Castelnau Group’s (CGL’s) board has reviewed the performance fee arrangements under the investment management agreement that the trust has with Phoenix Asset Management Partners Limited (CGL’s investment manager) and has agreed what it describes as a number of minor amendments to the way the performance fee is calculated.
No base management fee, management incentivisation all through performance fee
CGL’s investment manager does not receive a base management fee in relation to its management of CGL’s portfolio and, instead, is incentivised solely via a performance based fee arrangement, which is measured over consecutive periods of not less than three years, with the first period commencing on the company’s IPO on 18 October 2021 and ending on 31 December 2024. The performance fee payable is one third of the outperformance of the Net Asset Value total return after adjustment for inflows and outflows, over the FTSE All-Share Total Return Index (the “Benchmark”) with, subject to certain regulatory considerations, the performance fee being satisfied through the issuance of new ordinary shares.
No longer based on ‘average net assets’
Under the previous arrangement, the performance fee was to be paid based on the outperformance over the Benchmark, calculated by reference to the ‘average’ adjusted net assets of the company over each performance period. The board says that averaging of the net asset value over the performance period does not fully take into account the outperformance that has been delivered by the investment manager [We think that this point is debateable – see below] and principally for this reason a limited number of adjustments are being made to the IMA, with the revisions summarised as follows:
- The fee will remain as one third of the outperformance over the benchmark, however, the fee will be calculated by reference to the closing net asset value (NAV) rather than the average net asset value, and will be compared to the ‘Benchmark NAV’.
- The closing NAV is the reported net asset value of the company at the period end, excluding any accrued performance fees. This will be compared to the benchmark NAV, which is the company’s opening NAV for the performance period to which the Benchmark return is applied. The benchmark NAV will also be adjusted for the impact of inflows and outflows to the share capital, to ensure that both the closing NAV and benchmark NAV reflect performance adjusted for the impact of these events.
- For the avoidance of doubt, no performance fee for the period to 31 December 2024 would currently be payable under either the original or revised performance fee calculation. In addition, no additional changes under the Revised IMA (other than in respect of the performance fee) are being made.
- As a specialist fund segments company, CGL says that it is not required to comply with the provisions of Chapter 11 of the Listing Rules regarding related party transactions. However, the company has adopted a related party policy which applies to any transaction which it may enter into with any Director, the Manager or any of their affiliates, which would constitute a “related party transaction” as defined in, and to which would apply, Chapter 11 of the Listing Rules. In accordance with the company’s related party policy the independent directors of the company have considered the terms of the Revised IMA and have confirmed that they consider the changes to be fair and reasonable.
[QD comment: In the short term, these changes have no real impact as a performance fee is not payable under either arrangement. However, the rationale for averaging out net assets is that it reduces the impact of volatility in the NAV from shifts in sentiment – both positive and negative – and so should lead to a fairer outcome for all. In reality, CGL was established in 2021 with a strong growth mandate and these sorts of investments have been out of favour in an environment of higher inflation and interest rates that has prevailed for much of its life. This may well be harsh on the manager but, if it is successful in making investments, this should average out over the longer term. We will never know what might have happened in a more benign environment but we think that it will be difficult for CGL to avoid the charge that this change is largely for the managers’ benefit (and not shareholders) and wouldn’t have come about if growth companies hadn’t been so out of favour.]