Look-Through Leverage: The Debt Behind an LP's Distributions
An LP's capital stack has more floors than its quarterly report shows. Look-through leverage counts all of them, from the portfolio companies up to the fund.
IN BRIEF
One distribution can rest on company debt, a holdco note or dividend recap, and a NAV loan, each disclosed in a different document to a different reader.
Look-Through LTV adds up the debt that ranks ahead of the LP and divides it by the look-through value base: that debt, plus any subscription line balance, plus fund NAV.
Cash Provenance splits a fund's distributions into earned, borrowed and related-party cash.
A company dividend counts as earned only up to the free cash flow the company produced and kept, net of new borrowing.
An LP can ask for the trace with five requests. A GP who sends it first decides how it is read.
I have watched a fund's best IRR turn out to be its credit line. Nothing in the report was wrong. Each number was accurate on its own page, and nobody had put the pages side by side.
For sixteen years I worked on the operating side of private equity, inside the companies a fund owned. From that seat, borrowing shows up early. A dividend recap appears in the company's compliance certificate the quarter it closes. A holdco PIK note appears in the cash forecast as interest that never leaves the bank account and grows anyway. Months later the LP receives a distribution and a steady NAV, with no line in the report that connects the two.
NAV lending, dividend recaps and holdco notes have each been explained well on their own. This article gives LPs two measures that add them up. Look-Through LTV shows how much debt ranks ahead of an LP's money. Cash Provenance shows how much of a fund's DPI was earned. A GP already holds every document needed to build both.
An LP owns the bottom of every layer in the stack, and usually receives a report on one of them.
What Is Look-Through Leverage?
Look-through leverage is the total borrowing that ranks ahead of an LP's equity, counted from the portfolio companies up to the fund. It matters because NAV is what remains after every layer is paid, and each layer reports to a different audience.
Look-Through LTV = debt ahead of the LP ÷ (debt ahead of the LP + subscription line balance + fund NAV) Debt ahead of the LP = the fund's share of portfolio company net debt + holdco debt + NAV loan balance + any fund-level preferred equity. The denominator is the look-through value base, close to the fund's share of portfolio enterprise value. Shown beside the ratio: PIK accrued at each layer. |
The subscription line stays out of the debt figure for a reason. It is secured on LP commitments, not on the companies, and LPs repay it through capital calls, so it does not change how many dollars an LP loses when company values fall. It changes when LPs pay in, and that moves IRR. Reported NAV is stated after the line is deducted, which is why its balance goes back into the value base. Loan-to-value is the measure every lender in the stack already uses. Applying it to the LP's position lets an LP compare its own exposure with what each lender sees.
Which Layers Sit Ahead of the LP?
Three layers of claims can rank ahead of an LP's capital, and a fourth changes the timing of its cash. Each one is secured on something different and disclosed to someone different.
EXHIBIT 1 · THE CAPITAL STACK BEHIND ONE LP DISTRIBUTION
Company senior and second-lien debt Secured on: The company's assets and cash flow Who sees it: Company lenders and the board Where it is disclosed: Credit agreement and quarterly compliance certificate Arete view: Read the cash sweep and restricted payments before the leverage ratio |
Holdco PIK notes or recap debt Secured on: Shares of the operating company Who sees it: The holdco lender and the sponsor Where it is disclosed: Holdco accounts, often absent from the LP report Arete view: The layer LPs miss most often |
NAV loan or NAV preferred equity Secured on: The fund's portfolio Who sees it: The NAV provider, and the LPAC if consulted Where it is disclosed: NAV facility reporting Arete view: Watch the loan-to-value test and the maturity |
Subscription line (shown beside) Secured on: LP commitments Who sees it: The fund's lender Where it is disclosed: Capital account statements Arete view: Moves timing and IRR, not company risk |
Source: Arete Ventures.
Company debt
This is the layer LPs know best, and the one most often reported. The two terms that matter most sit below the leverage multiple: the excess cash flow sweep, which sends a share of each year's cash to lenders, and the restricted payments basket, which caps what the company may pay its owner. Together they decide how much cash can leave the company at all.
Holdco PIK notes and dividend recaps
A holdco note sits above the operating company, so the company's credit agreement does not count it and the company's leverage ratio looks unchanged. Its interest is often paid in kind, which means no cash leaves and the balance compounds. A dividend recap works the other way: new debt at the company, used at once to pay the owner. Both raise the claims ahead of the LP. In the LP report they show up, if at all, as a lower equity value for that company.
NAV loans and NAV-based preferred equity
NAV lending is borrowing at the fund level, secured on the whole portfolio and repaid from exits. Some funds use preferred equity in place of a loan, which ranks ahead of the LPs in the same way and is often left out of leverage limits written for debt. Because the collateral is the whole portfolio, trouble at one company can tighten the loan-to-value test for all of them.
Subscription lines
A subscription line lets the fund invest before it calls capital, secured on what LPs have committed. It stays out of the debt figure because its main effect is on timing and reported IRR.
Why Does No Report Show the Total?
Each layer reports to the party that lent against it. The company's lenders read the credit agreement and the holdco lender reads the holdco accounts. The NAV provider receives facility reports, and the LPAC may see them too.
Regulation does not close the gap. In the EU, the AIFMD leverage rules tell a fund whose core strategy is buying control of non-listed companies to leave the debt inside those companies out of its leverage figure, as long as the fund cannot lose more than it invested. In the US, large private equity advisers report fund-level borrowing and defaults at controlled portfolio companies on Form PF, and Form PF is confidential. Regulators see parts of the stack. The LP, whose money sits at the bottom of it, rarely sees it in one place.
Industry reporting has moved, but only part of the way. ILPA's updated reporting templates, recommended for reporting from the first quarter of 2026, reconcile management fees from gross to net and show fund performance with and without the subscription line. They are voluntary, and they do not ask for NAV loans, holdco debt at portfolio companies or borrowing by the GP itself.
What Is Cash Provenance?
Cash Provenance is the share of a fund's distributions paid from operating cash and arm's-length exits. The remainder was borrowed at some layer of the stack, or came from the GP selling a company to a vehicle it also manages.
Cash Provenance = earned distributions ÷ total distributions Report the borrowed share and the related-party share beside it. |
EXHIBIT 2 · THREE KINDS OF DISTRIBUTION
Earned Sources: Exits to unaffiliated buyers; dividends covered by free cash flow the company produced and kept What remains for the LP: Exposure reduced, no new claim ahead of the LP Repeatable?: Yes, if the strategy works |
Borrowed Sources: Dividend recaps, holdco PIK proceeds, NAV loan draws, dividends beyond retained free cash flow What remains for the LP: The same assets with more debt ahead; some NAV-funded payments can be recalled Repeatable?: No. It spends future distributions |
Related-party Sources: Sales to the GP's continuation vehicle or other vehicles it manages What remains for the LP: The asset priced partly by its own manager Repeatable?: Depends on how the price was set |
Source: Arete Ventures.
One rule settles most of the hard cases. A company dividend counts as earned up to the free cash flow after debt service that the company has produced and kept since its last distribution, less any new borrowing in the same period. Anything beyond that was paid with borrowed money, whether it came from a new term loan, a revolver draw or a holdco note. A company cannot pay out more cash than it produced unless someone lends it the difference. This is the fund-level partner to the DPI Conversion Rate in our article on DPI in private equity, which measures how much of one company's EBITDA can become cash for its fund.
A sale to a continuation vehicle is real cash for the LPs who sell. It is not an arm's-length exit, because the GP manages both sides of the trade. Whether it deserves to count as earned depends on how the price was set, which the questions later in this article test.
Who Gains From a Borrowed Distribution?
The LP receives cash early and carries the cost later, so the answer depends on the fund's terms. Interest on a NAV loan or holdco note is paid from the portfolio the LP owns. Returning capital sooner lifts IRR, and in funds with an IRR-based preferred return it can bring the GP closer to carried interest. Management fees are usually charged on commitments or invested capital, so a NAV-funded distribution rarely reduces them. And some LPAs allow NAV-funded distributions to be recalled if the facility comes under pressure.
None of this makes a borrowed distribution wrong. It makes the terms part of the diligence. Four lines of the LPA answer most of it: the leverage limit and whether preferred equity counts toward it, the recall clause, the fee base, and how the waterfall treats a distribution funded by debt.
Is the GP's Own Commitment Borrowed?
One more layer sits outside the fund altogether. LPs expect the GP to invest its own money alongside them, and commitments of 2% to 4% of fund size are now typical, up from 1% to 2% a decade or so ago. Many GPs fund part of that with debt: loans to the management company, or facilities secured on future management fees and carried interest.
This debt does not rank ahead of the LP on the fund's assets, so it stays out of Look-Through LTV. It matters for a different reason. A GP commitment funded with borrowed money is a smaller real stake than the headline suggests, and a GP paying interest on that loan has its own reason to want distributions early. Because it sits in the GP's own entities, outside the fund's accounts, it does not appear in the LP report.
Ask how the GP commitment is funded, by whom, and what secures the loan. Then put it in the side letter: notice of any NAV facility, any holdco debt at a portfolio company, and any financing at the GP or management company secured on the fund's fees, carried interest or fund interests.
How Do You Trace a Distribution?
An LP can build both measures from five requests to the GP. Most managers already hold every item.
Distribution notices with a source for each payment for the last twelve quarters: exit, dividend, recap, NAV loan draw or secondary sale.
The NAV facility: balance, loan-to-value and draws by quarter, with the use of proceeds for each draw.
Holdco debt by company, with PIK accrued to date.
A leverage summary for each company: net debt, the excess cash flow sweep and the capacity left for restricted payments. The compliance certificate holds all of it.
Free cash flow after debt service since the last distribution, for every company that paid a dividend.
If the GP will not share, an outside-in estimate still helps. Match distribution dates against NAV loan draws in the capital account statements, and against dividend recaps reported in the leveraged loan press. A distribution that lands within weeks of a recap at a portfolio company is rarely a coincidence.
A Worked Example
WORKED EXAMPLE · ILLUSTRATIVE
A fund has called $1,000 million from LPs and distributed $600 million, so its DPI is 0.6x. NAV stands at $1,100 million. The trace sorts the $600 million into five sources.
Source | Amount | Bucket |
Exits to unaffiliated buyers | $290M | Earned |
Dividends covered by retained free cash flow | $40M | Earned |
Dividend recap at one company | $100M | Borrowed |
NAV loan draws paid out to LPs | $70M | Borrowed |
Two companies sold to the GP's continuation vehicle | $100M | Related-party |
Cash Provenance is 55%: $330 million earned, $170 million borrowed (28%) and $100 million related-party (17%).
The stack behind the fund's NAV holds $1,400 million of company net debt at the fund's share, $150 million of holdco PIK notes and a $200 million NAV loan, part of which funded follow-on investments. Debt ahead of the LP is $1,750 million. Look-Through LTV is 1,750 ÷ (1,750 + 1,100), or 61%. The company-level view an LP usually receives counts only the $1,400 million, which gives 49%. The fund repaid its subscription line long ago, as most funds have by this stage, so no balance enters the value base.
0.6x | 55% | 61% |
DPI as reported | Cash Provenance | Look-Through LTV |
The LP's report showed a 0.6x DPI and company leverage near the middle of the market. The trace shows that close to half the cash was borrowed or sold to the GP's own vehicle, and that $350 million of debt ahead of the LP never appeared in the company view.
What Does the Stack Do in a Downturn?
The upper layers turn an ordinary fall in company values into a much larger fall in NAV. Take the same fund and let enterprise values across the portfolio drop 20%, from $2,850 million to $2,280 million. The debt does not drop with them.
EXHIBIT 3 · A 20% FALL IN ENTERPRISE VALUE, WITH AND WITHOUT THE UPPER LAYERS
If the fund carried company debt only ($1,400M) Equity before: $1,450M Equity after: $880M Change: Down 39% |
With the full stack ($1,750M) Equity before: NAV $1,100M Equity after: NAV $530M Change: Down 52% |
Source: Arete Ventures. Illustrative.
The extra 13 points come from layers the LP could not see. The order of payment explains why: in a sale or a restructuring, the company's lenders are paid first, then the holdco lender, then the NAV provider, and the LP takes what is left.
Two features make this worse in practice. PIK interest keeps adding to holdco and fund claims while values fall. And a NAV loan's loan-to-value test can push a fund to sell companies near the bottom of a cycle. The share of business development company loans using PIK rose from about 6% to about 10% between early 2022 and early 2026, which the Federal Reserve Bank of Boston reads as cash-flow strain. PIK interest is now appearing in NAV facilities as well, with lenders still setting the guardrails, so the same feature can sit at two levels of one stack.
Calculate It for Your Fund
Our free Look-Through Leverage Calculator runs Cash Provenance, Look-Through LTV and the stress test on any fund's figures. It opens with the example above, suggests what to ask the GP based on the results, and saves a one-page PDF for an IC file.
What Should an LP Ask, and What Does a Good Answer Sound Like?
Six questions turn the trace into a conversation with the GP. In each case the strong answer arrives quickly, because the GP has already run the number.
What was your subscription line balance at each quarter end for three years, and your IRR with and without it?
A strong answer comes with both figures. A weak answer is a promise to come back later. A manager who has never computed IRR without the line is telling you something it did not intend to.
What share of your distributions was earned, and what share was borrowed or sold to your own vehicles?
A strong answer gives percentages by bucket. A weak answer moves the conversation to TVPI.
Which companies have you held for more than five years, and what event gets each one out?
A strong answer names the event and a rough date. "Market conditions" is not an answer. A long hold that has already paid a recap is the pattern to probe hardest.
On your continuation vehicle, who set the price and who else bid?
A strong answer describes a process with outside bidders. A fairness opinion on its own documents a process without creating one.
How much of your reserve capital went into bottom-quartile companies?
A strong answer is a number, because the GP tracks it. Reserve decisions are where judgment and sunk-cost bias part company. The same failure shows up in deep tech due diligence, where teams keep funding the experiment that nearly worked.
How is your GP commitment funded?
A strong answer splits the commitment into partners' cash and borrowing, and names what secures the loan. A weak answer is that "the partners have committed", with nothing on how.
What Should GPs Do Before LPs Ask?
A GP who sends the trace before an LP asks for it controls how it is read, and it helps the raise. In a 2026 CSC survey of 200 LPs, nine in ten said clear disclosure of a GP's fund-level leverage and liquidity tools would make them more likely to commit or re-up. One page each quarter is enough.
EXHIBIT 4 · A ONE-PAGE QUARTERLY LOOK-THROUGH REPORT
Look-Through LTV Note: Layers included |
Cash Provenance: earned / borrowed / related-party Note: Since inception and last 12 months |
Subscription line balance Note: Days outstanding |
PIK accrued, by layer Note: Company, holdco, fund |
Next maturity at any layer Note: Amount and date |
Source: Arete Ventures.
Our LP Look-Through Workbook carries a fillable version of this page, the five requests, a rulebook for classifying hard cases and the LPA points to raise with counsel. It is a free PDF with no sign-up.
A high borrowed share is not a verdict. A recap at a company with strong free cash flow and falling leverage can be a sound decision. What hurts a re-up is an LP finding the recap on its own, two years later, in someone else's report.
How Arete Helps
Arete reviews how a fund's returns were built for LPs before a commitment, at a re-up and before buying a secondary position. GPs preparing a raise use the same work to see their fund the way a careful LP will. We build Look-Through LTV and Cash Provenance from the GP's documents and test the answers to the six questions. The work sits within our private equity and venture capital advisory practice, on fixed fees over four to twelve weeks, and Gaurav Shah leads every engagement. Arete is not a registered investment adviser and does not recommend investments. We test how a return was produced.
Reviewing a commitment or a re-up?
Bring the fund and your decision date. A thirty-minute call is enough to tell which of the five requests matter most.
WHERE MARKETS STAND, AS OF NOVEMBER 2026
PE-owned US companies borrowed $94 billion in 2025 to fund payouts (Moody's, via Bloomberg Tax).
KBRA-rated NAV loan issuance reached a record $23 billion across 38 transactions in 2025 (KBRA, July 2026).
PIK use in business development company loans rose from about 6% to about 10% between early 2022 and early 2026 (Federal Reserve Bank of Boston, August 2026).
Distributions as a share of NAV have run below their historical average for four straight years (Bain & Company, 2026).
54% of LPs call DPI critical or most critical when judging performance (McKinsey LP survey, January 2026).
37% of GPs surveyed by Investec said they had used NAV finance to speed up LP distributions (PE Trends, November 2025).
Nine in ten LPs say clear disclosure of fund-level leverage would make them more likely to commit or re-up; 58% want more visibility of financing costs (CSC, July 2026).
Updated quarterly.
Key Terms
DPI (distributions to paid-in). Cash returned to LPs divided by capital called. The closest private markets come to cash on cash, which is why it pays to check how it was produced.
TVPI (total value to paid-in). DPI plus the reported value of what the fund still holds. The second half is an estimate by the manager being measured.
Subscription line. Short-term fund borrowing secured on LP commitments. It lets a fund invest before calling capital and raises reported IRR without changing the investment.
NAV loan. Fund borrowing secured on the portfolio. When the proceeds fund a distribution, LPs receive future returns early, less interest.
NAV preferred equity. Fund-level financing structured as preferred equity, ranking ahead of LPs in the same way as a NAV loan.
Holdco PIK note. Debt issued above an operating company, with interest added to the balance in place of cash.
Dividend recap. New company borrowing used to pay a dividend to the owner.
Continuation vehicle. A new vehicle managed by the same GP that buys assets from an existing fund. Price discovery is the whole question.
GP commitment financing. Borrowing by a GP or its management company to fund its own commitment to the fund, often secured on future fees or carried interest.
Look-Through LTV. Debt ahead of the LP at every layer, divided by that debt plus any subscription line balance plus fund NAV.
Cash Provenance. The share of distributions paid from operating cash and arm's-length exits.
Frequently Asked Questions
What is look-through leverage in private equity?
Look-through leverage is all the borrowing that ranks ahead of an LP's equity, counted from the portfolio companies up to the fund: company debt, holdco debt and any NAV loan or NAV preferred equity. Expressed as Look-Through LTV, it is that debt divided by the look-through value base: the debt, plus any subscription line balance, plus fund NAV. The subscription line stays out of the debt figure, because it is secured on LP commitments.
How can an LP tell whether distributions were borrowed?
Trace each distribution to its source. Exits to unaffiliated buyers and company dividends covered by free cash flow the company produced and kept are earned. Dividend recaps, holdco PIK proceeds, NAV loan draws and dividends beyond retained free cash flow are borrowed. Sales to the GP's own continuation vehicle are related-party. Cash Provenance is the earned share of the total.
What is NAV lending, and why does it matter to LPs?
NAV lending is borrowing by a private equity fund secured on the value of its portfolio, repaid from exits. It matters to LPs because the lender ranks ahead of them, and because NAV loan proceeds paid out as distributions raise DPI without any company being sold. KBRA-rated NAV loan issuance reached a record $23 billion in 2025.
What is a dividend recap in private equity?
A dividend recap is new borrowing by a portfolio company used to pay a dividend to its private equity owner. It returns cash to the fund and its LPs early, and leaves the company with more debt. For an LP, a recap is a borrowed distribution unless free cash flow the company produced and kept covered the payment.
How should an LP evaluate a fund's reported IRR?
Ask for IRR with and without the subscription line, plus the line's balance at each quarter end for three years. The gap shows how much of the reported return came from financing timing. Then check DPI by source, because a high IRR built on borrowed or related-party distributions tells a different story from one built on exits.
Is a distribution from a continuation vehicle earned?
It is real cash for the LPs who sell, but it is a related-party transaction, because the GP manages both the selling fund and the buying vehicle. Whether it should count as earned depends on the price process: outside bidders, an independent lead investor and a price tested against them. A fairness opinion alone does not establish that.
Do GPs borrow to fund their own commitment?
Often, in part. GP commitments of 2% to 4% of fund size are now typical, and many GPs fund some of that with management company loans or facilities secured on future fees and carried interest. That debt does not rank ahead of LPs on fund assets, but it shrinks the GP's real stake and sits outside the LP report. LPs should ask how the commitment is funded.
For the company-level view of the same question, see our article on DPI in private equity. For how LPs test a GP's operating claims, see operator-led investing.
Sources
BDO, Preparing for Q1 2026: The New Era of ILPA Reporting and Performance Templates
Commission Delegated Regulation (EU) No 231/2013, Article 6 (AIFMD leverage)
CSC, Future Private Capital CFO 2026, reported by City AM (July 2026)
Davis Polk, The continuing use of preferred equity in private equity NAV facilities (January 2026)
Federal Reserve Bank of Boston, PIK in BDC portfolios (August 2026)
KBRA, Private Credit: NAV Loans Evolve as Product Goes Mainstream (July 2026)
Mayer Brown, Payment-in-kind interest in fund finance transactions (August 2026)
Torys, How sponsors are funding increasingly large GP commitments (October 2025)
Gaurav Shah is Managing Partner of Arete Ventures. He spent sixteen years as a private equity operating partner, running and improving the companies his firm owned, and sits on venture capital and private equity investment committees.
