Typically, with Portugal funds, there are fees involved with all three steps: setup, management, and investment exit. However, a few funds have 0% for one of these fees, which could sometimes mean that the others are relatively higher. So, it’s always important to consider the combination of all three.
It’s important to note that most if not all fees are not charged on top of your investment, but charged to the fund. This means the fees still reduce your overall return on investment, but they are already baked into the fund’s forecasted returns and won’t necessitate any additional outlays by the investors.
Subscription/setup fee
This is a one-time fee paid together with the investment made into funds. It can be charged as a percentage of the capital invested (usually 1%-3%) or a fixed amount. It covers the fund setup costs and fundraising (marketing, administration, etc.), compliance, KYC, and more. Setup fee is the only fee that can be charged as an extra on top of the €500k investment amount; however, in most cases, it’s deducted from the investment amount. Therefore, it’s worth clarifying in each individual case how the fund representatives charge this fee, and some funds don’t charge any setup fee.
Management fee
The management fee is an annual fee paid by the fund to the management entity, usually calculated monthly or quarterly from the fund resources. Typically, it’s between 1%-2.5%. It covers the overhead costs of daily operations, including salaries for management company personnel, regulatory compliance, and monitoring of the existing investments.
Some funds have a minimum fixed management cost per year, which makes the percentage higher if the fund doesn’t reach its capital target. It’s important to check with the fund representatives how much money they need to raise to achieve the advertised management fee. It’s also not uncommon to initially have a higher management fee while acquiring assets, and it drops during the investment management years.
Performance fee
Fund return is usually the most exciting aspect both for fund managers/advisors and investors. The performance fee is the cut of investment returns that the fund does not distribute to investors. Performance fees vary widely depending on strategy, asset type, and whether the fund distributes annual dividends.
Performance fee often has a hurdle rate, under which 100% of the profits belong to investors. The average hurdle rate for funds in our list is between 5-7% per annum, but it can also be less or more.
The hurdle can be with a catch-up or without. The catch-up means that once the fund return reaches the hurdle rate, all the profits will go to fund representatives until they have received their performance percentage of overall return. After that, the profits are split with investors.
Since it might be difficult to grasp, I’ll give an example. Fund X reached maturity with a 15% total annual return, and they didn’t distribute any dividends. The fund has a 20% performance fee with a 5% hurdle with catch-up. The distributions at the fund maturity will be paid in the order of the below steps:
1. Return of investors’ capital
100% of investors’ original investments are paid back.
2. Hurdle/preferred return
100% of profits up to 5% IRR (hurdle rate) are distributed to investors.
3. Catch-up
100% distributions go to the fund’s general partners until they’re “caught up” to 20% going back to the first euro of the profits.
4. Remaining distributions/carried interest
The remaining 10% will be distributed 80/20 in favor of the investors.
If a fund has a hurdle rate but doesn’t have a catch-up mechanism, they would skip step 3.
We can also look at how the profits would be distributed at varying levels of return for the same fictional fund:
| Scenario 1 | Scenario 2 | Scenario 3 | Scenario 4 | Scenario 5 | |
|---|---|---|---|---|---|
| Fund annual return | -5% | 0% | 5% | 6% | 10% |
| Investor annual return | -5% | 0% | 5% | 5% | 8% |
| Manager* annual return | 0% | 0% | 0% | 1% | 2% |
If the fund didn’t use a catch-up mechanism the results would have looked like this:
| Scenario 1 | Scenario 2 | Scenario 3 | Scenario 4 | Scenario 5 | |
|---|---|---|---|---|---|
| Fund annual return | -5% | 0% | 5% | 6% | 10% |
| Investor annual return | -5% | 0% | 5% | 5.8% | 9% |
| Manager* annual return | 0% | 0% | 0% | 0.2% | 1% |
*Manager may here also refer to fund advisor—this varies per fund.
Typical fees for different types of Golden Visa funds
Private equity and venture capital fund management fees usually range between 1.5% and 2%, while setup fees are typically 0-3%. Performance fees vary greatly, but generally, these are around 20-25%, with a hurdle rate between 5-8% annually.
Mutual funds’ annual management fees are, on average, 1.5%- 2%, but they could be lower in some cases. They usually have a 1-2% setup fee and generally no performance fee.
Questions to ask yourself when choosing a fund
When considering different funds, the first step is to understand what you are looking for and narrow your focus. The below questions will help you get started with this.
- Which strategy do I prefer? Is capital preservation or maximizing potential return more important? How much risk am I willing to take?
- Which sector do I want to invest in (tech companies, farmland, healthcare, renewable energy, education, wine industry, etc.)?
- Is it important that it’s an ESG fund?
- How long can I keep my capital locked in?
- Do I want to invest only in one fund or further diversify the investment? Most funds require a minimum investment between €50,000-€250,000, so you can split your investment between several funds.
Questions to ask fund managers/advisors
Once you have a better idea of what’s important for you, I’d recommend reaching out to request a presentation and set up meetings with funds you’re interested in. I’ve listed some of the questions you might want to ask from the fund representatives.
- What are the credentials and track records of the fund’s managers and advisors in the specific field?
- What are the fund’s investment strategy and risk profile?
- How diversified is the fund (how many companies, real estate projects, etc. does it invest in, and how different are they)?
- How much leverage do they use for investments?
- What is the target fund size, and how much have they raised so far? Have they reached their first close? What is their contingency plan if they don’t raise as much funding as expected?
- How much “skin in the game” do the managers/advisors have (how much have they invested themselves)?
- What is the expected target return per annum?
- Does the fund distribute dividends (how often and how much)?
- What are the fees (subscription fee, management fee, performance fee)? Is the subscription fee additional or included in the investment amount? Does the stated management fee assume a specific fund size (will the percentage be higher with a smaller size)? Does the performance fee have a hurdle?
- Do they provide annual PFIC information statements (for US investors)?
- If the fund has any real estate exposure, what is its strategy for qualifying for Golden Visa investment? Also, ask to see an official legal opinion about the fund’s eligibility for a Golden Visa.
- What is the exit strategy for investors? Is it possible to exit before the fund term ends?
Source/Credit: NomadGate Community
