The Revolver
The Revolver
The Revolver
The Revolver
A Game-Changer in Fund Management
Revolvers are essential in any GP's portfolio of funds, enabling GPs to launch funds without LPs, to earn higher returns on the funds they enhance (7.9% vs 5.5%), and to earn returns from the Revolver itself (3%).
A Revolver accrues carry in the funds it enhances, compounding a 14% return from underlying portfolios into a 22% return for the LPs.
Why Revolvers Work
Revolvers generate high returns by earning carry in each fund they enhance, compounding returns over time. They also benefit from exposure to dual portfolios, further strengthening their performance.
When structured properly, a Revolver can accumulate substantial carry without deploying its own capital, enabling it to deliver higher returns to its LPs than they would have earned from the underlying portfolios alone, while also increasing returns for the GP.
Alts for the Retail Investor
The Revolver is not only an attractive investment vehicle for institutional investors, but also well suited to retail investors. The Revolver itself generates early cash flows while building long-term value, and it enables the funds it enhances to issue senior equity tranches with preferential returns that are particularly attractive to retail investors.
Financing
Your Own Funds
Forming and Capitalizing the Revolver
The Revolver is a special purpose vehicle formed to acquire and hold high-grade assets such as Treasury bonds that can be used to enhance a GP's other funds.
Capitalizing the Revolver
The Revolver's First Engagement
In this example, we track a Revolver that enhances four funds over 12 years, helping to seed each fund's portfolio. The diagram below illustrates the Revolver's first engagement. The Revolver uses its assets as collateral to enhance the debt that the enhanced fund issues to acquire assets for its portfolio. Note that no LP commitments are needed to launch the enhanced fund; at the end of 3 years, the GP has a 79% carry in the enhanced fund, while the Revolver has earned a 21% carry in the fund.
In its first 3 years, the Revolver earns:
-
5% per year in credit enhancement fees,
-
7% interest on its collateral, and
-
7% per year of the fund’s carried interest (21% over 3 years).
Engaging Fund #1
The Revolver earns 13.4% per year for the 3 years it enahnces its first fund, while also picking up a 21% carried interest in the fund.
The Revolver's First Exit
At the end of 3 years, the enhanced fund (Fund #1) issues LP units and assumes new debt to repay the debt the Revolver guaranteed. In this example, the Revolver acquires the subordinate LP units in Fund #1 by using a portion of the credit enhancement fees it earned. The subordinate units, plus the carried interest that the Revolver earned, serve to provide returns for the Revolver for years to come as it enhances other funds.
Exiting Fund #1
The Revolver exits Fund #1 with 56% of the carry, while the GPs retain 44% of the carry—twice what they would have had under a conventional 2 & 20 structure.
The Revolver Repeats the Cycle, Picking Up Additional Carry in More Funds
Over the next nine years the Revolver repeats this cycle three more times. The diagram below shows how the Revolver's portfolio total carry grows over four cycles.
With each new fund the Revolver enhances, it earns:
-
5% per year in credit enhancement fees,
-
7% interest on its collateral, and
-
7% per year of the fund’s carry (21% for 3 years),
-
plus returns from its carry in each of the previous funds.
The Revolver When Exiting Fund #4
While enhancing Fund #4, the Revolver earns 26.2% per year. When it exits, it does so with 56% of the carry in Funds 1, 2, 3 and 4.
The Math
The following spreadsheet illustrates how a Revolver's returns compound every three years as it accrues carry with each fund it enhances.
Returns for the Revolver
Tables Are Not Available on Mobile Devices
Returns for the Enhanced Fund
The Assumptions Used in Modeling the Above Tables
Using the Revolver to Finance Others' Funds