Step by Step Guide to Fund Closing and Subsequent Closing

When managing private funds, few processes are as critical, or as complex, as funds closings and subsequent closings. These events determine the updated ownership percentages and net capital contributions, through the equalisation of investor interests and the rebalancing of their accounts. 

This guide provides a breakdown of a typical fund closing and subsequent closing process. For fund managers, investors, and financial professionals, a clear understanding of this workflow is essential to understand how fairness is maintained as the fund grows. 

Subsequent Closing Process 

As a follow up to our previous guide on closed-ended fund lifecycle during the fundraising period there could be multiple closing subsequent to the initial first close.  

During each closing, an equalisation (or rebalancing) exercise will be performed. This allows all investors to be trued-up as if they had joined the fund during the first closing.  

As part of the equalisation exercise, new investors are required to fund their allocated portion (from the initial first closing) in their first capital call. 

New investors are typically required to pay interest (known as equalisation or subsequent interest) to the existing investors as they have the benefit of assessing the fund’s existing portfolio and performance prior to participating. They are also required to pay the fund manager their portion of management fee (since the first capital call) as well as late interest fee on management fee.  

During each subsequent close, rebalancing of the fund’s existing investors’ contribution shall be performed to equalize all investors’ contribution, as if they had joined the fund during the first closing. The equalisation and rebalancing process shall include the following procedures: 

• Reallocation and rebalancing of investors contribution to ensure all existing and new investors are contributing an equivalent amount according to their revised ownership percentage  

• Computation of equalisation interest payable from the new to existing investors 

• Computation of management fee and management fee late interest payable from the new investors to fund manager 

• Profit and Loss rebalancing 

• Issuance of subsequent close notice to both existing and new investors, informing all investors of the latest round close as well as reflecting the latest ownership percentage and net asset value of each investors 

Equalisation interest 

During a subsequent close where the fund is accepting new investors into the fund, existing investors could potentially be diluted on their ownership percentage of the fund. 

New investors are essentially buying out a portion of the existing investors’ contributions, which results in the new investors paying the existing investors a “premium”. This premium is called the equalisation interest and is typically equivalent to the preferred interest / hurdle rate (typically 8% IRR of the “buy out portion”). As such, equalisation interest are not earned by the fund and the fund is merely the conduit to 1) receive the equalisation interest from the new investors and 2) paying the equalisation interest to the existing investors. 

Accordingly, equalisation interest in simple terms refers to the opportunity cost of the existing investors for contributing more than what they should have based on the revised ownership percentage.  

Management fee and management fee late interest 

As elaborated in the previous post, because new investors are equalized back to the First Closing, hence during the rebalancing of accounts, new investors will be allocated their portion of expenses since day 1.  

As management fee is typically chargeable based on the commitment of the respective investors (typically 2% of the commitment during the investment period). Hence during a subsequent close where the commitment size of the fund increases, the management fee will also increase proportionally (ie. 2% x the new fund size). The increased in management fee will be borne entirely out of the new investors. In simple terms, if the fund’s 2^nd close is at the end of the first year, the new investors will be required to pay 1 year worth of management fee.  

Because the new investors are deemed to have participated in the fund since day 1, but only paid the management fees during the subsequent close (at the end of first year as per above example), hence these new investors are required to pay the fund manager late interest on the management fee payable.  

Similar to equalisation interest, management fee late interest is typically computed at 8% IRR and is not earned by the fund. The fund is merely the conduit to 1) receive the management fee late interest from the new investors and 2) paying the management fee late interest to the fund manager. 

How we can help 

Fund closings, equalisation and rebalancing of investors contributions and net asset value don’t have to be complicated. At Kai Global Consulting, we bring hands-on experience and a practical approach to fund administration. We don’t just follow processes - we optimize the process, simplify the reports and make them work for your unique needs. 

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