Co-GP Capital for RE
See some smaller outfits tout that they focus on providing co-GP capital. Not familiar with the inherent mechanics. How does this differ from LP capital?
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Just higher up in the capital stack. There is the GP-LP waterfall then that GP cash flow is flowed off to another waterfall and the developer will get a promote off the co-GP.
So does the "actual" GP set hurdles for the co-GP or do they split the hurdles above LPs pref return?
Sometimes if it's a co-GP they get pretty aggressive. They may have their GP piece structured as pref w/ a kicker, or might promote themselves within the GP slug. Sometimes not, sometimes it's just true co-GP money. Really depends on how good the deal is and how desperate the original GP is. If they're aggressive they also sometimes structure in takeover rights similar to an LP. Gotta be careful, I've seen a co-GP totally take over a deal and preferred return the original GP out of virtually any profit.
It can be both, whatever the developer/managing member prefers.
Co-GP may share in fees as well.
Co-GP partners provide equity for your GP. If you have a $100mm fund with a 5% co-invest, you're looking at a $5mm check from your partners to invest the fund, which can put a strain on the liquidity/balance sheet of the partners. A Co-GP can come in, provide 50%-90%+ of that equity, help with financing guarantees if they have the balance sheet/relationships, or help in other areas where they have expertise.
As payment for this they typically get a portion of the promote (splits I've seen are between 40%-60% of the promote). This works out for the sponsor as they can fundraise more effectively and significantly reduce their money at risk and get a much higher multiple on the money they do invest as they effectively get two promotes.
why wouldn't the OG GP just raise additional "LP" capital if the co-GP terms are aggressive? I've seen GP/LP deals where the capital commitment is 1%/99%.
Because smaller GPs may not have the capability to raise sufficient LP capital and need to find another means of getting money.
It's not as easy as snapping your fingers and making LPs appear when you're not a massive player.
Also, smaller GPs may get site control at an attractive basis but not have the balance sheet to guarantee construction debt. Bringing on a co-GP lays off risk and brings in some valuable support.
thanks, would you say that co-GP capital is primarily geared towards smaller GPs? I.e. if you're related / hines / trammel, there's no need for co-GP capital?
Where have you seen 1%/99% contributions? What kind of deals and firms?
from what i've read, most of the major REPE firms don't provide co-GP capital but rather LP capital. is there a reason for this? if returns are higher, wouldn't it make sense for them to provide co-GP capital?
LP money has more protections and a preferred return that co-GP money doesn't necessarily have, so the returns are lower (potentially) but are more stable. You can have a deal that doesn't perform as expected and the LP still gets paid out but the GP loses their investment or most of the returns get eaten up by pref and the GP is left with a pittance. Not every deal is a homerun for the GP.
We look at a lot of co-GP deals for one reason - off-market deals where the seller wants to stay in the deal and/or help us with local relationships as their value add to the project. We handle design, construction etc, but they bring the land/asset and focus on relationships with local stakeholders. Oftentimes its the only way to get a deal done if the asset you're chasing is a trophy asset that's hard to wrangle away with an outright purchase. We always negotiate the majority share and control of the partnership though.
Doesn't make sense to me. We let sellers stay in all of our deals, and when they agree to a land equity contribution, they are slotted in as an LP.
Ser, we only buy the best properties in the markets we enter. Those owners aren’t idiots. If we could slot them into the LP we would.
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