A semi-liquid fund can pay a steady distribution whatever it earns. The coverage ratio and the NAV line show what the payout is made of.
No. An evergreen fund's total return is its distributions plus the change in NAV per share, and the distribution rate is a payout policy, not a measure of what the fund earned. On an illustrative fund at a NAV of 25.00 paying a 5.5 per cent distribution yield, net investment income covers only 58.2 per cent of the payout, and 27.3 per cent of it is paid from capital. Total return is 7.6 per cent, but only because unrealised gains of 0.90 a share keep NAV rising.
Worked in full in The Evergreen Fund Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Semi-liquid private markets funds, especially those sold to wealth clients, usually advertise an annualised distribution rate: the latest monthly or quarterly distribution, annualised, over the current NAV. It is a real cash figure. What it does not say is where the cash came from, and in a fund whose return is mostly unrealised appreciation, a steady distribution has to be funded partly by handing investors back their own capital.
| Item | Per share | % of opening NAV |
|---|---|---|
| Opening NAV | 25.00 | |
| Net investment income | 0.80 | 3.2% |
| Net realised gains | 0.20 | 0.8% |
| Net unrealised appreciation | 0.90 | 3.6% |
| Total earned | 1.90 | 7.6% |
| Distributions paid, at a 5.5 per cent rate | −1.375 | 5.5% |
| Closing NAV | 25.525 | 2.1% |
Distribution = 25.00 × 5.5% = 1.375 a share.
Closing NAV = 25.00 + 0.80 + 0.20 + 0.90 − 1.375 = 25.525, a NAV change of 2.10 per cent.
Total return = (closing NAV − opening NAV + distributions) ÷ opening NAV = (0.525 + 1.375) ÷ 25.00 = 7.6%. In Excel, with opening NAV in B2, closing NAV in B3 and distributions in B4: =(B3-B2+B4)/B2. Equivalently, distribution yield plus NAV change, 5.5 + 2.1.
Coverage by income = 0.80 ÷ 1.375 = 58.2%. Including realised gains: 1.00 ÷ 1.375 = 72.7%.
Paid from capital = 1.375 − 1.00 = 0.375, or 27.3 per cent of the distribution.
Read the two percentages together. The 5.5 per cent yield is larger than the 4.0 per cent the fund actually realised in cash, income plus gains. The difference, 1.5 per cent of NAV, is covered by the 3.6 per cent of unrealised appreciation, which is a valuation, not cash. The fund paid out a mark.
The advertised figure is usually the most recent distribution annualised and divided by the current NAV, or sometimes by the original offering price. Both choices matter. If NAV has fallen since launch, quoting against the offering price shows a lower yield than the investor is being paid on current value; if NAV has risen, it shows a higher one. And because the rate is set by the board rather than earned, a fund can hold it steady through a year in which income falls, simply by paying a larger share from capital. Coverage is the line that reveals this, which is why it belongs next to the rate in every report, computed on the same period and the same share class.
Hold the income, the realised gains and the 5.5 per cent payout constant, and change only the unrealised line.
| Unrealised per share | Closing NAV | NAV change | Total return |
|---|---|---|---|
| −0.500 | 24.125 | −3.50% | 2.0% |
| 0.000 | 24.625 | −1.50% | 4.0% |
| 0.375 | 25.000 | 0.00% | 5.5% |
| 0.900 | 25.525 | 2.10% | 7.6% |
| 1.500 | 26.125 | 4.50% | 10.0% |
In every row the investor receives the same 1.375 of cash and the same 5.5 per cent yield. Total return runs from 2.0 to 10.0 per cent. The yield tells you nothing about which row you are in; the NAV line does. The row to remember is the third: NAV holds steady only if unrealised gains reach 0.375 a share, 1.5 per cent of NAV, every year. Below that the fund is shrinking per share while paying a constant rate.
Over several years. With flat valuations and the rate held at 5.5 per cent of the current NAV, five years of payouts total 6.67 a share and NAV falls from 25.00 to 23.18, a 7.3 per cent decline. Investors have received cash every quarter, and more than a quarter of it was their own subscription coming back.
The common mistake is to compare a semi-liquid fund's distribution yield with a bond's coupon or a closed-ended fund's IRR, as if it were a return. It is a payout. A fund can raise it by paying more capital back, and a fund with a lower yield and full coverage may be earning more. The second mistake runs the other way: treating any distribution paid from capital as a red flag. For a fund that owns growth assets and pays a fixed rate, some return of capital is arithmetic. The test is whether total return, distributions plus NAV change, beats the distribution rate over a full cycle, and whether coverage by income is stable or falling.
Ask for three numbers alongside the yield: net investment income per share, coverage, and the NAV per share history. Total return is yield plus NAV change; coverage tells you how much of the yield is earned in cash; the NAV line tells you whether the payout is sustainable at current marks. The companion workbooks in the free files for this book compare evergreen returns with drawdown fund returns on a like-for-like basis. For how fees cut the gross return before any of this, see how much of a semi-liquid fund's return the fees take.
Divide net investment income per share by distributions per share over the same period. In the worked case 0.80 of income against a 1.375 distribution is 58.2 per cent coverage, or 72.7 per cent once 0.20 of realised gains are included. The remaining 0.375 a share is paid out of capital.
Because distributions above earned income come out of NAV. In the worked case, with flat valuations the fund earns 1.00 a share and pays 1.375, so NAV drops from 25.00 to 24.625, a 1.50 per cent fall, while the total return is still a positive 4.0 per cent.
Not by itself. A fund whose return is mostly unrealised growth must pay a fixed rate partly from capital. The test is whether total return exceeds the payout. In the worked case NAV stays flat at 0.375 a share of unrealised gains; with none, five years at the same rate take NAV down 7.3 per cent.
This article is one calculation from The Evergreen Fund Handbook. 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.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: private equity and private markets → · All 453 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.