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Imagine three types of investor, one wants capital secure growth, one income, and one is speculating. They are Zeros, Income and Capital investors, and they each put up £5,000,000 to produce a £15,000,000 fund.
The deal is simple. The Zeros are lending the money to the Incomes, who will get the dividends, and the Capitals, who will get the end surplus.
Assume a 4% yield in the fund and 6%pa capital growth. Allow that the Zeros were promised 10%pa, paid as Capital gain at the end of 10 years when the fund is would up.
What happens?
Income in year one is circa £600,000, but this is a 12% yield for the income shares, so they are happy, and if dividends increase over the years they get even happier.
At the end of the period the fund has grown to £27,000,000. The Zeros take their £13,000,000.
So what about the Capital and Income shares? If the Income shares get their £5,000,000 back then the Capital get £9,000,000, a return of 6%pa.
And if growth had been 8% in the fund? No change in the Income or Zeros, but a final fund of £32,000,000 gives a net return of £14,000,000 to the Capitals, i.e. about 11%pa. If fund growth was 12% then the Capital shares get back 19%pa.
But if the fund only grows to £18,000,000 then the Capital holders get nothing.