What To Know About Investor Subscriptions

You’re the coach, and the investors are your players. You’re in the middle of a play, and your newest player wants in! What do you do? Stop the play and sub him in, or do you wait until the play is complete, or even until the next quarter? It is tough call to make, especially when so much is on the line! This same strategic thinking comes into play with your fund, in relation to investor subscriptions. Knowing the appropriate time to admit investors into your fund is important to not only you, but the rest of your team of investors.

Hedge funds typically have monthly subscription and redemption periods that coincide with the monthly accounting and establishment of the fund’s NAV. Once the NAV has been established, you can pay redeeming investors the value of their accounts and also accept new investors into the fund. You need to establish the fund’s NAV or overall value before you accept new capital into the fund. Once this is done, you add the new investors into the fund and you now know their percentage ownership of the whole fund. This ownership percentage is how they will share in the profits of the fund going forward.

When pondering whether or not you should bring in an investor into the fund mid-month because they just wired money to the fund’s bank account and the you don’t want to have the cash sitting there doing nothing, it is best to consult with your fund administrator. The conversation may go something like this:

Manager: “Vince, can we take the investor’s money now and start trading it?”

Vince: “It depends. Your fund documents say that investor subscriptions are accepted on the first of the month, but they also say that as the fund manager you have discretion to accept monies at other times.”

Manager: “OK, I want to accept their money now. What do I have to do? Can we just accept their investment as effective for the beginning of this month?”

Vince: “The fund is up significantly so far this month. If you accept them in as of the first of the month, they will be sharing in the profits made so far this month, even though they didn’t have any money in the fund. This would not be fair to the investors who have been in since the start of the month.”

Manager: “True, that wouldn’t be fair. What can we do to make it fair?”

Vince: “We should strike a mid-month NAV and allocate the profits to date to the investors in the fund from the beginning of the month, and then bring the new investor in.”

Manager: “Perfect, let’s do that!”

Vince: “There is a cost to doing an additional NAV for the month. Who will cover that cost? It’s not fair to have all the investors pay for that, so do you want to charge the new investor or do you want to pay for it?”

Manager: “I will pay for it.”


Private equity funds are in a different situation when it comes to taking new investors into the fund.  PE funds operate on a commitment basis and circle a group of investors together to start the fund. Depending on the fund’s plans, they target a certain amount of commitment they will need to execute their strategy, let’s say $250 million. Depending on their investor base, many funds will gather a part of that amount on a certain date from investors who are ready to complete their subscription documents, and earmark the funds for deployment. This first round of investors may make up about half of the total $250 million the fund needs over its lifespan, but the manager has investments ready to be acted on that require only a fraction of the total target commitment amount. Thus, the fund will start with the first round of investors and call capital needed to cover these first investments and fund expenses. The amounts that they will contribute are based on their percentage of commitment compared to the total commitments of everyone that came into the fund in the first round.

Over the next several months or even a year later, the remaining investor group becomes ready to come into the fund. Since they will be equally sharing in all the investments and costs of the fund, they will have to contribute their proportionate share of all the contributions made by the first-round investors to date in order to catch up. The total contributions to date are now divided among the total amount of commitments from both the first and second round of investors to see what each investor should have contributed. The new group of investors contributes the required amount to get them in line with their ownership percentages. The first group of investors is then returned the amounts due to them from the new investors group.

During this “re-balancing” process, the new round of investors is usually charged interest on the amounts needed to be contributed to catch them up. This interest is a nominal amount and basically is for compensating the first round of investors for their use of capital during the period between the first closing and the second closing of investors. The interest is paid to the first-round investors and not retained by the fund.  This re-balancing process can be done several times, depending on how many closings the manager wants to do to complete their target commitments.

So, are you ready to throw your new player into the game? Is the timing right? Well, you better be sure! your decision can effect the future of the game and all players currently in the game. Choose wisely!