Permanent capital sounds more valuable than a ten-year commitment. Discount the fees, count the retrocession, the redemptions and the cost to raise, and it usually is not.
Per unit raised, usually not, once fees are discounted and retrocessions and redemptions are counted. On illustrative terms, 100 raised from an institution for a ten-year fund is worth 6.77 in present value of net management fees to the manager; 100 raised from wealth clients for an evergreen fund is worth 3.24. Wealth capital only catches up if clients redeem less than 4.4 per cent a year.
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 →
The case for building a wealth channel often rests on one word: permanent. Evergreen money has no end date, so it must be worth more than a commitment that winds down after ten years. The arithmetic says otherwise unless three things hold: a fair share of the fee stays with the manager, redemptions are low, and the cost of raising it is kept in proportion.
| Input | Institutional, closed-end | Wealth, evergreen |
|---|---|---|
| Management fee | 1.50% on commitment, years 1 to 5 | 1.25% on NAV |
| Fee base after the investment period | Invested cost: 80, 65, 45, 25, 10 | NAV, no end date |
| Retrocession to the distributor | none | 40% of the fee |
| Servicing cost | 0.02 a year | 0.10% of NAV a year |
| Cost to raise the 100 | 0.50 | 1.50 |
| Net return on NAV, reinvested | n/a | 7% a year |
| Redemptions, share of NAV a year | n/a | 10% |
Step 1: the institutional fee stream. 1.50 per cent on 100 less 0.02 of servicing is 1.48 a year for five years, then 1.18, 0.955, 0.655, 0.355 and 0.130 as the invested cost runs off. Undiscounted, 10.67. At 10 per cent, 7.27; less 0.50 to raise it, 6.77.
Step 2: the wealth margin. The manager keeps 1.25% × (1 − 40%) − 0.10% = 0.65 per cent of NAV, as worked in how retrocessions are calculated. Year one earns 0.65, less than half the institutional 1.48.
Step 3: the wealth NAV path. Each year NAV grows 7 per cent and loses 10 per cent to redemptions: a factor of 1.07 × 0.90 = 0.9630. The book shrinks, slowly, for ever.
PV of wealth fees = 100 × margin ÷ (1 + d − g) = 100 × 0.65% ÷ (1.10 − 0.9630) = 4.74
Less 1.50 to raise it: 3.24, against 6.77 institutional. Ratio 0.48.
In Excel, with NAV in column B (B2 = 100, B3 = B2*1.07*0.9) and years in A: =SUMPRODUCT(B2:B61*0.0065/1.1^A2:A61)-1.5. At 10 per cent redemptions, fees beyond year sixty add almost nothing; at very low redemption rates they would add more, so the horizon is stated.
The institutional dollar wins on three counts at once. Its fee is charged on the full commitment for five years, not on a NAV that is redeemed from the first year; none of it is shared with a distributor; and it cost a third as much to raise. The evergreen's permanence is real but slow: after ten years its NAV is 68.6 and it has paid 5.52 of fees, against 10.67 for the closed-end fund.
Solving for the redemption rate at which the two are worth the same gives 4.4 per cent a year, an average holding of about 22.5 years. At 10 per cent the average client stays about 10.0 years, which is roughly a closed-end fund's life with a fee stream less than half as rich.
| Case | PV of wealth capital |
|---|---|
| Redemptions 5% a year | 6.22 |
| Redemptions 10% a year (base) | 3.24 |
| Redemptions 15% a year | 1.91 |
| Redemptions 20% a year | 1.16 |
| Net return 5% instead of 7% | 2.69 |
| Net return 9% instead of 7% | 3.96 |
| No retrocession: margin 1.15%, servicing paid by the client's share class | 6.89 |
Two levers matter far more than returns. Redemptions: each extra 5 points of annual redemption cuts the value by 39 to 48 per cent. And who pays the distributor: where the servicing fee is a separate charge on the client's share class rather than a share of the manager's fee, the margin rises from 0.65 to 1.15 per cent and wealth capital is worth 6.89, level with institutional.
Institutional capital also comes back. If 70 per cent of it re-ups into a successor fund every five years, at a raising cost of 0.20, the chain is worth 12.21 per 100 first raised. Against that, wealth capital breaks even only below 1.2 per cent of annual redemptions.
Adding up the fees without discounting them. Over sixty years the evergreen pays 15.74 in total, half as much again as the closed-end fund's 10.67, and a business plan built on undiscounted totals will conclude that wealth money is worth more. Most of the evergreen's fees arrive decades out, when they are worth little today, while the closed-end fees arrive in the first five years. The second mistake is ignoring the cost to raise: a wealth team that costs 1.50 per 100 raised takes almost a third of the 4.74 the money will ever earn in present value. How that cost scales with the size of the book is in how much AUM a wealth distribution team needs to break even.
Value each channel per unit raised: net margin, divided by (1 + discount rate) less the yearly NAV factor (1 + growth) × (1 − redemptions), minus the cost to raise. On these illustrative terms 100 of wealth capital is worth 3.24 to the manager against 6.77 institutional, and catches up only with redemptions below 4.4 per cent or a fee the manager does not share. The channel's full flow model is in the free workbook for this book.
Because evergreen money is redeemed and its fees arrive late. At 10 per cent annual redemptions and 7 per cent growth, NAV shrinks by a factor of 0.9630 a year. The fees run for decades, 15.74 undiscounted over sixty years, but discounted at 10 per cent they are worth 4.74, against 7.27 for the institutional fees paid mostly in the first five years.
On the illustrative terms, 4.4 per cent a year, an average holding of about 22.5 years. At 5 per cent redemptions, 100 of wealth capital is worth 6.22 against 6.77 institutional; at 15 per cent it is worth 1.91. If 70 per cent of institutional capital re-ups every five years, the break-even falls to 1.2 per cent.
Yes, decisively. If the distributor's servicing fee is charged to the client's share class instead of paid out of the manager's fee, the manager keeps 1.15 per cent of NAV instead of 0.65, and 100 of wealth capital is worth 6.89, level with the 6.77 of institutional capital.
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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