Why PE Professionals Think About Debt Differently
First and foremost, I tend to see that you likely have a different relationship with leverage than most. Professionally, you are thinking about it constantly, and you’re already carrying a concentrated, illiquid, levered position of your own through your carry and co-invest (I’ve written about this concept before: Long Levered Equity). Today’s comments are less about the education of how to use debt, and more about the thoughtful side of it: whether it makes sense to stack more leverage on top of what you’re already carrying, through your mortgage, your auto loan, or your line of credit.
The familiarity with leverage is useful. It’s also the exact thing that can get you in trouble, especially once you see it as more leverage layered onto a position you’re already levered in.
Here’s the distinction I’d draw. Being comfortable with debt is not the same thing as needing to use a lot of it. Just because you understand leverage doesn’t mean your personal balance sheet should carry more of it than it needs to, on top of what your career already has you carrying. There’s real value in simplicity. A simpler personal balance sheet is easier to manage, easier to stress-test, and easier to sleep on.
Two types
It’s interesting, because I tend to see people sit on either end of a spectrum. Some say, I see how levered my life already is, and I’d like to de-lever where I can — paying cash for cars, putting more down on a down payment, not maxing out the line of credit for co-investments. Others are very comfortable with debt and actively look for rate arbitrage across their personal transactions.
In wealth management, there is rarely a right or wrong perspective. My goal is to explain how to take an intentional approach.
Morgan Housel has a concept worth keeping in mind here: The goal isn’t to take the biggest risk that could pay off. It’s to avoid the risk that could wipe you out. Everything else is optional. That one isn’t.
The debt on your personal balance sheet
If you remember the Balance Sheet framework from earlier in the series (link), this is the debt side of it. Most of you are carrying some combination of:
Mortgage
Auto loans
A line of credit, sometimes tied to co-investments
Each of these behaves differently. A mortgage on a primary residence is a very different animal than a line of credit you’re using to fund a capital call. One is amortizing, long-dated, and usually fixed. The other can be short-term, variable, and tied directly to your liquidity needs in a given year.
The mistake I see is treating all debt as one bucket. It isn’t. Before you decide what to do about it, you have to know what you’re actually holding.
Rates have moved. Has your comfort level moved with them?
A few years ago, a lot of this debt was cheap. That’s changed. Rates are meaningfully higher than when many of you took on your mortgage, your auto loan, or set up your line of credit.
So the question worth asking isn’t “Am I still carrying this debt?” It’s whether you’re still comfortable carrying it at today’s cost. That’s a different question, and it touches three things:
Your overall portfolio — does the return on your liquid assets still clear the hurdle of what you’re paying in interest?
Your cash flow — does debt service still fit comfortably inside your inflows without squeezing your protective reserve?
Your risk tolerance — has anything changed about your career, your firm, or your outlook that makes carrying leverage feel different than it did?
None of these have a universal right answer. They’re personal, and they’re worth revisiting rather than assuming the math that made sense a few years ago still holds.
Should you use excess cash to pay debt down?
This is the question I get the most, and it’s the one without a clean formula. Here’s how I think about it.
If you have excess cash sitting on your balance sheet, the decision to pay down debt versus deploy it elsewhere comes down to a comparison: what’s the after-tax cost of the debt you’re carrying, and what’s the realistic, risk-adjusted return on the alternative use of that cash. If your line of credit is costing you more than you can reasonably expect to earn holding it in liquid assets, paying it down isn’t just conservative. It’s the higher-returning decision. (I’ve written before about paying down your co-invest line of credit in more detail.)
But this isn’t purely a math exercise. It’s also about what letting that debt run does to your Protective Reserve and your Foundation for Liquidity Strategy, the framework from earlier in this series. Debt reduction is one legitimate use of excess cash. It competes with building your reserve, funding upcoming capital calls, and new fund commitments. The right answer depends on where you sit across all of those buckets, not just the interest rate on one loan.
Final thoughts
Debt isn’t something to be afraid of, and it isn’t something to treat casually either. You already understand leverage better than most people will ever need to. The discipline is applying that same clear-eyed thinking to your own balance sheet that you’d apply to any deal.
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