CION Ares Interval Fund Shareholders to Vote on Incentive Fee Calculation Change
Shareholders of CION Ares Diversified Credit Fund, a daily-NAV interval fund, will soon vote on a proposal to amend the company's advisory agreement with CION Ares Management LLC in order to make certain changes to the calculation of the fund’s incentive fee on net investment income.
Shareholders of CION Ares Diversified Credit Fund, a daily-NAV interval fund, will soon vote on a proposal to amend the company’s advisory agreement with CION Ares Management LLC in order to make certain changes to the calculation of the fund’s incentive fee on net investment income. Shareholders will vote at the company’s special meeting held on Thursday, April 23, 2020 at 9:00 a.m. ET.
If approved by shareholders, the incentive fee will be based on each share class’s net investment income (rather than fund-level net investment income) and each share class’s net asset value (rather than the fund’s adjusted capital – or how much money it has raised.).
The company said that the first change would provide for more equitable treatment of shareholders of each share class and more closely align the incentive fee structure with each individual investor’s actual investment performance. The change could, under certain scenarios, cause shareholders that pay lower or no class-specific fees (i.e., shareholder servicing and distribution fees) to bear higher incentive fees, and could cause shareholders that pay higher class-specific fees to bear lower incentive fees.
The second change to the calculation would reduce the complexity of the incentive fee calculation – which poses a significant operational burden on the advisor, the company said. The change is expected to have a neutral impact on incentive fees paid by the fund and may result in higher or lower incentive fees depending on market events.
Under the existing advisory agreement, the advisor is entitled to a fee consisting of two components: a base management fee and an incentive fee.
The management fee is calculated and paid monthly at the annual rate of 1.25 percent of the average daily value of the fund’s managed assets, which is the total assets of the fund minus the fund’s liabilities other than those relating to debt.
The incentive fee is equal to 15 percent of the fund’s “pre-incentive fee net investment income” for the previous quarter, and is subject to a quarterly 1.5 percent hurdle rate, based on adjusted capital, and a catch-up feature.
Currently, each class bears a pro rata share of the incentive fee to the extent that pre-incentive fee net investment income at the fund level exceeds the hurdle rate of 1.50 percent per quarter (6 percent annually).
However, according to the company, this methodology could potentially lead to an undesirable result where the fund has exceeded the hurdle rate on a consolidated basis, but shareholders of certain classes with higher expense ratios (such as classes with higher shareholder servicing and/or distribution fees) are charged an incentive fee when their investment has not experienced net returns that exceeded the hurdle rate.
Under the amended advisory agreement, only share classes where the individually calculated pre-incentive fee net investment income exceeds the hurdle rate would be charged an incentive fee.
During the fiscal year ended October 31, 2019, the advisor received nearly $4.8 million in management fees from the fund, and the fund incurred no incentive fees. If the amended advisory agreement had been in effect, the fund also would have incurred no incentive fees during that time.
CION Ares Diversified Credit Fund (ticker: CADEX) recently reached its three-year anniversary and had a 6.9 percent annualized return since inception with a distribution rate of 5.4 percent as of December 31, 2019.
The fund oversees a portfolio of directly originated loans, secured floating and fixed-rate syndicated loans, corporate bonds, asset-backed securities, commercial real estate loans and other types of credit instruments. Since its launch in 2017, the fund’s managed assets totaled $695 million as of year-end 2019, with capital raised through wirehouses, registered investment advisers, and independent broker-dealers.
