Borealis - Strategic Capital Partners, LP

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Value Creation Model – Definition of Terms

The Value Creation Model (“Model”) is provided to display hypothetical returns from a seed investment in an underlying hedge fund based on negotiated fee terms and revenue share with a hedge fund as part of a seeding agreement. This Model, and the hypothetical returns presented in this Model, do not include fees and expenses of a seed investment that would be incurred through a seeding fund. Any return generated by this model is hypothetical and cannot be relied upon as the both the seeded manager assumptions and the seed investor assumptions input into the model may not be achieved. Actual returns or results could differ materially and adversely from those generated by this model as the result of various factors.

The Model is designed to provide modelling of hypothetical returns of underlying seeded managers to include excess return attributable to a seed investment through savings from discounted fees and the contribution from revenue share. This illustrates, using various assumptions input into the Model, both the total return as well as isolates the excess return attributable to a seed investor based on the assumptions input into the model.

The Model assumes the values input into the Model are static for an annual period and correspondingly presents hypothetical returns for a single period.

INPUTS

Hypothetical Manager AUM & Return

  1. Manager AUM ($m) – defines the hypothetical Assets Under Management of a seeded manager fund, which includes the Investment By Seed Investor amount. This data is used as an input into the “Contribution from Revenue Share” calculation as it provides an asset base for calculating the Revenue Share earned by the Seed Investor.
  2. Net Return to “Standard” Investors – defines the net return of the seeded manager fund for an investor subject to the Standard Management Fee and Standard Performance Fee (i.e. not privy to the discounted fee terms anticipated from a seeding agreement). This data is used as an input to “Total Return to Seed Investor” calculation as well as the “Contribution from Revenue Share” calculation.

Hypothetical Deal Specifics

1. Investment ($m) By Seed Investor – defines the investment made to seed the seeded manager fund by the seed investor, which entitles the seed investor to preferred investment terms including fee discounts and Revenue Share as a result of the seeding agreement. This data is used as an input into the “Contribution from Revenue Share” calculation and the asset base used to calculate all return percentages.
2. Revenue Share (%) By Seed Investor – defines the % of the seeded manager fund’s management and performance fees/allocations that the seed investor is entitled to as a result of the seeding arrangement. This data is used as an input into the “Contribution from Revenue Share” calculation. The calculation assumes that Revenue Share is not earned on the Investment ($m) by Seed Investor.
3. Management Fee (%) By Seed Investor – defines the management fee that the seed investor is subject to as a result of the seeding arrangement. This data is used as an input into the “Savings from Discounted Fees” calculation.
4. Performance Fee (%) By Seed Investor – defines the performance fee/allocation that the seed investor is subject to as a result of the seeding arrangement. This data is used as an input into the “Savings from Discounted Fees” calculation.
5. Standard Management Fee (%) – defines the management fee a standard investor in the seeded manager fund is subject to. This data is used as an input into the “Savings from Discounted Fees” calculation and the “Contribution from Revenue Share” calculation.
6. Standard Performance Fee (%) – defines the performance fee/allocation a standard investor in the seeded manager fund is subject to. This data is used as an input into the “Savings from Discounted Fees” calculation and the “Contribution from Revenue Share” calculation.

OUTPUTS

Excess Return Created by Seed Investment – this is the sum of two return components: Contribution from Revenue Share + Savings from Discounted Fees. In total, this represents the excess return of a seed investor relative to a standard investor in the seeded manager fund.

Contribution from Revenue Share – this represents the return to the seed investor attributable to revenue sharing, as part of the seeding agreement, of the seeded manager fund for management and performance fees/allocations.

Savings from Discounted Fees – this represents the savings from fee discounts negotiated by the seed investor, as part of the seeding agreement, relative to the standard fees offered by the seeded manager fund to “standard” investors.

Net Return to “Standard” Investors – this represents the return, net of standard fees, to a “standard” investor of the seeded manager fund.

Total Return to Seed Investor – this is the sum of two return components: Net Return to “Standard” Investors + Excess Return Created by Seed Investment.

“Standard” Investor refers to an investor that does not have the influence or ability to negotiate fees and other investment terms that are preferential to a normal investor. The influence to negotiate preferred fees and terms is typically associated with the size of an investment, a strategic relationship or other unique factors. A seed investor, due to size of investment and multiple strategic factors, generally has the ability to influence fees and other investment terms. Inputs into this Model that reference “Standard Investor” implies fee terms that applicable to an investor that accepts standard non-negotiated fees.