Independent Sponsor Coinvest Fees
I recently started as a midlevel at a LMM independent sponsor. We have a new platform deal set to close in the next 2-3 months. Wondering for those who are familiar with this space how common it is for the GP to charge carry on our co-investment? I've been told some spiel about how legal expenses, paperwork, etc. makes it uneconomic for a separate entity to be stood up for our coinvest as we're a small shop and these are single asset deals. I have transaction related payments tied to deal performance but no carry, this would be the way to get more exposure. No management fees are charged on my investment, just the carry portion.
I'm leaning towards just not co-investing as them taking carry on my co-invest rubs me the wrong way (after I've been working on the deal and will be working heavily on post-close management), but curious for other perspectives if this is actually "market".
Thanks
I guess it depends on how much you are looking to co-invest as a % of the total capital. If it's let's say a $25mm cheque and you want to put in like $50k then it may be uneconomical for the firm to bother amending the LPA to have a second non-carry paying fee class. If I were you I wouldn't bother co-investing.
Got it and that's what I was thinking, this is the scenario basically of what's happening. I'm just struggling to think of why this would be hard to add to an LPA (that is not finalized yet -- remember, it's a deal-by-deal raise and these are still new and open docs). It seems pretty easy to me to add a clause that the firm's employees are not charged fees/carry, why would another LP push back on that? Alternatively, I do not see a reason why we could not just have ours waived even if this was not specifically documented in the LPA.
For what it is worth, I worked for a fund where the owner wanted LPs to believe that even principals were investing in the fund and having fees deducted and that no one got a "free ride". In actuality we just had staff sign a one page side letter which states that no mgmt fees or carry are to be charged on their commitment and we gave it to our fund admin and it was easy to track...it's not a big deal unless you work for the type of people to make it a big deal. Side letter is the way to go IMHO.
I'm a little confused by the fact pattern. If you're asking about the GP portion of a co-investment, then at my firm it's no fee / no carry (i.e. why take carry on your own dollars?). That'd be weird for the partners to take carry on a VP's co-investment. It should all be treated the same way. I'm not sure why they would do that unless (i) they are not good guys or (ii) they got screwed on the non-GP investment carry structure and are looking to someone squeeze more dollars out. Either way, that does not sound good.
I'm also confused if you have carry or not.
I believe this is market but others can correct me.
Edit: At the mid-level, it'd be weird to not coinvest your pro rata share. You may have good reasons but it'd be looked down upon and as if you weren't a "team player".
Thanks -- so to clarify, I do not have carry, just some TBD profit sharing in the event of an exit. I'd be investing alongside other LPs on the same terms as other LPs (NOT investing with the GP), just with my management fees waived. It's the scenario someone else mentioned -- they are taking carry on my $50k investment into a $20M total fundraise. They did not get screwed on the non-GP investment carry structure: it's a deal by deal raise, so all new funds coming in are under the same carry terms that I am being charged. There is no "pro rata share" that I currently have.
I hear your point on not looking like a "team player" but I want to put it back on them -- what does that say to the rest of the team that you are charging us profits on our co-investment?
I started my career at an IS and we made so much freaking money going deal by deal that there was more than enough to go around to give everyone actual carry if they worked on a deal.
Based on what you've stated it sounds like the partners are kind of greedy? I wouldn't be comfortable with a TBD profit share unless I literally didn't work on the deal at all. If you worked on it then you should be in the carry pool IMHO.
I understand where you're coming from, but these guys do not sound like folks who care about optics. I'd strongly suggest not bringing that up as it will nearly 100% be a huge blow to your future at that firm (assuming this is a somewhat small firm and you're talking with the managing partner-types).
The economics of IS model typically are such that if you had carry (and potentially some form of leverage on the co-invest) it wouldn't be super material whether you had carry charged on the co-invest because presumably you would get xx times as much in carry from the other LP capital than you're charged yourself on it.
Red flag is not the carry on co-invest but lack of carry allocation. What makes deal by deal appealing is that you have a lot more visibility on your (potential) carry and your contribution to it.
That's correct -- I would not be complaining if I was also receiving carry on the deal. Just paying it out though is pretty frustrating.
Agree this is a red flag, I do know what my profit sharing looks like on each exit, but there similarly has been a resistance to document this. Typing this out, it is obviously that much more of a red flag.
Good luck, it's not a great situation to be in. For what it's worth, the actual GP specific docs get finalized often way after the close of the fund vehicle so having something in writing even if it's an email could go a long way if you ever get into a dispute on this.
I don't know the details of your "profit split" but you might want to lobby for being part of the formal carry pool for tax efficiency etc. You might also try to get some visibility of the actual carry allocation - is it all going to the partners or is there visibility on the unallocated house pool? If everything is allocated, it's all empty promises as there is not much "profit" to share.
We can chat via PM on this topic but you need to get it documented. My first gig had all profit share allocations up to partner discretion at exit and there were verbal promises of 10% at exit, and guess what, when exit came it certainly was no where near 10%.
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