GP Development Funds

Based on the most helpful WSO content, GP development funds can be a mixed bag in terms of profitability for the sponsor. Here's a breakdown of key insights:

1. Returns and Profitability:

   • GP development funds often focus on providing capital to emerging or smaller GPs to help them scale. The returns can vary significantly depending on the performance of the underlying funds and the structure of the agreements.
   • Sponsors managing these funds may generate returns through a combination of management fees, carry (promote), and potential equity stakes in the GPs they support. However, the profitability heavily depends on the success of the GPs they back.

2. Carry Structure:

   • Carry at these firms typically follows a standard private equity model, with a hurdle rate (e.g., 8%) that must be met before the GP earns carry. After the hurdle, the carry is often split 80/20 between LPs and the GP.
   • Some GP development funds may also include a "catch-up" mechanism, where the GP receives a larger share of profits after the hurdle is met until they reach their agreed-upon carry percentage.

3. Fee Machine vs. Real Returns:

   • These funds can sometimes lean towards being "fee machines," especially if the underlying GPs struggle to deliver strong returns. Management fees from the fund itself and any advisory fees charged to the GPs can provide steady income, but the real upside comes from carry.
   • If the GPs perform well and generate strong returns, the sponsor can make significant money from carry. However, if the GPs underperform, the sponsor may only see modest profits from fees.

4. Challenges:

   • The success of a GP development fund is highly dependent on the ability to identify and back high-performing GPs. Poor selection can lead to underwhelming returns and limited carry payouts.
   • Additionally, the timeline for realizing carry can be long, as it depends on the lifecycle of the underlying funds.

In summary, while GP development funds can be lucrative, they are not guaranteed money-makers. Sponsors need to carefully evaluate the GPs they back and structure agreements to align incentives. If you're considering working at or investing in such a fund, it's crucial to assess the track record of the sponsor and the GPs they support.

Sources: Promote vs Carried Interest vs Catch up, Data: Average Private Equity Compensation and Carry from Associate to Managing Partner, Do you think it's justifiable to ask for 25% of the GP for being the fund raiser for the projects?, Paying for carry at fund