Two classes of the same semi-liquid fund, run through the full fee formula: what an early investor gains, why the gain shrinks when returns are low, and what the manager gives up.
A founder share class is worth the fee difference, compounded. Against a standard class charging 1.25 per cent of NAV and a 12.5 per cent performance fee over a 5 per cent hurdle, a founder class at 0.75 per cent and 10 per cent adds 69 basis points a year of net return on an illustrative 11.0 per cent return before fees, or 14.9 per 100 invested over ten years. On a 10 million ticket that is 1,491,838. At low returns the gain shrinks to 25 basis points, because the founder class crosses the hurdle first.
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 →
New evergreen and semi-liquid funds need capital before they have a track record in the wrapper, and the usual price for it is a founder or early-bird class: lower fees for investors who subscribe in the first months or up to a capacity cap, often for as long as they stay invested. An allocator deciding whether to go early, and a manager deciding how much to give away, need the same number.
| Term | Standard class | Founder class |
|---|---|---|
| Management fee, on NAV | 1.25% | 0.75% |
| Performance fee | 12.5% | 10.0% |
| Hurdle, full catch-up | 5.0% | 5.0% |
| Return before fees, a year | 11.00% | 11.00% |
| Holding period | 10 years | 10 years |
| Founder class capacity | 300,000,000 |
The return before fees is after fund expenses and the liquidity sleeve, and both classes hold exactly the same portfolio. The performance fee is crystallised annually on the return after management fee, with a full catch-up, as in many semi-liquid structures. All terms are illustrative.
Performance fee = MAX(0, MIN(r − hurdle, p × r)), where r is the return after management fee
Standard: r = 11.00% − 1.25% = 9.75%; above the catch-up top of 5.714%, so the fee is 12.5% × 9.75% = 1.219%; net 8.531%
Founder: r = 11.00% − 0.75% = 10.25%; above 5.556%, so the fee is 10% × 10.25% = 1.025%; net 9.225%
The catch-up top is the hurdle divided by (1 − fee rate): above it the manager takes its full share of the whole return. In Excel: =B1-B2-MAX(0,MIN(B1-B2-B4,B3*(B1-B2))), with return before fees in B1, management fee in B2, performance fee rate in B3 and hurdle in B4.
| Class | Net a year | Per 100 | Per 10,000,000 |
|---|---|---|---|
| Standard | 8.53% | 226.8 | 22,675,039 |
| Founder | 9.23% | 241.7 | 24,166,877 |
| Founder advantage | 69 bps | 14.9 | 1,491,838 |
The 69 basis points split into 0.50 points of management fee and 0.194 points of performance fee. In year one it is worth 69,375 on a 10 million ticket; after ten years the cumulative gain, compounding included, is more than twenty times that.
| Return before fees | Standard net | Founder net | Advantage a year | 10 years, per 100 |
|---|---|---|---|---|
| 6% | 4.75% | 5.00% | 25 bps | 3.8 |
| 8% | 5.91% | 6.53% | 62 bps | 10.6 |
| 11% | 8.53% | 9.23% | 69 bps | 14.9 |
| 14% | 11.16% | 11.93% | 77 bps | 20.5 |
The advantage is smallest in the scenario where it matters most. At a 6 per cent return, the standard class earns 4.75 per cent after its management fee, below the hurdle, and pays no performance fee at all. The founder class earns 5.25 per cent after its lower management fee, clears the hurdle, and pays 0.25 points of performance fee. Half the management fee saving goes straight back to the manager. A management fee discount is not always worth its face value: near the hurdle, part of it comes back as performance fee. A discount on the performance fee rate is worth something only when the fund clears the hurdle.
On the full 300,000,000 of founder capacity at an 11.00 per cent return, the manager gives up 1,500,000 a year of management fee and 581,250 of performance fee: 2,081,250 a year. The standard class pays 2.469 per cent of NAV in total fees against 1.775 per cent for the founder class, so the discount costs the equivalent of the fee revenue on 84,303,797 of standard-class assets. That is the test of whether to offer it: if founder capital is what lets the fund launch, reach scale and gather that much more standard-class money sooner, the class pays for itself. If the capital would have come anyway, it is a permanent transfer.
Founder classes commonly come with conditions: a minimum subscription, a soft lock-up, or capacity that closes after the first closing period. A two-year lock-up gives up liquidity in exchange for an advantage worth 1.51 per 100 over those two years. Compare it with the early repurchase fee an investor would otherwise risk.
Adding the two discounts at face value: 0.50 points of management fee plus 2.5 points of performance fee rate does not mean 3.0 points of anything. The performance fee discount is a share of a return, and the lower management fee raises the return the performance fee is charged on. Run both classes through the full fee formula, as above, and compare net returns. The full comparison of evergreen and closed-end fee loads is in this article, and how the high-water mark behaves after a loss in the performance fee piece.
On these terms a founder class is worth 69 basis points a year and 14.9 per 100 over ten years at an 11.00 per cent return, less at low returns and more at high ones. For the manager it costs 2,081,250 a year on 300 million of capacity. The Evergreen Fund Handbook treats share classes as a question of fairness between investors, and the free workbook for the book computes what each class costs.
A share class with lower fees reserved for early investors in a new fund, usually limited by time or capacity. In the illustrative case it charges 0.75 per cent and a 10 per cent performance fee instead of 1.25 and 12.5 per cent, worth 69 basis points a year at an 11.00 per cent return before fees.
Because the lower management fee can push the founder class over the hurdle while the standard class stays below it. At a 6 per cent return the standard class pays no performance fee and nets 4.75 per cent; the founder class pays 0.25 points and nets 5.00, so only 25 of the 50 basis points of fee saving reach the investor.
The fee difference on the founder capital. On 300,000,000 at an 11.00 per cent return it is 1,500,000 of management fee and 581,250 of performance fee a year, 2,081,250 in all, equal to the fees on 84,303,797 of standard-class assets at a total fee rate of 2.469 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.
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