A dedicated, cheaper share class for one private bank, priced on new money, cannibalised money and the side letters that may claim the same discount.
A share class dedicated to one distributor breaks even at its annual fixed cost divided by what each euro in it really earns: the class margin on genuinely new money, less the discount given away on money that would have come anyway. For a class 20 basis points cheaper, with 63,000 a year of costs and a quarter of its volume cannibalised, that is 17.4 million. If institutional MFN clauses pass the same discount to 300 million of other holdings, break-even rises to 182.9 million, 1.83 times the 100 million the distributor promised.
Worked in full in The Private Wealth Fundraiser by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A private bank offers to place 100 million of an evergreen fund across its advisory book, on one condition: a class 20 basis points cheaper than the standard one for its clients. The manager has to decide whether the class pays, and what minimum volume to write into the distribution agreement. Most answer with the first line of the calculation below and stop there.
Earnings per euro in the class = (1 − cannibalisation) × class margin − cannibalisation × discount
Break-even volume = (annual class cost + MFN cost) / earnings per euro
Excel: =(Fixed+MFNPool*Discount)/((1-Cannibal)*(StdMargin-Discount)-Cannibal*Discount)
| Input | Value |
|---|---|
| Manager's net margin, standard class, after distribution costs | 0.75% |
| Discount on the dedicated class | 20 bps |
| Manager's net margin, dedicated class | 0.55% |
| Set-up cost (ISIN, documents, administrator, platform onboarding), over 5 years | 90,000 |
| Running cost a year (class accounting, reporting, audit) | 45,000 |
| Share of class volume that would have come through the standard class | 25% |
| Volume promised by the distributor | 100,000,000 |
| MFN holdings able to elect the discount | 300,000,000 |
Step 1, annual cost of the class. 90,000 / 5 + 45,000 = 18,000 + 45,000 = 63,000.
Step 2, the naive break-even. 63,000 / 0.55% = 11.5 million. This treats every euro as new money.
Step 3, cannibalisation. A quarter of the class comes from clients who would have bought the standard class through the same bank. On that quarter the manager earns nothing new and gives up 20 basis points. Earnings per euro: 75% × 0.55% − 25% × 0.20% = 0.4125% − 0.05% = 0.3625%. Break-even: 63,000 / 0.3625% = 17.4 million.
Step 4, the side letters. The fund's institutional investors hold MFN clauses entitling them to any better fee granted to an investor whose holding is equal to or smaller than theirs. If the clause looks through the bank's nominee account to the underlying clients, each a few hundred thousand, every MFN holder qualifies; if it counts the nominee as one investor of up to 100 million, only holdings at least that large do. Either way, if 300 million of MFN holdings elect the 20 basis points, the cost is 300,000,000 × 0.20% = 600,000 a year. Break-even: (63,000 + 600,000) / 0.3625% = 182.9 million.
| Volume raised, million | Earnings in the class | After class costs | After MFN pass-through |
|---|---|---|---|
| 30 | 108,750 | 45,750 | -554,250 |
| 50 | 181,250 | 118,250 | -481,750 |
| 100 | 362,500 | 299,500 | -300,500 |
| 150 | 543,750 | 480,750 | -119,250 |
The class's own cost is small: it still pays if the bank delivers 30 million instead of 100. The side letters are not. With the MFN cost the class loses money at every volume the bank could plausibly deliver, and the minimum volume clause would have to sit at 182.9 million to protect the manager, a number no distributor will sign. The decision is therefore not about the minimum volume. It is whether the fund's MFN clauses carve out terms granted to distributors and their nominees, which most well-drafted side letters do, and whether that carve-out was actually negotiated into the letters this fund signed.
| Cannibalisation | Earnings per euro | No MFN | MFN pool 150 | MFN pool 300 |
|---|---|---|---|---|
| 0% | 0.5500% | 11.5 | 66.0 | 120.5 |
| 25% | 0.3625% | 17.4 | 100.1 | 182.9 |
| 50% | 0.1750% | 36.0 | 207.4 | 378.9 |
Cannibalisation matters more than it looks: at 50 per cent, half the class is existing demand repriced, and earnings per euro fall to less than a third of the class margin. It is highest when the distributor already sells the standard class, which is the usual case, since banks ask for a better class once they have seen the product sell. Measure it from the bank's own flows before the class launches, not after.
Dividing the class cost by the class margin, 11.5 million, and calling the deal safe because the promise is almost nine times larger. That ignores the two costs that do not appear on the class's own profit and loss: the discount on money that was coming anyway, and the discount the manager may owe to everyone else. Ask legal for the MFN schedule before pricing the class, and price retrocession-free classes the same way, as described in how retrocessions are calculated.
The fee stack, the total-cost sheet and the new-class test are among the working documents that come with the free workbook for this book.
A large private bank or platform often asks for a lower fee or a class without retrocessions in exchange for a committed volume. A separate class keeps the discount ring-fenced to that distributor's clients. In the worked case a class 20 bps cheaper earns the manager 0.55 per cent instead of 0.75 on new money and pays for its 63,000 of annual costs above 17.4 million.
It can, if the clause is not carved out. MFN clauses usually let an investor elect any fee granted to a holder of equal or smaller size. If the clause looks through the distributor's nominee to its underlying clients, each small, every MFN holder qualifies; a carve-out for distributor classes avoids this. In the illustration 300 million of MFN holdings electing a 20 bps discount cost 600,000 a year, more than the class earns at 100 million.
It is the volume that would have come anyway through the standard class and now pays the lower fee. It earns nothing new and costs the full discount. At 25 per cent cannibalisation the class earns 0.3625 per cent on its volume instead of 0.55; at 50 per cent, 0.175, and break-even without MFN rises from 17.4 to 36.0 million.
This article is one calculation from The Private Wealth Fundraiser. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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