Hey guys,
this may be a really naive questions but I am trying to wrap my head around true ups for a private RE fund. I get the part about equalizing the paid in capital for later capital call rounds, but I don’t fully understand the rationale for the 8% extra that’s also paid back to earlier LPs.
I’ve looked it up and can only find explanations about the mechanic but not the why it exists and also why is 8% such a standard rate.
Any insights would be greatly appreciated.
Thx!
As an LP investing after the first capital call you’ve effectively taken a loan from the LPs who committed earlier, hence the interest you’re paying them. You could also argue that it’s a tool too encourage LPs to commit earlier to the fund but I’m not sure that carries much weight.
The interest rate charged should be the pref (or close to it) so if 8% was the preferred return for the funds you’re evaluating that’s likely why the interest rate is set at 8%.
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