We all know LPs expect GPs to have skin in the game - I've seen 50 bps up to 10%, but the standard probably being 1-2%.
Do you think you can raise money in this day and age if you legit can't afford a GP commit? My sense is you would probably be a 3c1 fund and raise non institutional capital.
I have a great track record, network, and strategy, but no cash to go out on my own
Isn't this effectively a search fund?
It would only be a search fund if they plan to operate the sole investment that they make. Much more operational. 3c1 is more about fewer investors and sidetepping SEC.
Correct. Not talking about deal by deal but rather a traditional commingled fund but where the GP is younger and just doesn't have substantial cash for a big GP commit.
It's possible (and is done) with supportive LPs who can (and want to) enable this. It's an uphill battle because the argument from LPs (beyond alignment of interest) is that if you haven't been successful in generating wealth for yourself thus far, how will you be able to do that for them? Nonetheless, if you bring something more unique to the table than a seasoned ex banker/PE exec with a corresponding net worth, then there is more reason for your anchor investors to try and help solve this problem.
There are mechanisms you can use if you can't afford all that $ upfront, such as deferred management fees / fee waivers, or a loan from the fund to the GP. Obviously less ideal than an actual cash commitment, but have seen early funds where only part of the commit is cash and rest is using some combo of the above.
But yeah usually see anything from 1-5%, 2%+ preferred.
Thanks!
I do some fund investing in my role.
Key here is it's about alignment. LPs want to know is that you're both all in on this endeavour and that you have real capital to lose/downside risk, not just upside from carry and fees. We, for example, model your wealth generation/loss (based on your fees and carry vs your commit) across various scenarios and compare it to our position to measure our alignment with you.
Think the minimum viable gp commit for PE/VC is 1% cash plus it's basically your entire liquid net worth in the fund vehicle/establishing the management company. This of course assumes you don't have a lot of wealth in other assets. If you had any wealth in stocks or an expensive property you could downsize from that should obviously happen.
You can also do the fee deferral stuff but that has to be on top of the above.
Ideal commit is more like 2-3% cash for a drawdown fund and higher for a hedge fund/public equity fund.
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