Development Fund vs. JVs

My partners and I are at a point where we have a ton of upcoming pipeline (mostly multifamily), which is going to require a few hundred million of equity over the next 3-7 years. Traditionally we've always gone to institutional partners on a deal-by-deal basis, but we've noodled with the idea of using these deals to seed a fund.

Ergo, I wanted to start a discussion to get this forum's thoughts on the pros and cons of having a platform vs. raising capital and negotiating every deal as you go to put them into production. We love the idea of building out more of a fee-based business to smooth cash flow, but obviously a fund comes with a ton of overhead and I have no idea how much (if any) of those fees are actually profit.

 

Are all your deals you’re looking at going to fall within similar hold period / geography / product type / strategy? If the deals are wildly different across any of those metrics it’s going to cause headache in terms of locking in LP capital across such a broad mandate. Most of those guys who will commit blind pool, long dated capital have strict requirements for how the capital can be used and when it can be returned.

Additionally, you’re looking at way longer time period to hit your promote as it will likely be fund based and not deal based - forget about cashing out on refi here if the fund overall still hasn’t hit pref at that point.

From what I’ve seen developers who did go the fund route ended up regretting it for those reasons - they like the flexibility to handle each deal on a case by case basis and get their promote earlier. I’ve seen much more interest in forming programmatic JVs than an outright fund wherein the capital isn’t outright committed up front and there’s no ongoing AM fees to collect while searching for deals but you typically have an agreed upon mandate for which a larger LP will definitively commit capital upon certain deal criteria being hit.

 
Most Helpful

Mostly agreed with this, but a couple points on structuring a fund that can circumvent some of the above-mentioned issues assuming your strategy is an appropriate fit for one.

1. You can always structure with an american-style waterfall (i.e. deal-by-deal) to get paid earlier, but the downside here is you're going to need a clawback provision so if your fund returns don't line up at the end you'll be paying back a chunk of that money and will likely need to hold it in escrow (or at least a good portion of it).

2. If your fund strategy is build and hold, another workaround is to allow for crystallization in the fund. For example, once the equity is fully funded and you've refinanced whichever projects you're going to hold, then you crystallize the GPs share and earn your promote that way. Still requires you to wait for build out but if its a long time horizon you get paid much earlier.

 

In addition to what youve outlined, you can also do pools under the JV and paper it so promote can't get clawed back between pools.

I've done deal-by-deal, European with pools and with crystallizations... 100% prefer crystallization, just have to make sure you're papering it so the value is based on the full portfolio and not on FMV of each asset.

 

They're all in the same metro area, asset class (multi with some mixed-use components), and the stars appear to be aligning in terms of groundbreaking dates - although there is still plenty of entitlement to be done which makes the timing rather unpredictable.

I hadn't though about the promote being at the fund level - which is such an obvious but great point.

 

Are your existing investors the same type who will commit to a fund? We do a lot of LP equity in development deals through our own discretionary funds and we would not commit to a fund with a GP, we couldn't justify the additional layer of fees to our own LPs and we would also have reduced line of sight on capital deployment which makes it a lot harder for the portfolio managers to allocate capital. We'd do programmatic JVs instead to address these issues. If you're working with investors who can invest in individual deals or discretionary funds this issue goes away.

A fund creates issues around pooled promote. While you can get paid out deal by deal, there'll be a clawback and other mechanisms to protect the investors as CREnadian has pointed out. If the market blows up or you fuck up a few of your deals you can end up with no promote. If you split the deals into 2-4 programmatic JVs instead you'll decrease the pool mitigating this risk.

 

as others have mentioned, fund investors vs. LP investors are different, so my feeling is you'll have difficulty raising a fund. I'd stay deal by deal, try to find someone programmatic (with uncrossed deals), and maybe approach a few of the very large capital allocators (like a nuveen) to see if they would just take it all down

 

Enim quod aut sint saepe ullam. Modi sapiente et distinctio dolores necessitatibus labore ut. Necessitatibus animi sed quidem et dicta officiis vero id. Aut doloremque nemo alias non aliquid. Soluta consectetur expedita consequuntur ab iure sed veritatis ratione. Enim porro eum quae est.

Ab alias animi temporibus et est. Eos nisi eveniet dolores ab est. Dolor rerum ut quae. Fugiat nulla fugit voluptas id quidem natus possimus. Aut laboriosam numquam explicabo aperiam magnam. Quod quas iure ipsam voluptate.

Dolor quod aut eum placeat amet nulla sunt. Tempore et eius facilis placeat sed eveniet expedita. Non eveniet qui accusantium dolor corrupti. Laboriosam pariatur perspiciatis quibusdam. Non minima culpa officiis nesciunt temporibus. Voluptatem consequatur nesciunt quo doloribus et nemo perferendis.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
DrApeman's picture
DrApeman
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
CompBanker's picture
CompBanker
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”