Investment income (including interest, dividends, fees, etc.) = 2.00% Hurdle rate(1)= 1.75%
Base management fee(2)= 0.5%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3)= 0.2%
Pre-incentive fee net investment income (investment income – (base management fee + other expenses) = 1.30%
Pre-incentive fee net investment income does not exceed the hurdle rate, therefore there is no incentive fee on income payable.
Scenario 2 Assumptions
Investment income (including interest, dividends, fees, etc.) = 2.60% Hurdle rate(1)= 1.75%
Base management fee(2)= 0.5%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3)= 0.2%
Pre-incentive fee net investment income (investment income – (base management fee + other expenses) = 1.9%
Incentive fee on income = 100.0% × pre-incentive fee net investment income (subject to “catch-up”)(4) = 100.0% x (1.9% – 1.75%)
= 0.15%
Pre-incentive fee net investment income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the incentive fee on income is 0.2%.
Scenario 3 Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.2% Hurdle rate(1)= 1.75%
Base management fee(2)= 0.5%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3)= 0.2%
Pre-incentive fee net investment income (investment income – (base management fee + other expenses) = 2.5%
Catch up = 100.0% × pre-incentive fee net investment income (subject to “catch-up”)(4)
Incentive fee on income = 100.0% × “catch-up” + (20.0% × (pre-incentive fee net investment income – 2.1875%))
Catch up = 2.1875% – 1.75% = 0.4375%
Incentive fee on income = (100.0% × 0.43755) + (20.0% × (2.5% – 2.1875%)) = 0.4375% + (20.0% × 0.3125%)
= 0.4375% + 0.0625% = 0.5%
Pre-incentive fee net investment income exceeds the hurdle rate and fully satisfies the “catch-up” provision, therefore the incentive fee on income is 0.5%.
(1) Represents 7.0% annualized hurdle rate.
(2) Represents 2.0% annualized base management fee on gross assets. Examples assume assets are equal to adjusted capital.
(3) Excludes organization and offering expenses.
(4) The “catch-up” provision is intended to provide NSAM Adviser with an incentive fee of 20.0% on all pre-incentive fee net investment income when net investment income exceeds 2.1875% in any calendar quarter.
The following is a graphical representation of the calculation of the Incentive Fee: Quarterly Incentive Fee
Master Fund’s pre-incentive fee net investment income (expressed as a percentage of the Master Fund’s adjusted capital)
0 1.75 2.1875
0% 100% 20%
Percentage of the Master Fund’s pre-incentive fee net investment income allocated to the Incentive Fee. These calculations will be appropriately prorated for any period of less than three months.
Approval of the Investment Advisory and Sub-Advisory Agreements
The Master Fund Advisory Agreement and the Master Fund Sub-Advisory Agreement were approved by the Master Fund’s Board on January 15, 2016 and became effective once the registration statement of a feeder fund of the Master Fund was declared effective by the SEC. The Fund Advisory Agreement and the Fund Sub-Advisory Agreement were approved by the Board on January 15, 2016 and became effective once the registration statement of a feeder fund of the Master Fund was declared effective by the SEC. Unless earlier terminated, as described below, each of the Master Fund Advisory Agreement, the Master Fund Sub-Advisory Agreement, the Fund Advisory Agreement and the Fund Sub-Advisory Agreement will remain in effect for a period of two years from the date they first become effective and will remain in effect from year-to-year thereafter if approved annually by the Master Fund’s Board or the Board, as applicable,
or by the affirmative vote of the holders of a majority of the Master Fund’s or the Board’s outstanding securities, as applicable, including in either case, approval by a majority of the Master Fund’s or the Fund’s trustees who are not interested persons, as defined by the 1940 Act (i.e., the Independent Trustees), as applicable. Mutual written consent and an affirmative vote of a majority of the Master Fund’s Board or the Board, as applicable, or the holders of a majority of the Master Fund’s or the Fund’s outstanding voting securities, as applicable, and, in either case, the vote of a majority of the Master Fund’s or the Fund’s trustees who are not interested persons, as applicable, are also necessary in order to make material amendments to the Master Fund Advisory Agreement, the Master Fund Sub-Advisory Agreement, the Fund Advisory Agreement and the Fund Sub-Advisory Agreement.
In its consideration of the Master Fund Advisory Agreement and Master Fund Sub-Advisory Agreement, the Master Fund’s Board focused on information it had received relating to, among other things: (a) the nature, quality and extent of the advisory and other services to be provided to the Master Fund by NSAM Adviser and OZ Credit Management; (b) comparative data with respect to advisory fees or similar expenses paid by other investment companies with a similar investment objective; (c) the Master Fund’s projected operating expenses and expense ratio compared to other investment companies with a similar investment objective; (d) any existing and potential sources of indirect income to NSAM Adviser and OZ Credit Management from their respective relationships with the Master Fund and the profitability of those relationships; (e) information about the services to be performed and the personnel performing such services under the Master Fund Advisory Agreement and Master Fund Sub-Advisory Agreement; (f) the organizational capability and financial condition of NSAM Adviser, OZ Credit Management and their respective affiliates; and (g) the possibility of obtaining similar services from other third party service providers or through an internally managed structure.
Based on the information reviewed and the discussion thereof, the Master Fund’s Board, including a majority of the Independent Trustees, concluded that the investment advisory fee rates are reasonable in relation to the services to be provided.
A discussion regarding the basis of the Master Fund’s Board’s approval of the Master Fund Advisory Agreement and the Master Fund Sub-Advisory Agreement will be available in the Fund’s first semi-annual report to Shareholders.
In its consideration of the Fund Advisory Agreement and the Fund Sub-Advisory Agreement, the Board focused on the Fund’s policy to invest substantially all of its assets in the Master Fund and the fact that, as long as the Fund has such a policy, it will not incur a separate management fee or incentive fee. In addition, the Board focused on information it had received relating to, among other things: (a) the nature, quality and extent of the advisory and other services to be provided to the Fund by NSAM Adviser and OZ Credit Management; (c) the Fund’s projected operating expenses and expense ratio compared to other investment companies with a similar investment objective; (d) any existing and potential sources of indirect income to NSAM Adviser and OZ Credit Management from their respective relationships with the Fund and the profitability of those relationships; (e) information about the services to be performed and the personnel performing such services under the Fund Advisory Agreement and Fund Sub-Advisory Agreement; (f) the organizational capability and financial condition of NSAM Adviser, OZ Credit Management and their respective affiliates; and (g) the possibility of obtaining similar services from other third party service providers or through an internally managed structure. A discussion regarding the basis of the Board’s approval of the Fund Advisory Agreement will be available in the Fund’s first semi-annual report to Shareholders.