One of the challenges with an open ended fund is this moving valuation of what the value of all the assets of the company are, that investors are best investing into, as time moves on. Because if you have investors coming in at these different time periods, then suddenly the investor who came in at time zero, and the investor who came in two years later, may have completely diluted each other and caused the problem, the solution to that problem is net asset value. In this video, we’re gonna talk about net asset value, how it’s determined, and how you can use it for an open ended fund.

Net Asset Value is the key tool for figuring out what the value is at any given point, so that you don’t improperly take away the rights of an investor based on time. To make that a little bit more clear, let’s look at a whiteboard. So let’s talk about the scenario in which this can take place. Let’s use a very simple example. Let’s say you have an investor who invests Oops, my pen who invests with you here, right? He buys in here and he gives you $1 million. Now with that $1 million, you have put it into a into a property. And in that property, you have done a lot of things. So this is when you bought it right here. Now, maybe you you did a lot of construction here, and maybe you kicked all the tenants outhere and released here.

Now, you’ve still got this property here, right. So the value of this has obviously changed. There has been there has been appreciation that has taken place over this period of time. Let’s say this is three years later. There’s been appreciation this taken over this period of time you’ve done construction, you’ve kicked tenants that you guys have been together through thick and thin for these three years. And now you have someone else who comes to you give him a different color. And he comes to you here. And he says I am going by let’s say he the red guy, let’s change him. He owns 20% He gave you $1 million for 20%. And now let’s say that now this blue guy, he comes to you and he says okay, great. Here is $1 million for 20%, just like the red guy got. Sounds fair, right? Well, what about all this thing that’s been taking place over this period of time, this building isn’t worth that 5 million anymore. It’s worth more, you’ve done a lot of work, you’ve added value. There’s been appreciation, you’ve retested the old building. So it’s not worth that amount. This is the problem that is solved by by net asset value. It’s determining what this value what this person needs to pay, based on what this acids value is. So let’s go through exactly how we can do that. And so you will erase Here we go. So the challenge of figuring out net asset value is very simple in one, one version of it, and it’s very complex and another version of it. Let’s say the most classic example of a mutual fund, which is a bucket a stocks and bonds here here here, right? Every day, it’s a there’s still a bucket there. And things come in and they go out, right? There’s always an addition and subtraction of, of new things coming in and other things going out. Well, did you know that mutual funds actually don’t trade in real time? When you buy a mutual fund, or you sell a mutual fund, you’re not doing you’re not actually buying it, the minute you hit go from your brokerage account, you’re actually buying it at the end of the day, I think it’s like at 530, or something Eastern time. And that’s because what needs to happen before you figure it out before you do it, is that this bucket? Let’s look, let’s blow this up. So we can see what’s happening.

This bucket of in the mutual fund. Each individual piece, each individual piece is figured out what its value is that day. So if it’s a stock, we’ll see if it holds stocks only. They all the different stocks are added up together. It said, Okay, if we were to sell this whole bucket today, what valid price could we get it for? And then what we would divide it by the number of outstanding units, that comes up with the net asset value for the day. And when it closes and at about 530. When you buy your mutual fund, that’s when you’re actually buying and because then you know what the net asset value is. So net asset value is all of the assets minus liabilities. divided by number of units, comes up with that share price. Okay, so that makes sense, right? Now, what is hard to do is what about the case where we’re not talking about when we’re not talking about a mutual fund, when like in the example, we’re talking about buildings, and real estate. And these are all purchases of different buildings in real estate, and they’ve all got different appreciation things going on, and they’ve got different re tenanting going on. And they’ve got all sorts of things, there’s construction going on. How on earth do you figure that out? Because you can’t do that every day. There’s just too many things. If you even had five, five buildings, and you were trying to figure out the net asset value, it would be really hard to figure out what it is every day, you have to come up with five actual, you know, legitimate values. Because real estate is so illiquid, it’s really hard to figure out exactly what that value is at any given point. So what here’s what companies do, they say, Okay, we are going to allow investors in here at time zero, and then we’re going to do some stuff with that money. And then let’s say these are quarters, one, quarter one, quarter two, quarter three, quarter four. So here is here is year, 11234 years, year two, and if I make a mistake, I don’t need to hear about it in the comments. You get the idea. All right. So you got year one, year two, year three, as they go on, so let’s say every quarter, so this quarter, q1, the team gets together and they do an evaluation and they calculate everything. Okay? We know that this is now worth $100 the unit still now, Q let’s skip ahead to year one, q two, q one, year one. Okay, now we’ve got another building, and we’ve also done some other there’s been some appreciation, and the management team determines that now it is worth $110 A unit and you’ve done some more things and then you have some purchases that go on. And oops q1 And you Have a mass downsizing in terms of all of your tenants leave. So now management decides, oh my goodness, our net our value, if we had to sell it all today has gone down radically, it’s now $95 A unit. And you’re only sweeping money in once that determination of the net asset value is determined. Here, I’m making the assumption that there’s also there’s determinations here and here. So that’s how net asset value works. Now, quarterly net asset value determination for a for real estate is still really tricky. It’s a lot of work. So most companies do it, do it annually. Some do it quarterly still, there’s some also do it by end really, the challenge is finding out what’s going to work the best, and finding out what that mechanism for determining mostly what that asset value is determining the liabilities isn’t that difficult, but determining what the net asset value of an illiquid product at a regular interval is challenging. So when doing it, that’s really the big, the big thing that takes the most amount of time, is figuring out that net asset value, the asset itself, and then dividing it by the number of units, number of units, that’s very easy to figure out. So I hope that helps. Let’s go over some key takeaways here that go through net asset value again, just to really make sure we’re rock solid here. Number one, net asset value, or NAV as we call it, most of the time, it’s a critical metric to understand the open ended investment itself, it impacts the pricing that investors are able to go into, and whether or not they can what price that they can exit from. Number two, the calculation of NAV is done by adding the assets or as taking the assets, subtracting out the liabilities to create the total value, and then you divide that value by the number of shares outstanding or units outstanding. What that does is it gives a per unit value. Number three, NAV can be used for assessing the performance of investments as well. It helps you identify first, the true worth of the investments. And it helps in the management of the portfolio. All fund managers want their NAV to go up. So they that shows a good level of performance. Number four market fluctuations change this nap. So it’s that market fluctuation and the value of each individual asset that’s changing over time. It’s the market that’s actually driving it right the markets, the one that determines value. So that’s changing over time, and it will change the decisions that are made not only by your investors, but also by the fund manager themselves. And number five, transparent and accurate calculation of NAV is crucial for giving your investors not only an accurate number that they can rely on, but also for that transparency so that they understand how it was calculated, and so that they can feel like they’re truly being informed with full disclosure about the material thing that’s changing which is net asset value. My name is Tilden Moschetti. I am a syndication and private equity fund management attorney for the Moschetti syndication Law Group. If we can help you establish your own open ended fund, or if you’re doing a closed ended fund and be compliant with the SEC is Rule of Regulation D rule 506 B and 506. C, we’d love to talk with you and strategize about how we can help you move from where you are today to being more successful and getting your funds put together in the right way that will give you peace of mind. Keep your investors happy and ultimately make you successful.