Private Equity - Fund Equity vs Deal Equity; Gross vs. Net Property Level Returns w/ Sub Line
I recently did and diligence request for a potential LP that asked questions differently than usual. This relates to peak equity, reinvesting cash flows, and using a subscription line in a closed end RE fund. If I take what I invest in a deal day one (x), take cash flow (y) to pay fund fees and expenses or distribute, and then fund more into that deal (z), my "invested equity" should be "x+z". I understand my net invested capital would be x-y+z, but that is somewhat irrelevant since management fees are paid on invested capital. Now to fund x, I put it on my subscription line and called the money later, also x. So if I take cash flow from a different deal and invested it (as z) into the deal, I have invested capital that is not from a capital call. So now I am in a situation where I have deal level invested equity of x+z and fund level equity of x.
At the same time, lets say I funded the deal from my line in June, books close, and then call the equity in August. At 6.30 I will have invested equity in a deal that is from the subscription line. That is 1) ok, right? and 2) any property level returns should not include any sub line activity? What if I wait 6 months to call that equity? Is the property 100% levered? The acq guys are trying to sneak in using the sub line into their underwriting and I am pushing back but need more ammo. I have always been under the impression that subscription line activity should never be in deal level returns.
Frankly, in past roles I was lucky to work with fabulous accountant that knew the fund world like the back of their hand. Now its a little bit different and I am getting different answers and there are (plenty) of times when looking at the fund level vs sum of the property level I cannot keep track of what is going on or what is right.
Does anyone have any tips on how to manage this from a deal level and fund level perspective? Or how LPs digest this information when evaluating a manager?
