I'm an owner operator/GP. I locate an off-market deal, brought to me through a broker but unlisted. Broker needs protection on the commission as seller will not pay (for whatever reason). 1% fee on top of the purchase price. I take the deal to a group of LPs. I include an additional acquisition fee (payable to GP) of 1%, with the logic that we sourced this off market and justify an acq fee.
Given the fact that there is already a 1% buyer fee on top, would most LPs balk at paying another point to GP? I would think it may reach a point where the deal seems too fee heavy, or the LP may cap the fee at a certain % and thereby limit the acq fee given the presence of the broker fee.
Any thoughts on how to approach this?
Depends on the LP, but generally no, a 2% acq fee is not crazy out of market.
It comes down to the quality of the project and the total returns. You will always find LPs who complain about the fees, even if you're returning crazy-good returns. Those are the investors you want to cut loose anyway.
Agree with the above, if they're still hitting their returns who cares. Besides the acquisition price will reflect the 1% of fee already being paid to the broker out of your pocket.
That's my point. I would think that the LP would take the stance of capping the total fee at, say 1%. Meaning the sponsor would be allocating all of the 1% to the broker commission and being left out with no acq fee (unless they could renegotiate the fee and therefore scrape some of it for their acq fee).
What I'm asking is if you showed the LP the underwriting with 2% total for acq and commission, wouldn't that seem a bit fee heavy?
Sure it's fee-heavy, and if you're returning them a 20% IRR on a quality deal and you've got a quality team then they can deal with it or get lost. There's always another investor.
honestly I have seen significantly crazier shit. I once saw a syndicator secure a contract on an off market deal and flipped the deal to a new entity at a markup for his LP/GP structure.
I'm a GP and we're constantly having this debate. Take the short term fee structure and see every deal as the last deal you do to maximize short-term profits or defer compensation and build trust with investors and raise money for the long-term. Today sponsors have the upper hand as there is so much liquidity chasing limited deal flow. When that liquidity shifts, you'll see gp contributions increase and fees decrease. If this is a good deal and you're a sponsor that believes in it, why in the hell wouldn't you want a higher promote? The only times we've wanted to fee out is when we truly didn't believe in the deal and we were just off-loading risk to investors. They smelled it a mile away and it had a carry over effect of labeling us as a risky operator with some groups. We've since only pursued large fees with high net worths or crowdfunding platforms that are only focused on the net returns. Said another way, small deals with dumb money.
wow your group sounds super duper ethical
I disagree with your philosophy, but less passionately than when I first read it. The way my group invests is simple--we look at the projected returns, net of fees and promote, analyze the risk, assess the underlying asset (quality, location, class, type), and investigate the Sponsor's background and competence (actually, we mostly work with Sponsors we have a prior relationship with). If the deal works--it matches our risk/return profile, strong Sponsor, quality asset and location--we could not care less what the Sponsor's promote or fees are. We don't pay attention to the gross return. All we look at is $1 dollar in, and ask, how many dollars out?
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