Knowledge
How SHLs are structured, how interest accrues, and why day-count conventions matter when reconciling balances across a fund hierarchy.
A shareholder loan (SHL) is a debt instrument extended by a shareholder — typically a fund or holding entity — to a portfolio company or intermediate vehicle within the same ownership structure. Unlike third-party bank debt, the lender and the borrower are related parties, which gives the fund considerable flexibility in setting commercial terms.
Private equity funds routinely deploy capital as a combination of equity and shareholder loans rather than equity alone. The reasons are well established:
Every shareholder loan is governed by a loan agreement that specifies the following parameters. These are the fields that a cap table system must capture in order to calculate accrued interest accurately.
| Term | Description | Typical range |
|---|---|---|
| Interest rate | Annual rate applied to the outstanding principal. May be fixed or variable (e.g. linked to EURIBOR plus a margin). | 8% – 15% p.a. in PE structures |
| Day-count basis | The convention used to calculate the fraction of a year for any given period. Act/360 and Act/365 are most common; see below. | Act/360 or Act/365 |
| Compounding frequency | How often accrued interest is added to the principal balance and begins earning further interest. | Annual or quarterly |
| PIK vs cash pay | Payment-in-kind (PIK) interest is not paid in cash but capitalised onto the principal. Cash-pay interest is settled periodically. | Mostly PIK in PE buyouts |
| Maturity | The date on which all outstanding principal and accrued interest falls due. Often aligned to the fund's expected exit horizon. | 5 – 10 years |
The day-count basis determines how many days are counted in the numerator and what divisor is used as the "year". Two conventions dominate PE shareholder loans:
The formula is the same in both cases; only the basis differs:
To make the difference concrete, consider a loan of €10,000,000 at 10% p.a. over a standard 90-day quarter:
| Convention | Principal | Rate | Days | Basis | Interest accrued |
|---|---|---|---|---|---|
| Act/360 | €10,000,000 | 10.00% | 90 | 360 | €250,000.00 |
| Act/365 | €10,000,000 | 10.00% | 90 | 365 | €246,575.34 |
The difference here is €3,424.66 for a single quarter on a €10m loan. Over a five-year hold, compounded annually, the divergence between the two conventions becomes material — which is why the basis must be recorded precisely against each instrument class and applied consistently throughout the life of the investment.
Most PE shareholder loans compound annually: at each anniversary of the loan origination, the interest accrued during the preceding 12 months is capitalised onto the principal. The enlarged principal then accrues interest at the same rate in the following period. This is the standard PIK capitalisation mechanism.
Some structures compound quarterly, in which case the capitalisation event occurs at each calendar quarter-end. Quarterly compounding produces a marginally higher effective annual rate than annual compounding at the same nominal rate — a consideration when modelling exit waterfall scenarios.
Per-period rounding is standard practice. Fund administrators typically round the interest figure for each accrual period to two decimal places before capitalising it onto the principal. This mirrors the methodology used by auditors and fund accountants, and ensures that the balance shown in the cap table ties exactly to the figures in the audited financial statements. Rounding at the period level rather than at the end of the holding period prevents small cumulative differences from building up over a multi-year investment.
When a loan is drawn in a partial period — for example, if funds are advanced on 15 March and the first quarter-end is 31 March — interest accrues only for the actual days elapsed (16 days in this example) using the same day-count formula. The stub period is treated identically to a full period; only the day count changes.
In a typical Luxembourg PE structure, shareholder loans do not exist at a single level. They are often present at multiple points in the ownership chain, each with its own lender, borrower, rate and terms:
Each layer may carry a different interest rate, reflecting the margin between what the fund charges down and what the intermediate entity on-lends to the next level. Where a co-invest vehicle participates alongside the main fund, it will typically extend its own SHL to LuxCo on identical or parallel terms, so that the co-investors accrue interest at the same rate as the fund.
This multi-layer structure means that a cap table system must track each SHL as a distinct instrument class — with its own lender entity, borrower entity, rate, day-count basis and compounding schedule — rather than aggregating all debt at the portfolio company level. The aggregate SHL balance visible at TopCo level is the sum of all instruments flowing through the structure, and each must be reconcilable independently.
When modelling the exit waterfall, SHL principal and accrued interest at every level must be repaid before any equity distribution is calculated. Getting the interest schedule right at each layer is therefore not merely a bookkeeping exercise — it directly affects how proceeds are allocated between the fund, co-investors and management.
CapTab tracks every SHL across your entire fund hierarchy — rate, basis, compounding frequency and accrued interest — all in one place.