Monthly dealing on quarterly appraisals lets new money buy at last quarter's price. The transfer is one formula, and it runs both ways.
When a semi-liquid fund deals at a NAV that lags the market, incoming money gains flow × (fair NAV − stale NAV) ÷ (stale NAV + flow), and existing investors pay for it. On an illustrative 1,000 NAV struck on last quarter's appraisals, a 10 per cent market rise makes the fund fairly worth 1,051; a 100 subscription dealt at 1,000 gains 4.64 on day one and dilutes the existing investors by 44 basis points. In a falling market the same arithmetic pays redeemers at the stayers' expense.
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 evergreen funds deal monthly but value their private holdings quarterly, often on appraisals or manager NAVs that are themselves one quarter old. Between valuations, the published NAV is a price that everyone can see is out of date. That is fine while flows are small and markets are quiet. It is a transfer between investors as soon as either is not.
| Input | Value |
|---|---|
| Published NAV, on last quarter-end valuations | 1,000 |
| of which private holdings / liquidity sleeve | 850 / 150 |
| Public market move since the valuation date | +10% |
| Expected pass-through to the next private valuation (beta) | 0.60 |
| Subscriptions dealt at the published NAV | 100 |
Fair NAV = published NAV + private holdings × beta × market move
= 1,000 + 850 × 0.60 × 10% = 1,000 + 51 = 1,051
The sleeve is already valued daily, so only the 850 of private holdings is stale. The published NAV is 5.1 per cent below where the next valuation is expected to land.
The subscriber pays 100 at a NAV of 1,000 and owns 100 ÷ 1,100 = 9.09 per cent of a fund now worth 1,051 + 100 = 1,151.
Subscriber value = 9.09% × 1,151 = 104.64, a gain of 4.64
Shortcut: gain = F × (V − N) ÷ (N + F) = 100 × 51 ÷ 1,100 = 4.64
In Excel, with the flow in B1, fair NAV in B2 and published NAV in B3: =B1*(B2-B3)/(B3+B1). Divided by the fair NAV, 4.64 is 44 basis points of the existing investors' value.
The 4.64 is not a market return. The existing investors owned all of the 51 of unrecognised value before the dealing date; afterwards they own 90.91 per cent of it. The subscriber earned 4.64 per cent on its money for being allowed to buy at last quarter's price.
After a 15 per cent fall, the same 0.60 pass-through puts fair value at 923.5, 7.65 per cent below the published 1,000. Investors redeeming 50 at the published NAV receive 50 for units fairly worth 46.17. The 3.83 difference is paid by those who stay, 44 basis points of their remaining 877.33. This is the run dynamic a gate exists to contain: the first out are paid at the stale price, and the incentive to be first grows with the gap. The queue that results is worked in how long it takes to exit a gated semi-liquid fund.
The transfer repeats at every dealing date between valuations, and it does not net out over a cycle. Subscribers tend to arrive after markets have risen and redeemers after they have fallen, so the flows line up with the sign of the gap: inflows buy cheap in rallies, outflows sell dear in drawdowns. In both directions the investors who stay are the ones who pay, which is the opposite of what a long-term product should reward.
| Market move | NAV gap | Flow 2% of NAV | Flow 5% | Flow 10% |
|---|---|---|---|---|
| +2% | 1.02% | 2 | 5 | 9 |
| +5% | 2.55% | 5 | 12 | 23 |
| +10% | 5.10% | 10 | 23 | 44 |
| +15% | 7.65% | 14 | 34 | 65 |
In quiet markets with small flows the transfer rounds to nothing, which is why it is easy to ignore. It scales with the product of the gap and the flow, so it peaks exactly when a fund is popular and markets have moved: a quarter with 10 per cent inflows after a 15 per cent rally costs existing investors 65 basis points.
Work out the fair NAV, then the transfer is F × (V − N) ÷ (N + F): 4.64 on a 100 subscription when the NAV is 5.1 per cent stale. The fix is to make the dealing price the fair price, not to hope flows stay small. The Evergreen Fund Handbook treats the mark as the price investors deal at, and the free workbook for this case comes with a valuation governance working document built on that principle.
Because investors deal at it. If public markets rise 10 per cent and the private book is expected to follow by 0.60 of that, a 1,000 NAV struck on old appraisals is fairly worth 1,051. A 100 subscription at 1,000 buys 9.09 per cent of a fund worth 1,151, a gain of 4.64 taken from the existing holders.
Yes, the transfer runs the other way. After a 15 per cent fall with a 0.60 pass-through, a 1,000 NAV is fairly worth 923.5. Investors redeeming 50 at the stale NAV receive 50 for units worth 46.17, and the 3.83 difference comes out of the stayers, 44 basis points of their value.
By moving the dealing price towards fair value: an interim fair value adjustment for market moves since the appraisal date, or a swing factor sized to include the expected revaluation rather than dealing costs alone, plus notice periods long enough that flows are dealt at a later NAV. In the example, dealing at an adjusted 1,051 instead of 1,000 removes the 4.64 transfer entirely.
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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