Debt Fund Returns
How would you guys characterize debt fund returns? I was doing some back of the napkin math and assuming a $1.5bn fund with a 1.5% asset management fee, an 11% target return, and a 20% promote over 7%, there doesn't seem to be a lot of money made. 1.5% fee gets you $22.5m to the fund, and then getting 20% of the 4% of target profit above the 7% promote gets you another ~$12m.
To me, that's $34.5m of profit on the year you harvest that fund for a firm with over 100 people, or just $365k per person before taxes, rent, and everything else. Am I missing something, or is this astronomically low for a private equity/private credit firm? How do debt funds actually make money if that 11% target return is already a levered return with A-notes and senior notes behind each loan?
No $1.5B fund is employing 100 people. you can't average $15MM AUM and expect to make money.........that's not even 1 loan per person lol.
Your math is correct except that most funds that size would have more like 15 total headcount.
And that 35mm is every year, not just the year you harvest. There are some other tricks that can be used to increase IRR (short term deals upfront so you can recycle capital, judicious use of credit lines so you don't have to call capital, etc.) but figure WALT of ~5.0 years for a debt fund (2 years to invest + 3 years of harvesting).
My firm has three flagship funds that are about that size, and has well over 100 people across asset management, investor relations, accounting, compliance, risk management, and investing team, let alone the deal teams and partners. I'm only referring to year the fund terminates and capital is returned since those years are what matter most for a firm's profitability. So for a given year, assuming one of your three funds is winding down and you're getting AM fees on the other two, it still seems you cap out below $100m in profit pre-tax
Are you the OP? And do you mean your firm manages $4.5 billion total? If so I guess that makes sense but it sounds pretty inefficient.
I know someone who joined a private equity firm managing about $2 billion back in 2016 and they had like 10 people or 15 people total.
Your math is wrong brother. Your carry calculation is correct if the funds entire holding period was one year. There is a lot more profit to go around.
If a debt fund only returns 1.11x of investors money they have failed dramatically. Our deals underwrite to a 1.25x equity multiple on the low end and a 1.8x on the high end.
Edit: Just did some back of the napkin math in excel. Assuming a 13.6% IRR, 3 year investment period, 6 year fund life, you’re looking at $93mm of fees.
This is conservative for a few reasons: No recycling of capital. 3 year investment period is likely too long. I use 1.25% management fee. I think returns will be higher as rates go up.
Now consider that my firm (that many of you prob haven’t heard of) has 5 different RE investment vehicles currently outstanding. Pretty fantastic business to be in.
How's that math work out? Curious to see how you calc that out and arrived at those fees?
You have to build a JV Waterfall model in excel. There’s no shortcutting that part out. It’s the same as any RE model, but you’re looking at fund level cash flows.
So lines for:
1) Capital deployed into deals (I did $500mm per year over 3 years)
2) interest earned on deals (I did something like 13-14% bc I wasn’t modeling any entry or exit fees)
3) repayment of principal
Sum all of these up to get your fund level cash flows. Then from there you can do a standard waterfall to see what the GP takes home in promote
Sorry for being dumb but as a debt fund why are you looking at an IRR return? Should you not be targeting a yield above a basket of equivalent corporates or high yield bonds?
Can you share the quick excel file you mocked up please?
You can't share files in the comments here.
It's seriously 3 lines to get to cash flow and then putting that cash flow through a waterfall. If you're an associate in PE you should be able to put this together in 5 minutes like I did
Aren’t we also excluding fund level leverage which can also meaningfully impact returns?
Shouldn’t GP be getting caught up over a 7? So would get 20% of total profits not just those over a 7%?
Yeah I was thinking the same. Not sure why you got MS, I have definitely seen deals structured that way
Lol was confused by the MS also.
I’ve noticed some of these debt funds pay higher at the associate level even though returns are lower than equity from an investor perspective. Granted it’s a volume and fee games and I’d bet on average a debt fund is more profitable than a repe
lol probably 10 employees in the segment...
Seriously, people who don't know how to calculate a promote structure are worried that there isn't enough carry to go around at credit funds. The irony.
Why are you monkeys trying to do a back of the envelop math on promotes, fees, whatever on a $1B debt fund?
You monkeys are can't see the forest from the trees.
The answer is no $1B fund is employing 100 people.
Real impressive talent we have in real estate today.... Guess tech drained it all....
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