Have you guys seen GP funds before? That is, sponsor raises capital from HNW, retail investors for the GP portion of the fund. Allows sponsor to be more active with having so much of their own capital tied up.
Wondering what peoples experience has been with them, typical terms, etc.
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Yes there are plenty and I work at one, look up any fund that also owns it’s own management company, you can PM me with any specific questions
We do it on a project to project basis on maybe 1/3-1/2 of our deals, so not a fund but the same overall concept. They get the same returns as the GP in the waterfall but no fees.
Personally, I hate it, because I get paid as a percentage of company profit at exit, and if our GP position is only 50% of the overall GP position, that means my check is 50% of what it should have been. Hah, I totally understand why the company owners do it though.
But that promote
Do the fees get placed into the company profit as well?
Nah. Fees keep the lights on and pay our salaries though, so I can't complain too much.
Isn't that a co-GP fund? Kinda different to a fund being the actual sponsor on a deal.
It's effectively selling a portion of the GP stake.
It is different to a fund being the actual sponsor on the deal.
Yes. My firm raises funds that we use (sometimes) as the GP in deals on the JV level. Sometimes we take the deal down on our own.
It's no different than any other REPE fund. Sometimes these "GP funds" distribute a portion of the JV-level promote to both the GP and LPs of the "GP Fund."
I've actually only seen this in the reverse of what you describe - institutional investors put equity into an operating company so they can expand the number of deals they do, and take a piece of the carry in return. The kind of "fund" you describe doesn't make a whole lot of sense, as an owner - if you have access to those kinds of investors, it makes more sense to call on them on a deal by deal basis rather than a fund structure, I would think.
And these things are always risky, because allowing someone access to your books, and a proverbial seat at the table, can be extremely damaging. As an owner, someone investing outside capital in what amounts to your underlying business is automatically creating a misalignment of economic incentives.
Isn’t your argument against funds in general then? Including a typical LP structure. Raising a fund, I’d assume sponsor can more quickly and confidently take on more deals without having to raise funds for each one.
Get your point about having access to the books and being open kimono though. Can’t have it all.
Well it's the difference in who is investing, and why. An LP fund raises money from HNW individuals or institutions who don't have knowledge of the asset base. If it's multifamily, for instance - wealthy dollar store magnate may have no idea how to value a piece of property, or the Sponsor who purports to run it for you. But CRE LP Fund XYZ does. They're the middleman between people who want to diversify into real estate and the folks who actually own and operate it (Sponsors). As a Sponsor, I get to promote off those people. And you're right, if I can, it makes more sense for me to tap the LP Fund investors myself - but those relationships aren't easy to form, either. The LP fund is both allocator of capital and provides some protection and due diligencing ability for the people investing.
In a GP fund, you cut out that middle link (presumably) but you also give up a ton of project economics. I suppose, depending on the returns you are generating and the assets you're investing in, that it might make more sense to give up some piece of your carry than to layer another hurdle into your deal. I just don't see the sense in pre-raising that kind of fund, because if you're the random HNW investor and your comfortable vetting your operating partners (and want to be relatively further down the capital stack), you'll almost always be in for a one off deal. Everything is a one off deal, essentially. Part of the value of being in the LP Fund is to diversify your risk.
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