Gross Net Asset Value

Two different NAVs travel through a Category III AIF's fee calculation, and the paper tests whether you can keep them apart.

Gross Net Asset Value is the asset value struck at the valuation date. It is what the management fee is charged on.

Net Asset Value (pre-incentive) is what is left after set-up costs, fund expenses and that management fee have been taken out. It is what the incentive fee is measured from, against the hurdle.

Charging the management fee on GNAV rather than on a post-expense figure is not a rounding difference — it is charged on the larger number, every period, whether the fund made money or not.

Management fees in a Category III AIF run at a fixed 1% to 2.5% of GNAV, set before launch and disclosed in the PPM. They are paid to the manager irrespective of gains or losses — the fee buys fund management services, not profit.

The workbook is emphatic on the base: management fees are not charged on committed capital or on capital contributions. They are charged on GNAV. A fund with Rs 50 crore of commitments and Rs 65 crore of GNAV pays on Rs 65 crore.

Timing: fees accrue from the date of first close until the AIF is dissolved, are paid quarterly, half-yearly or yearly as the PPM specifies, and are generally paid in arrears within 14 days of the valuation day on which GNAV is struck. GST at 18% sits on top and is a real cost to the fund.

Management fee = GNAV × fee rate × (1 + GST)

NAV (pre-incentive) = GNAV
                      − set-up costs (amortised)
                      − fund expenses
                      − management fee including GST

The incentive fee is then computed on NAV (pre-incentive) against the reference hurdle — never on GNAV.

Fund ABC, a close-ended Category III AIF launched 1 January 2019. Committed capital Rs 50 crore, 5,00,000 units at Rs 1,000. Management fee 1.5% excluding GST at 18%.

Year 1 — GNAV Rs 58 crore:

Management fee   = 1.5% × Rs 58 crore     = Rs  87.00 lakh
Add GST at 18%   = 18% × Rs 87 lakh       = Rs  15.66 lakh
Total payable                             = Rs 102.66 lakh

Year 2 — GNAV Rs 65 crore:

Management fee   = 1.5% × Rs 65 crore     = Rs  97.50 lakh
Add GST at 18%   = 18% × Rs 97.50 lakh    = Rs  17.55 lakh
Total payable                             = Rs 115.05 lakh

Now see what the base choice cost the investor. Had the fee been charged on committed capital of Rs 50 crore instead:

Year 1: 1.5% × Rs 50 crore × 1.18 = Rs  88.50 lakh   (vs Rs 102.66 lakh)
Year 2: 1.5% × Rs 50 crore × 1.18 = Rs  88.50 lakh   (vs Rs 115.05 lakh)

Over two years the GNAV base costs investors Rs 40.71 lakh more — 0.81% of committed capital, before a rupee of incentive fee. And the gap widens every year the fund grows.

Carrying Year 1 down to the incentive-fee base: set-up costs of Rs 1.25 crore amortised over 5 years take Rs 25 lakh, yearly fund expenses take Rs 30 lakh, management fee takes Rs 102.66 lakh — leaving NAV (pre-incentive) of Rs 56,42,34,000, or Rs 1,128.468 per unit.

Chapter 6 (Fees Structure, Fund Performance and Benchmarking) opens with this computation and returns to it repeatedly — the Fund ABC example above is the workbook's Example 1 and it feeds every later fee illustration in the chapter. Expect to be given GNAV, a fee rate and a GST rate and asked for the fee payable, or to be given GNAV and expenses and asked to arrive at NAV pre-incentive as the first step of a hurdle calculation. The trap question is which base management fees are charged on.

• Management fees are charged on GNAV, not on committed capital or capital contributions. The workbook states this as a standalone note precisely because it is the common error.
• GST at 18% is charged on the fee, not on GNAV. 1.5% × 1.18 = 1.77% of GNAV, not 19.5% of anything.
• GNAV is not the incentive-fee base. Incentive fees are computed from NAV after set-up costs, fund expenses and management fee — see Hurdle Rate.
• The management fee is payable whether the fund gains or loses. Only the incentive fee is contingent.
• Fees accrue from first close, not from registration or from final close, and run until dissolution.
• Different classes of units can carry different fee rates depending on ticket size and timing of commitment, so one fund can have several effective GNAV fee rates at once.