GP Co-investment Funds

Hi all

So I read this article today: Exclusive: Clairmont collects $110M for GP co-investment real estate fund | PitchBook

For those of you who don't have the time to read it, the company referenced in the article have a GP co-investment fund, rather than undertaking co-investment via the traditional JV structure.

I.e.

1). A GP needs to provide 10% of the funding for a deal and the LP's 90%. Clairmont's fund will provide part of the 10% required from the GP in exchange for part of the promote (I imagine the promote share depends on how much funding they provide).

2). The primary GP manages the investment. Clairmont don't need to be the main firm managing the investment (so they're chilling, depending on how involved they wish to be) and can then provide GP co-investment to further deals and become more diversified while providing less of the capital one would normally need to become involved in a deal (as sharing the GP capital requirement, not taking it all on). 

What are your thoughts on this? I think it seems like a really smart strategy. Granted you will get less of the promote, but to investors I imagine it would seem like quite an attractive offering as your capital could be managed by multiple GP's across different projects, allowing for diversification. This would be even more true if the GP co-investment fund invested across different sectors and geographies.

Comments (5)

Most Helpful
Jun 23, 2022 - 8:59am
Ozymandia, what's your opinion? Comment below:

I mean, it makes sense for everyone but the LPs in a deal.  The whole point of the GP/LP structure is to make sure the GP is paying attention and will have their incentives aligned with their investors.  If I were coming into Project X as an LP, I'd be very concerned that instead of focusing on my deal, my GP was selling off a portion of their equity position and running 3 other projects at the time time with the same structure.  Are they even staffed to undertake this kind of thing?  When shit hits the fan, which project are the principals going to bail out and which are they going to bail on?

Obviously it's a smart move for Clairmont as long as they're doing their diligence on the Sponsors they invest with.  It makes a ton of sense to do it with smaller guys who have brought an asset under contract at an attractive basis but don't have the balance sheet to execute, but again... if it's just being used so that a 4 man development shop can run three deals at once instead of the one, I'd be worried about overextension.

As a developer, I'd be concerned about what kind of control this gives Clairmont over my day to day.  More generally, a truism I've heard is that fees pay for overhead and promote pays for risk.  If I'm a principal, how much upside am I giving up in comparison to the risk I'm taking?  Presumably Clairmont isn't coming in on joint and several guarantees - so here I am guaranteeing a deal from which I am now expecting a much reduced profit.  Is that still worth my time?  That'll depends on risk tolerance and overall goals, I guess, but worth thinking about when thinking about taking on money like this.

All in all it's a really smart play from Clairmont, and depending on your position across the capital stack, it can make a lot of sense or not depending on circumstance.  And depending on what the actual terms are, of course.  If Clairmont is guaranteeing anything than this is a home run.  Hell, have decision rights might even make LPs more comfortable.

Jun 23, 2022 - 10:03am
CREnadian, what's your opinion? Comment below:

Agreed with this - love the strategy if it is executed properly. I'd disagree about it not making sense for LPs though. It's perfectly common for GPs to raise their X% share of a JV from outside investors (hell a lot of the time they don't even share the promote and will take a separate promote from their internal investors).

Jun 23, 2022 - 10:16am
Ozymandia, what's your opinion? Comment below:
CREnadian

Agreed with this - love the strategy if it is executed properly. I'd disagree about it not making sense for LPs though. It's perfectly common for GPs to raise their X% share of a JV from outside investors (hell a lot of the time they don't even share the promote and will take a separate promote from their internal investors).

Oh, I agree it happens.  Half the condo developers in NYC syndicate out their GP positions.  However, just because it's common doesn't mean it is good for LPs.  Capital has been so abundant the last ten years that LPs didn't have a lot of power, since someone else would come in and fund.  I think that may change.  Certainly if I were an LP, I'd prefer my GP to have substantial risk alongside me.

Look at what JDS did at 111 W 57th St.  That is the poster child for the dangers of this kind of strategy for an LP.  Having your sponsor or general partner reduce or entirely take our their equity stake in a project should be a major red flag for anyone else further down the capital stack.  The fact that it has occurred frequently doesn't change that, in my opinion.

Jun 24, 2022 - 8:49am
PropertyMonkey202, what's your opinion? Comment below:

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