A partner at my firm is looking to start a debt fund with an existing JV partner. Do any of you know what a waterfall looks like for the GP in a CRE debt fund? For reference the firm gets 20% over a 9%, 30% over an 11% on acquisitions in the JV, but not sure where typical hurdles are on the debt side.
Thanks!
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Based on the most helpful WSO content, typical hurdles for a GP in a CRE debt fund can vary depending on the structure and risk profile of the fund. While the context doesn't provide specific examples for debt fund waterfalls, it does highlight some general principles for structuring waterfalls in real estate and private equity:
Preferred Return (Pref): Debt funds often include a preferred return for LPs, which could be similar to equity structures. For example, an 8-10% preferred return is common in equity deals, and this could serve as a baseline for debt fund structures as well.
Promote Structure: In equity JVs, promotes like 20% over a 9% IRR and 30% over an 11% IRR are common. For debt funds, the promote might be tied to achieving certain yield thresholds or cash-on-cash returns rather than IRR, given the focus on income generation.
Waterfall Tiers: A typical waterfall might look like:
Debt-Specific Adjustments: Since debt funds focus on fixed income and lower risk, the hurdles might be slightly lower than equity JVs. For instance, the promote might kick in at a 7-8% return instead of 9-11%.
If you're structuring a debt fund, it might be helpful to benchmark against similar funds in the market or consult with your JV partner to align on expectations.
Sources: , LPs/Investor Return Structure, Differences between Co-invest and Secondaries?, Best way to learn Real Estate Waterfalls?, Debt Fund Modeling in REPE?
It is usually a sliding scale depending on investor size, but being 15-20% over a 6% is pretty typical for a high yield fund. Most of the firms that focus on core debt do it for fees only.
Fees can vary a lot. I know some places that are as low as 35bps (very large pension/life co portfolios) and high yield funds that charge up to 2%.
This is really helpful, thanks!
Saw a more opportunistic fund charging 20% over a 7% with catch up. Don’t remember what the fees were but they were probably pretty high (pre Covid).
The fund at the time was probably using 30% leverage and targeting 15% irr on the loans at the fund level. Asset level was probably closer to 10-12%.
I see the fund is still around so the model has been working.
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