds and ATE triggers
Developed and implemented a strategy-wide FX and interest rate hedging policy covering both investment-level and currency feeder exposures
Structured Solvency II-optimised rated feeders, fund-of-one vehicles, evergreen SMAs and sub-participation agreements
Built allocation models for SMA and FOO vehicles investing across multiple strategies and sleeves
Oversaw multi-jurisdictional SPV holding structures across Luxembourg, Dublin and Amsterdam
Advised portfolio managers on capital sourcing for deployment, distributions, financing repayments and collateral posting
Partnered with PwC on a firm-wide operational review benchmarking capabilities against peers, driving centralisation of middle-office functions

2009 – 2016

The Citco Group of Companies

Assistant Financial Director, Citco Banks

London, Geneva, Amsterdam

Financial oversight of Citco’s custody banks, serving private equity and hedge fund managers, across a USD 6–9bn balance sheet, with the regulatory and management reporting that goes with it.

Directed finance teams of 15–20 across seven countries, delivering consolidated reporting under Basel II/III and CRD IV
Finance lead on a global banking system implementation (Temenos T24) and a group-wide Oracle ERP rollout
Led the carve-out of a USD100m custody business, supporting refinancing and private equity investment processes involving Goldman Sachs, Stone Point Capital and General Atlantic

2004 – 2009

KPMG LLP

Associate, Transaction Services

London

Financial due diligence on buy-side and sell-side transactions, including carve-outs and post-merger integration planning.

Your hurdle rate only looks conservative.

Three costs that never reach the investment committee.

Weighted funding cost

Net idle capital drag

FX / IRS sourcing cost

Drawn capital opportunity cost

What gets measured is the smaller number.

WACC values the portfolio. ICC prices the decision.

Six weeks, start to IC-ready.

Discovery

Build

Pilot

Institutionalise

Priced against the drag it removes.

Pilot

Full integration

Retained support

This works for some funds and not others.

Strong fit

Poor fit

Bring one live deal.

The calculation, shown in full.

Start here if the jargon is unfamiliar.

What the model does, and what it will not do.

Every input carries its source.

Five components, built in the open.

One block, straight into the IC memo.

Run it on a live deal.

I built this framework. Then I turned it into a consultancy.

Twenty-one years, three sides of the same problem.

Oaktree Capital Management

The Citco Group of Companies

KPMG LLP

You get the person who built it.

Credentials.

Thirty minutes, one live deal.