Equalization method
This procedure attempts to replicate the partnership method and it is sometimes referred to as “the partners fees structure of equalisation shares”. In other words, it is an accounting methodolgy that equalizes the price per share across different NAV’s. This objectif is either achieved by issuing notional shares (equalisation shares) or by taking a portion of the money invested into a seperated account (equalisation factors). The fundamentals between the two methods are similar; the main difference being that the former allows investors to be fully invested when the latter does not. This method equalizes new shareholders with current ones who have already paid incentive fees on their individual holding. however for the investor this amount is not invested. Investors are individually assesed for their own incentive fee liability and charged accordingly. And have the same capital at risk per share shown later
With this technique, the fund’s performance is accuretly reflected and investors only pay incentive fees on the increased value of their investments. It avoids the “free ride” syndrome which occurs when new subscriptions are made at a NAV which is at a discount/premium of the highwatermark and the fund’s performance subsquently rises. In this particular case, new shareholders make “compensatory” payments (depreciation deposits). It also ensures that investors who get into the funds while its NAV is above its HWM pay only the relevant portion of the total performance fee at year-end. Moreover, the portfolio managers receives fees on all positive performance made on each individual holding. At the end of the fiscal year, performance fees are crystallized and the new NAV become the new offering price
Some managers pay a T-bill rate on this investment Equalisation factors appreciate or depreciate depending on the subsquent performance of the fund, but they will never exceed the performance fees per share paid when the investment was made. At year end the offering price is reset if the GAV per share is higher than the previous high water mark on wich an incentive fees was charged performance fees will crystallise. For notional shares the principal is identical, expect that adjustment due the fund’s performance is made by adjusting the number of shares issued.
In the equalisation method the following principles apply:
Highwatermark: it is either the NAV at inception or the last NAV per share when incentive fees were paid.
Gross assets value : it represents the gross P/L (excluding incentive fees) since the last HWM .
Net assets value: it represents the net P/L deducted of all fees (including incentive fees) since the last HWM.