What's a market acquisition fee for institutional deals?
We are an institutional LP investor working on middle market deals. Due to middle market nature, we are starting to work with operators who are finally growing out of their HNW / FNF and moving into their first institutional equity relationships. However, they always send us their models / asks and many of the fees seem heavy to me which I'm sure they're used to getting (such as a 2% of purchase price acq fee)
Assuming we're looking at $20M - $40M acquisitions (so ~$10M - $25M of equity), what is a market acquisition fee? Is it different whether the deal is sourced off-market or is a brokered deal? Assume that we are providing the entire LP equity slug.
I'm also on the LP side for deals of this size. We typically split acquisitions fees 50/50 with the operator, the total fee being 1-1.5% usually (so 50-75bps each). We also allow for an AM fee to their organization (1% of effective gross revenue), but most of our operators are vertically integrated so it is effectively just a higher property mgmt. fee.
Speaking from the GP side, we typically see most institutions agree to 1% of PP for $20-40M deal size. Sometimes they will cut that if it was widely marketed (Investment Sale process). Depending on the LP we can get ancillary fees (financing, project management, etc.) on top of that.
I would say 2% is worth paying if off-market and returns are very compelling. Otherwise I would default to 1% as a standard, negotiating that up or down depending on the circumstances.
I'm assuming you guys are vetting your operating partners pretty well, but in this environment beating up people on fees too much could be to your detriment. Need the sponsor/operator to keep the lights on.
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