How much skin in the game do LPs like to see?
This is a completely made up and very basic scenario…but let’s say I’ve found a deal that’s $4m. Let’s assume debt at 65% LTV. This leaves $1.4m for sponsor and GP.
How much would the GP(s) typically expect to see the sponsors contribute? 1%? 10%? 20? Is it pretty dependent on the type of deal? Etc.
65/35 debt to equity and 95/5 or 90/10 LP to GP was typical for years.
These days debt is more like 55/45 or 60/40 but the equity split is more or less the same.
Sponsor should typically put in 10% of every deal. Ive seen some that are lower but those deals maybe larger with top notch operators. LPs are getting smarter now and they want GPs with skin in the game and now are seeing some push sponsor for 15%.
When talking about skin in the game they usually like to see about a lamp shades worth.
lol well done sir
90/10 or 95/5 and principals will put in 5-10% of the GP split
+1
5-10% of the GP commit for each principal or 5-10% total from all principals?
I used to see shit get done with a 99%/1% split. No clue how that nonsense ever got traction.
0% interest rates
Greed
Nah, I know of a huge insurance company who was 98%/2% thru LP/GP funds and had another fund that was their land loan in a major coastal market… an insurance company basically land banking and holding the GP by the nuts and bolts, and now by their necks since their proformas all blew up. Only thing saving them was an upzoning, but the millions lost on entitlements was shared 70/30% with the LP, but the LP is also 80% of the GP: LP is fully pregnant with quadruplets and the GP is just holding their hands at this point…
oh, forgot to point out the GP also has an opco (for rofr) investor for 80% of their 20% of the GP…. Principal is fullllllllyyyy slutted out…
One LP we talked to wanted “materially more than your acquisition fee” which I think is a good rule of thumb. Maybe 2x
+1 this is a common gut check for most savvy LPs
I think this is a fantastic answer, and spot on. If you're fee is $500,000 and your equity check is $500,000, you still have no skin in the game....
What does LP stand for? Sorry just a prospect
Limited Partner
Last 2 multifamily deals I invested in were 10%.
Firstly, the GP IS the sponsor, they are one and the same. I think you meant how much would LPs expect sponsors to contribute.
The answer is "it depends". The following response is assuming we're talking a single institutional LP for a joint venture, and not just a ton of UHNW LPs in a syndication...
If levered, generally 25%+ unless there's another institutional LP involved, then probably 10%. If all cash, 10%.
Not necessarily, we as the GP are a fund. The partners are sponsors of the fund and certainly do not contribute 100% of the GP.
Sorry to be clear I was speaking to a JV - generally the LP in a JV doesn't care how the GP is funding their share only that they have a certain ownership percentage. We are the same, most of our GP equity comes from UHNW investors for institutional JVs.
Would you mind explaining this? I also assumed "Sponsor" = "GP". In your situation, if the partners aren't contributing 100% of the GP, who is coming up with the portion not contributed by the partners? And do the LPs have any issue with that? And do you have any idea what the economics are between the partners and the other party paying the remiander of the GP coinvest?
Worked at an LP shop for 3 years. Invested about $40m/year. Primarily MF. We wouldn’t look at deals with GP contribution under 5% of required equity. I’d say % of GP equity in our deals were split as follows:
80% - 10-15%
15% - 5%
5% - 15%+
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