As a GP, what kind of waterfall offer would you turn down from an LP?
So let's say youu had an offer from a major investor, to inject as much capital as you could deploy, into a boutique hotel chain (project sizes roughly $3-4M equity checks per project), deploying about $25M of equity per year.
And the LP says we want:
10% pref
82.5% until 20% IRR
75% until 25% IRR
70% therafter
As well, GP (who has a property management arm) has to subordinate their management fee to the preferred, so that LP gets paid out on their pref first.
GP has to commit all their current holdings to securitize bank loans, so that LP knows GP's interests are 100% aligned and that they will be 100% incentivized to make it work.
GP needs to invest the majority of their liquid net worth in the venture.
So what would you say if you had this offer, from one of the world's leading financial institutions, ready to take out your funding needs permanently?
A) What % of the equity check is GP on any given deal? I don't play in the hotel space so I can't say if those splits are market or not, but I think they would sound high (in favor of the LP) for other CRE product types. Did you get any other offers?
B) Have you asked yourself - Is the accelerated growth (potential) of your platform and capital worth the loss of control? If you choose for this institution to be your sole source of equity funding, I'm guessing they will have a meaningful amount of leverage over you and your decision making. I'm not saying there's anything wrong with that - it's just a trade-off.
Looks like a bullying initial LP offer that I would find a red pen full of ink to use. Ask an equity placement group their thoughts. Programmatic deals like this can vary widely.
My experience is institutions can give up most on the highest end of the waterfall. I would not subordinate the hotel management fees to the pref - that sounds overboard. Committing all current holdings to securitize the notes also seems overboard and I wouldn't do that - you are already investing a majority of liquid net worth which should be sufficient incentive IMO.
I'd love to hear how this negotiation turns out, please keep us posted.
Curious what are the goto names for equity placement. I know there are plenty of debt brokers, is the same true for equity?
HFF and Eastdil
I know certain people at HFF who specialize in equity placement specifically. I also know an MD who is a very successful debt broker who also executed on many equity placement deals. If you ever need their info PM me
Its very important to know how much equity your putting in? If your not putting in much, then its not bad. I have never heard of a management fee being subordinate to the pref. Unless you are putting in no money. So depending on GP equity, it may or may not be a good deal. The other thing is are you a well qualified GP or a newer firm with less assets. If you have less AUM, then it may be worth taking on this partner to jumpstart you.
Hah - if you're getting a 25%+ IRR and only getting 30%, you're getting ripped off. The management fee thing is just a kick in the nuts too.
Agree on this, especially for hotel. We have forced subordinated AM fees, but never PM fees, that seems out of line to me. I have seen incentive fee portions of the PM fee (usually tied to F&B), get pushed below the line, but not sure what happened to those on the partnership level.
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