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In the world of private markets, the subscription premium, also referred to as the equalisation premium, is often presented as a purely technical mechanism, almost anecdotal.
In reality, the subscription premium is a structuring economic lever, directly influencing investors’ entry points, performance allocation and fairness between successive generations of subscribers.
When properly designed, the equalisation premium helps preserve alignment of interests between investors.
When poorly calibrated or insufficiently explained, it can instead create material economic distortions, particularly in funds open over extended periods.
Subscription premium: the general mechanism in private market funds
A private equity or private debt fund never invests all of its capital on day one. Investments are made progressively, as opportunities are identified by the management team.
This progressive deployment lies at the heart of institutional fund access mechanisms via AMF-regulated platforms, which precisely structure subscription and investor entry conditions in private markets.
This naturally raises a core question: how should investors subscribing at different moments during the fundraising period be treated fairly?
Without a corrective mechanism, a late investor would benefit from:
- investments already executed,
- a portion of value already created,
- without having immobilised capital or assumed the initial risk.
The subscription premium, or equalisation premium, directly addresses this issue.
It requires investors entering after the first closing to pay, in addition to capital calls, a premium intended to place them economically in the same position as initial investors.
This premium is generally calculated:
- on amounts already drawn,
- at a rate defined in the legal documentation (often close to the hurdle rate),
- prorated over the time elapsed since the first closing.
From a theoretical standpoint, the equalisation premium is a sound, institutional and widely recognised market practice. But this principle must be examined through the lens of economic reality.
Equalisation premium: a structuring tool to eliminate timing gaps
In funds open over long periods (18 to 24 months), which is now common, performance does not crystallise solely at the end of the investment period. It builds progressively, sometimes from the very first transactions.
The equalisation premium was specifically designed to eliminate the economic gaps created by successive entry points.
It places each investor, regardless of their subscription timing, in a comparable economic position, as if they had invested from the fund’s inception.
Under this framework:
- asymmetries created by staggered subscriptions are actively corrected,
- the J-curve borne by early investors is offset,
- and performance allocation becomes more equitable over time.
The longer the subscription period, the more decisive the economic role of the equalisation premium.
This balancing function becomes even more critical when the fund continues:
- to invest actively,
- to rebalance its portfolio,
- and to create value throughout the entire fundraising period.
The equalisation premium fully plays its role as a fairness mechanism: it is designed to eliminate gaps and preserve economic alignment between investors.
Fund of funds and feeders: when the subscription premium becomes critical
The issue of the subscription premium is particularly sensitive in fund of funds and master/feeder structures.
By construction:
- the master fund applies its own subscription premium,
- the feeder applies its own,
- and both must be perfectly aligned to avoid distortions.
When this is not the case, a relative transfer of value can arise between feeder investors.
A key point that is far too often underestimated.
Consider the example of a master fund and its feeder. If the master fund applies, for example, an 8% premium, while the feeder applies only 5%:
- the master fund continues to create value during the fundraising period,
- this value is partially absorbed at the feeder level,
- without being fully charged to late-entering feeder investors.
The gap is neither marginal nor purely technical. Over 18 to 24 months, it becomes economically material.
Impact of the subscription premium for first-closing feeder investors
An investor present at the first closing of the feeder:
- fully bears the J-curve,
- immobilises capital earlier,
- assumes initial portfolio uncertainty,
- without benefiting from any compensation mechanism vis-à-vis later investors.
Meanwhile, the master fund continues investing, latent performance increases, and new feeder investors only partially pay for this accrued value through an insufficient subscription premium.
There is therefore a relative economic dilution to the detriment of initial feeder investors. This is neither theoretical nor ideological: it is a mechanical consequence of imperfect structuring alignment.
Equalisation premium and the entry point of late investors
Conversely, investors entering the feeder at a later stage:
- gain access to a partially invested fund,
- benefit from improved portfolio visibility,
- enter at a point where value creation is already underway without fully paying for past performance.
Their economic entry point is objectively more favourable:
- reduced asymmetric risk,
- mitigated J-curve,
- potentially smoother performance.
This observation is purely economic. It involves neither moral judgement nor polemic.
Subscription premium, transparency and fiduciary responsibility
From a professional and fiduciary perspective, the subscription premium cannot be treated as a mere technical detail.
It has a direct impact:
- on comparative investor returns,
- on risk perception,
- on the quality of information delivered.
A poorly explained or insufficiently transparent equalisation premium:
- raises governance concerns,
- weakens performance comparability,
- sends a negative signal to sophisticated investors.
Structuring in service of net performance
At Private Corner, we believe that structuring is never cosmetic.
Aligning the feeder’s subscription premium with that of the underlying fund(s) means:
- respecting institutional logic,
- protecting early investors,
- preserving the true performance of the selected funds.
Our conviction is simple: value is created within the funds, but it is preserved through structuring — and particularly through rigorous treatment of the equalisation premium.
Conclusion: a mechanism to explain, not to downplay
The subscription or equalisation premium is an essential fairness mechanism in private markets. But it is neither magical nor perfectly neutral, especially in layered fund structures.
For financial advisors and investors alike, understanding it, questioning it and analysing alignment between master funds, feeders and underlying funds is an integral part of a rigorous approach to private markets.
In private markets more than anywhere else, structuring details make the difference between theoretical performance and performance actually experienced.
Disclaimer: Private Corner is authorised as a portfolio management company by the AMF on 05/11/2020 under number GP-20000038. Investing in private markets involves risks, including capital loss and liquidity risk.
