Item 5. Fees and Compensation
A. The rate of GMO RR’s advisory (or management) fee varies with the type of
Managed Account and the investment strategy employed and is generally set at an
annual rate expressed as a percentage (the “Management Fee Percentage”) of an asset
base (as further described below). In limited circumstances, GMO RR may also
agree with a client to an advisory fee set at fixed dollar amounts. For Managed
Accounts with a Management Fee Percentage, during an initial period specified in the
Managed Account’s governing documents (typically covering, at minimum the
Managed Account’s first full fiscal year), advisory fees are generally calculated by
multiplying the Management Fee Percentage by the capital contributed to the
Managed Account. Following the expiration of the initial period specified in a
Managed Account’s governing documents, GMO RR’s advisory fees are generally
calculated by multiplying the Management Fee Percentage by the value of the assets
held by the Managed Account. The Management Fee Percentages range from
approximately 0.55% to 1.50% per annum depending on the Managed Account, and
the Management Fee Percentage applicable to investors within a Managed Account
may vary depending on the capital committed to the Managed Account as well as the
investor’s assets under management with GMO RR across all Managed Accounts.
While a Managed Account’s valuation is generally based on appraisals performed by
independent third-party appraisers, such appraisals are based on the appraisers’
assumptions and estimates of many factors, including, for example, future market
prices of timber and agricultural products generated from the investments, the future
costs of production and other matters. In addition, an appraiser may rely on data
provided by GMO RR regarding a property and its management and disposition
strategy. Any or all of such data, assumptions and estimates used by an appraiser
may prove to be inaccurate. The frequency of independent third-party appraisals is
specified in a Managed Account’s governing documents and is generally annual for
investments that have been held for longer than the minimum period specified in the
governing documents. In certain circumstances, such as when an investment has been
held for less than the minimum period or when an investment is under contract for
sale at the time an appraisal would otherwise be completed, valuation of those
investments may be made using different methodologies, such as investment cost or
the contract sale price. Please see Item 11, “Code of Ethics, Participation in Client
Transactions and Personal Trading” for a description of some of the potential
conflicts related to the use of appraisals.
GMO RR also receives performance fees from the Managed Accounts. The
performance fees are generally calculated as a percentage (the “Performance Fee
Percentage”) multiplied by the net cumulative increase (which may include
unrealized appreciation based on the appraised value of investments) in the value of
the relevant Managed Account’s assets above the account’s stated “preferred return”
hurdle. Preferred return hurdles vary depending on the strategy of the Managed
Account and frequently include an inflation adjustment component. The Performance
Fee Percentage is generally 15.00%. Please see Item 6, “Performance Based Fees
and Side-by-Side Management” for more information.
For the Private Funds, the terms of the advisory arrangement, including fees and
terms of payment are set prior to that fund’s first closing, subject to the specific terms
of any “side letter” negotiated with individual investors in a Private Fund. Thereafter,
such terms generally may be modified only with the consent of GMO RR and at least
a majority of the investors in the Private Fund. For SMAs, the terms of the advisory
arrangement, including fees and terms of payment are negotiated and set with the
client prior to the execution of an advisory contract. Thereafter, such terms generally
may be modified only with the consent of GMO RR and the client.
B. Management fees are typically accrued quarterly and paid in arrears, although SMA
clients may request to be billed more or less frequently. Performance fees, if
applicable, are typically calculated annually (or, in the case of the Private Funds, at
such times as distributions are made by the Private Funds to investors), though such
fees may not be distributed to GMO RR at such time, in whole or in part, depending
on any applicable distribution hurdles or holdbacks intended to offset potential future
underperformance. For the Private Funds, GMO RR typically retains authority to
deduct fees due and payable directly from the Private Fund. For SMAs, GMO RR
does not generally deduct fees due and payable directly from the account, and such
fees are billed to, and paid by, the relevant client. However, where appropriate and
permitted by a Managed Account’s governing documents, all or a portion of
GMO RR’s management fees may be paid by one or more entities owned by the
Managed Account and formed for the purpose of holding such Managed Account’s
forestry and/or agricultural investments. In such cases, the management fees paid by
such entities are fully credited against the management fee due from the Managed
Account. For all Managed Accounts, the amount of asset-based management fees is
prorated if GMO RR provides advisory services for periods of less than a full
payment cycle (e.g. at the beginning or end of GMO RR’s engagement to provide
advisory services). In all cases, and even if a contract is silent, GMO RR requires
that management fees be paid within the calendar year in which they were billed, and
with respect to fees billed on December 31 of each year, by December 31 of the
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