Both wrappers around the same asset, the fee drag per year of capital at work, the return at which the ranking flips, and what the liquidity sleeve does to the answer.
Measured per year of capital at work, yes when the assets do well, and not always otherwise. On the same illustrative asset returning 12.40 per cent gross, an evergreen fund charging 1.25 per cent of NAV and a 12.5 per cent performance fee over a 5 per cent hurdle costs 2.64 points a year, against 3.57 points for a closed-end fund charging 1.5 per cent and 20 per cent carry over an 8 per cent preferred return. Between about 8 and 10 per cent gross the ranking flips, and the evergreen fund's liquidity sleeve can erase the gap altogether.
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 →
The two fee schedules sit on different bases. The evergreen fund charges every year on NAV, which includes unrealised gains, and crystallises its performance fee on annual NAV growth. The closed-end fund charges on commitments during the investment period, then on invested cost, and takes carry only on realised profit after the investor has received its capital back plus an 8 per cent compound preferred return. The only fair comparison puts both wrappers around the same asset and measures what the investor loses per year that its money is invested.
| Term | Evergreen, institutional class | Closed-end fund |
|---|---|---|
| Gross asset return | 12.40% a year | 12.40% a year |
| Management fee | 1.25% of NAV | 1.5% of commitments for 5 years, then of invested cost |
| Performance fee or carry | 12.5% of annual return | 20% of profit, European waterfall |
| Hurdle | 5%, full catch-up | 8% compound preferred return, full catch-up |
| Capital | 100 invested on day one | 100 committed, 22.5 invested in each of years 1 to 4 |
| Holding period | 10 years, perpetual | Each deal held 5 years |
No liquidity sleeve and no fund expenses on either side: this isolates the fee schedules. The sleeve comes back at the end.
After management fee = 12.40% − 1.25% = 11.15%
Performance fee: 11.15% is above the top of the catch-up zone, 5% / (1 − 0.125) = 5.714%, so the fee is 12.5% of the whole return: 0.125 × 11.15% = 1.394 points
Net return = 11.15% − 1.394% = 9.756%; fee drag = 12.40% − 9.756% = 2.64 points
Excel: =MAX(0,MIN(r-h, p*r)) where r is the return after management fee, h the hurdle and p the fee rate
Over ten years 100 compounds to 321.9 gross and 253.7 net. The fees take 68.2 of the 221.9 of gross profit, 30.7 per cent, and the cash actually paid to the manager over the decade is 41.6. The rest of the 68.2 is the compounding the investor would have earned on those fees.
Each deal of 22.5 is worth 40.37 after five years at 12.40 per cent, so the four deals return 161.46 on 90.0 invested. The management fee is 1.50 a year for five years, then 1.01, 0.675 and 0.337 as deals are sold and invested cost falls: 9.53 in total, so the investor contributes 99.53 of its 100 commitment.
| Item | Amount | Share of gross profit |
|---|---|---|
| Gross proceeds | 161.46 | |
| Invested in deals | 90.0 | |
| Gross profit | 71.46 | 100% |
| Management fees | 9.53 | 13.3% |
| Carried interest | 12.39 | 17.3% |
| Investor's net profit (149.08 received on 99.53 paid in) | 49.55 |
The deals earn a 12.40 per cent gross IRR; the investor's cash flows earn 8.83 per cent. Fee drag: 3.57 points a year. The carry is a full 20 per cent of the profit after fees because the investor clears its 8 per cent preferred return comfortably and the catch-up restores the GP's share. The waterfall mechanics are worked in how the GP catch-up is solved.
Both wrappers take the same 30.7 per cent of the gross profit, a coincidence of these inputs. The difference is time. The closed-end fund earns its fees on 450 capital-years (90 invested for five years each); the evergreen fund charges on 100 kept invested for the whole decade, 1,000 capital-years before any growth in NAV. Per year of exposure, the evergreen fund costs 2.64 points and the closed-end fund 3.57: the evergreen wrapper is cheaper by 0.92 of a point a year at this return.
The evergreen fund's fee looks cheaper because it is lower per year, but an evergreen investor pays it for as long as it stays invested. A closed-end investor pays a higher rate on capital that comes back after five years.
| Gross return | Evergreen net | Evergreen drag | Closed-end net IRR | Closed-end drag | Cheaper |
|---|---|---|---|---|---|
| 6.0% | 4.75% | 1.25 | 3.98% | 2.02 | Evergreen |
| 8.0% | 5.91% | 2.09 | 5.99% | 2.01 | Closed-end |
| 10.0% | 7.66% | 2.34 | 7.99% | 2.01 | Closed-end |
| 12.4% | 9.76% | 2.64 | 8.83% | 3.57 | Evergreen |
| 15.0% | 12.03% | 2.97 | 11.18% | 3.82 | Evergreen |
| 18.0% | 14.66% | 3.34 | 13.78% | 4.22 | Evergreen |
The break comes from the hurdles. At 10 per cent gross the closed-end investor nets 7.99 per cent, just short of its 8 per cent preferred return, so no carry is paid at all and the drag is the management fee alone. The evergreen fund's 5 per cent hurdle is cleared every year, so its performance fee of 1.09 points still applies. In a mediocre outcome the lower headline rate costs more. Lower still, at 6 per cent gross, the evergreen fund's return after its management fee falls below its own 5 per cent hurdle, its performance fee switches off and it is cheaper again.
The same-asset comparison, with the sleeve and the share classes, is set up in the free workbook for this book.
Because it is charged on a larger and longer base. An evergreen fund charges an illustrative 1.25 per cent on NAV, including unrealised gains, every year the investor stays in. A closed-end fund charges 1.5 per cent on commitments for five years and then on a shrinking invested cost. On the worked example the closed-end fund collects 9.53 of management fees on a 100 commitment in total, while the evergreen fund collects 19.7 of management fees alone over ten years on 100 invested.
Per year, usually, but not always. On a 12.40 per cent gross asset the evergreen fee is 1.39 points a year, while closed-end carry of 12.39, spread over 450 capital-years, is 2.75 points a year. At a 10 per cent gross return the closed-end fund's 8 per cent preferred return switches carry off entirely, while the evergreen fund still pays 1.09 points because its 5 per cent hurdle is cleared.
Wrap both around the same gross asset return and measure fee drag per year of capital invested: gross return minus the investor's net IRR. At 12.40 per cent gross that is 2.64 points for the evergreen fund and 3.57 for the closed-end fund. Then add the evergreen fund's liquidity sleeve: an illustrative 16.9 per cent of NAV earning 3.5 per cent cuts the net return to 8.44 per cent, 0.39 of a point behind.
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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