A worked year-by-year ledger of the performance fee in a semi-liquid fund: the high-water mark, the hurdle, the catch-up, and who rides free.
Each year, take the rise in NAV above the high-water mark, charge the fee rate on it, and cap the fee so that investors keep at least the hurdle return. With an illustrative 12.5 per cent fee, a 5 per cent hurdle with full catch-up and a high-water mark, a fund returning 11, minus 6, 9 and 14 per cent from 100 pays 3.67 in performance fees and ends at 125.70. Without the high-water mark the same path would cost 4.48.
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 →
Most semi-liquid private markets funds charge a performance fee on total return, crystallised annually or quarterly, rather than carried interest on realised deals. The terms are usually summarised in one line of the prospectus, and the line hides three mechanisms that interact: the high-water mark, the hurdle and the catch-up. The only reliable way to read them is a ledger, one period at a time.
| Input | Value |
|---|---|
| Starting NAV per unit | 100 |
| Performance fee rate | 12.5% |
| Hurdle, annual, on start-of-year NAV | 5% |
| Catch-up | Full |
| High-water mark | Yes, fund level |
| Crystallisation | Annual |
| Return before performance fee, years 1 to 4 | 11%, −6%, 9%, 14% |
Pre-fee NAV = start NAV × (1 + return)
Uncapped fee = 12.5% × max(0, pre-fee NAV − high-water mark)
Cap = pre-fee NAV − max(high-water mark, start NAV × 1.05), so investors always keep the hurdle
Fee = min(uncapped fee, max(0, cap)). In Excel, with pre-fee NAV in C2, the mark in D2 and start NAV in B2: =MIN(12.5%*MAX(0,C2-D2),MAX(0,C2-MAX(D2,B2*1.05)))
New mark = max(old mark, end NAV).
| Year | Start NAV | Pre-fee NAV | High-water mark | Gain above mark | Fee | End NAV | Net return |
|---|---|---|---|---|---|---|---|
| 1 | 100.00 | 111.00 | 100.00 | 11.00 | 1.38 | 109.63 | 9.63% |
| 2 | 109.63 | 103.05 | 109.63 | 0.00 | 0.00 | 103.05 | −6.00% |
| 3 | 103.05 | 112.32 | 109.63 | 2.70 | 0.34 | 111.98 | 8.67% |
| 4 | 111.98 | 127.66 | 111.98 | 15.68 | 1.96 | 125.70 | 12.25% |
| Total | 3.67 | 125.70 |
Year 1 is the simple case: the 11 per cent return clears the 5 per cent hurdle, the catch-up is complete, and the fee is 12.5 per cent of 11.00, or 1.375. Year 2 loses 6 per cent, no fee is due, and the mark stays at 109.63. Year 3 is where the mark earns its place. The fund returns 9 per cent on its start-of-year NAV, but 6.58 of that only recovers the year 2 loss. The fee falls on the 2.70 above the mark, 0.34, instead of 1.16 on the full 9 per cent. In year 4 the mark has reset to 111.98 and the fee is again a straight 12.5 per cent of the gain.
The hurdle did not bind on this path, because every positive year beat 5 per cent comfortably. It binds near the threshold, and the catch-up decides how quickly the manager gets back to a full 12.5 per cent share.
| Return before fee | Fee | Net return | Fee as share of gain |
|---|---|---|---|
| 4.00% | 0.000 | 4.00% | 0.0% |
| 5.00% | 0.000 | 5.00% | 0.0% |
| 5.50% | 0.500 | 5.00% | 9.1% |
| 8.00% | 1.000 | 7.00% | 12.5% |
| 11.00% | 1.375 | 9.63% | 12.5% |
Between 5 per cent and 5.71 per cent, every extra point of return goes to the manager and investors stay pinned at 5 per cent. The catch-up completes where 12.5 per cent of the whole gain equals the gain above the hurdle: 5 ÷ (1 − 0.125) = 5.71 per cent. Above that the hurdle is irrelevant and the fee is a flat 12.5 per cent of the gain. It is the same equation as the catch-up in a closed-end waterfall, explained in how the GP catch-up is solved, except that here it is reset every year on NAV rather than solved once on cumulative distributions.
Run the same four years without a mark, charging the fee on each year's gain over its own start NAV, and the year 3 fee rises from 0.34 to 1.16. Total fees go from 3.67 to 4.48, an extra 0.81, and the end NAV falls from 125.70 to 124.78. On a pre-fee profit of 29.65 that is the difference between paying 12.4 per cent and 15.1 per cent of it. The mark is the clause that stops a volatile path from paying twice for the same ground.
Who rides free. A fund-level mark treats every unit alike. An investor who subscribes at 103.05, after the year 2 loss, gains 6.38 per cent on the climb back to 109.63 and pays no fee on it, because for the fund as a whole it is a recovery. Funds that care about this use equalisation or series accounting; most semi-liquid funds accept the free ride as the price of a single NAV.
The common mistake is to model the fee as 12.5 per cent of each year's positive return. It overcharges after every drawdown, as year 3 shows, and it ignores the hurdle zone where the fee is more than 12.5 per cent of the marginal return. The second mistake is to measure the fee's cost by the cash paid. On this path the fees total 3.67, but they take 3.95 off terminal NAV against a fund with no performance fee, because every unit paid also stops compounding.
Build the ledger: pre-fee NAV, mark, uncapped fee, hurdle cap, end NAV, new mark. Then test it on a path with a loss in it, because that is where the clauses earn their keep. The workbooks in the free companion files for this book compare evergreen and drawdown returns, including the share-class fee gap. For the whole fee stack in a semi-liquid fund, see how much of a semi-liquid fund's return the fees take.
The highest NAV per unit on which a performance fee has been crystallised. No fee is charged until NAV is back above it. In the worked case a 6 per cent loss in year 2 takes NAV from 109.63 to 103.05, and the year 3 fee is charged only on the 2.70 above the mark, 0.34 rather than 1.16.
Below a 5 per cent return no fee is due. Between 5 per cent and the point where the fee equals 12.5 per cent of the whole gain, every unit of return above the hurdle goes to the manager. That point is 5 divided by 0.875, or 5.71 per cent. At a 5.50 per cent return the fee is 0.500 and investors keep exactly 5 per cent.
Not directly, but with a fund-level high-water mark and no equalisation they can ride free. In the worked case an investor who buys at 103.05 after the year 2 loss pays no fee on the climb back to 109.63, a 6.38 per cent gain, because for the fund as a whole that climb only recovers a loss.
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.
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