The six levels, one at a time. No. 2: Leverage
When to use leverage as... leverage
Leverage is a tool. Used as one, it works. Used as a substitute for the investment case, it waits.
By Katriona Lee, Reuben AI. Updated .
The short answer
In private markets, debt can sit at all six levels: the asset, the deal, the vehicle, the fund, the manager's approach and the investor's total portfolio. Each layer is reasonable alone. The question is what they add up to when you look through all of them at once.
Every layer of private markets has its own reason to borrow. The company borrows to grow. The buyer borrows to buy. The vehicle borrows to bridge. The fund borrows to smooth. Each decision is sensible on the page in front of you. Very few people are looking at all the pages together.
Pick a level and see what the same word, leverage, means there.
Illustrative only: each layer stacks on the ones below it.
- What it is
- Debt on the business, property or loan itself.
- What it does
- Amplifies the asset's own cash flows, in both directions.
- What to check
- Covenants, maturity, refinancing risk, and whether cash flows cover the debt without heroic assumptions.
Leverage as leverage, or leverage as the thesis?
There is a simple test. Take the debt away. Is there still an investment case? If the asset still improves, the cash still comes, the plan still works, then leverage is doing its job: amplifying a good idea. If the case collapses, the debt was never the tool. It was the thesis.
The stack is the risk
Debt at the asset. Financing on the deal. A facility at the fund. Each one passes its own credit committee. Together they can leave an investor far more exposed than any single document suggests. You only see it if the records connect, from the loan agreement at the bottom to the investor's total portfolio at the top.
What a good committee asks
- How much of the expected return comes from leverage, and how much from the asset getting better?
- What happens if refinancing costs more, or takes longer, than planned?
- How are fund-level facilities affecting the performance figures we are being shown?
- Looking through every layer, how much debt sits under this position?
Previous: The Anatomy of a Deal. Next: To Fund or Not to Fund.
Questions and answers
Where does leverage sit in private markets?
At every level: the asset, the deal, the vehicle, the fund through facilities, the manager's overall approach and the investor's total portfolio. Each layer can add its own debt.
What is a subscription line?
A fund-level credit facility secured against investors' commitments, used to bridge capital calls. It changes the timing of cash flows, which can affect how returns are reported.
What is a NAV facility?
A fund-level loan secured against the value of the fund's existing investments rather than undrawn commitments. It adds debt above the debt already held in the underlying assets.
How should an investor assess stacked leverage?
By looking through each level to the underlying holdings, so debt at the asset, vehicle and fund levels is read together rather than one layer at a time.
Does Reuben AI judge whether leverage is appropriate?
No. Reuben AI keeps the evidence on debt at each level linked in one record so the team can see it together. Judgement stays human.
Reuben AI is built as one linked record across all six levels of private markets. See it on your own deals, or explore what it could add for your platform's clients.
Read next: The six levels of private markets diligence or browse the Resource Hub.