Easier to get LPs in fund or one off deals?
So we have a major catch 22 here. We have some deals we like but are falling through the cracks. The deals underwrite well, but we are worried that the LPs are not going to fund at closing. We dont want to run that risk and end up losing our earnest money plus our reputation with the brokers/sellers. So we thought about putting it into a fund. The fund would still be a 90/10 (LP/GP) split, but at least this way we know we have the money ready to go.
A couple issues I see with the fund that LPs might have:
- LPs would not know what deal we are purchasing. Rather they would just have to trust us as we have sole discretion to buy whatever we desire
- Fund startup costs might be heavy (attorney fees, PPM fees, SEC fees, etc.) - Not sure if someone has experience in this.
I think the fund strategy would greatly alleviate the issue about LPs not funding at closing as we would have funds on hand. However, do LP equity sources prefer funds or one off individual investments?
Bump
What's the purchase price of the deals you're chasing and how big would your fund be?
There are plenty of people who are having the same problem. I was recently working for a small shop trying to help them raise equity for their first fund. They biggest hurdles they faced (from the feedback they had received) was that the deals they were chasing were too small (1-10 mm, but usually 2-4 mm) and they had no track record as a fund. They felt that all they needed was one or two checks and then others would start pouring in. From my point of view, the returns they were targeting were too low to truly entice any serious investors. I think they didn't need a discretionary fund but should have stayed as a syndicator and tapped some pref equity funds when they needed too rather than their typical equity source (friends and family).
You can set up a programmatic JV where the LP has 10 days to approve the funding or you can go to a "new" partner for the particular deal.
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