How do folks on here feel about this and opportunities to build the greatest amount of wealth in one's lifetime? Do you specialize as early as possible and become a master of one of the four food groups or get to know enough about all to be dangerous? Referring to some I overhead the other day, I was told that our CEO went out to visit a sponsor we are writing an equity check to (MFH in LA) and came back talking about this guys pad overlooking the ocean in Laguna, chuckling about going that direction with his career in "his next life". The sponsor started as an apartment broker in LA and then started rehabbing apartment buildings/flipping and is now developing new product. Working at a fund long term seems to carry significantly less career risk than going sponsor level (investment firm or dev shop) with plans to eventually start doing deals autonomously (and solo when the time is right). Does a career in institutional real estate/REPE/fund mgmt truly lead to $$$ (not a couple million, several+) or does the saying that you'll never get rich working for someone else hold true in this case? If so, why not hustle at the sponsor level, network, and get your hands dirty?
Also, previous posts have highlighted on this but it certainly seems less impossible to start doing deals if starting on the sponsor side than starting a fund/blind pool equity deals...
I've thought about this many a time. Ur right, sponsors get fuckin paid during the good times. We do some deals direct (no sponsor) and, frankly, they're a pain in the ass. I think you can make double digit millions quicker as a sponsor, but man, it's a lot less work as the equity parter IMO.
Also, I feel more like sponsors work for us than vice versa. Even if ur on the GP side of the promote, they get you what you want when u need it. ( financial data for reporting, etc.)
Yup. Sponsors earn their promote and fees. On top of normal property operations, they have to fulfill whatever requests the LP has, which can be incredibly time consuming.
Also, it is important to note that the sponsor signs off on guarantees/recourse, not the LP. If a deal goes bad and the bank comes after their net worth, that sucks. LP's losses are limited to their equity check.
bump
The higher the risk, the greater the return.
if one were to work for a sponsor vs. fund manager their whole life, how would earnings at say 10-15 years in compare?
I don't think their is a single merited answer for this question. Depends on the firm, market, organizational structure, # of employees, family vs. non family biz, etc.
If the sponsor you would go work for is one that gives you sizable carry in sizable deals, you could crush it. Go run some scenarios in your firm's waterfall model. Use general assumptions - $100MM total cap deal, generates a 20% IRR, 2.0x EM over a 4-5 year term, 25% promote over an 9% pref, 40% promote over a 13% IRR, 50% promote over a 15% IRR, 90/10 initial equity contribution. Solve for whatever CFs, $5MM in yr 1, 2, 3, and sell in yr 4-5. Look at the numbers. No need to post on WSO to find out what these numbers could be when you could just run it yourself.
Another consideration is timing of payout. GPs get paid their promotes after each deal. LPs have to wait the duration of their fund life, which - if things don't go as planned - can be up to 10 years.
I always find this topic interesting, curious to hear what deal guys are/have been able to structure as far as carried interest as part of their overall comp package.
Sticking to a major market (i.e. NYC, Los Angeles, San Francisco, Boston, DC, Chicago, etc) and assuming we are talking about a mid-sized value-add operator (I'm thinking along the lines of a firm like Brickman in NYC, or Shorenstein circa early 2000's, as an example).
$30M purchase price + $6M (capex, TI, LC, closing costs, acq fee, etc.) = $36M total capitalization 70% LTC 90/10 equity contribution ($1.1M in GP equity) Assume 5 year hold, deal level leveraged IRR of 17%, equity multiple = 2.1x Using the same waterfall/hurdles in the prior post, GP IRR = 29% with 3.5x multiple
Year 1-5 cash flow + residual profit for GP = $3.85M
In terms of the pure "promote" (i.e. GP's cash after pari pasu 9% pref to each LP and GP), the $ amount I came up with was $2.2M.
Assuming that, as the proverbial VP of Acquisitions, I did not personally contribute any of the $1.1M GP contribution. And assuming that the $2.2M in pure promote is in the pot to-be-distributed, what slice of that is realistically available? In other words, what could I ask for without having the principals of the firm laugh in my face and tell me I'm crazy?
Again, I realize this is all dependent on a myriad of facts, but I'm speaking in generalities here.
Gonna answer these based on the limited data I have. 1) VP and above typically receive carry. At startup funds it is common for Associates to receive carry. 2) At co-invest funds - while varying case-by-case - I would generally say 3-4 years of vesting. If it were 4 years and you were to stay with the firm for only 2 years - you would only be entitled to 50%. At the Sponsor level, not a clue, good question. 3) If you're working at an operator, chances are you will be a generalist working on all functions - acquisitions, Asset Management, etc. In the rare exception that this isn't the case, then yes, both VP of asset management and acquisitions should receive relatively similar carry, regardless of the unbalanced time commitments. 4) Not sure about this, but I do not believe it is. At the VP level I believe carried interest is offered IN ADDITION to your base + bonus. This is meant to really align interests between the employer and employees and to encourage sticking with a firm for the long haul. However, in the case of a startup fund that can't afford market comp, then yes, they will probably throw participation in lieu of other forms of comp. 5) Assuming you are working for a mid-market operator with slim staffing, I'd say it is fair for you to ask for 5% participation on new deals. However, if you're joining a deal late in the game then this should/would be revised downwards.
Thanks for the detailed feedback. Another monkey made a good point in this thread regarding the fact that in working for a sponsor, you get paid when the deal sells and profits are realized.
Assuming you are working for a mid sized LP/allocator fund (total fund commitments in the $250-500MM range), and you are given a piece of the carry, does said carry become realized only after the fund has completely wound down, divested out of every asset? In other words, when the first deal in the fund is sold (let's say the LP's IRR on the sale is 17%, which outperforms the 13% the fund "promised" it's investors), does the fund manager calculate their promote on that deal and pull it out at that point? Or are they required to wait until the entire fund has gone through it's life cycle and then look at the IRR across the entire fund before determining overall performance and promote?
Are LP allocator funds structured similarly in the sense that the fund principals are co-investing a portion of the total equity raise (i.e. 5-10% of the total $250MM-$500MM fund raise), and then that 5-10% piece is promoted within the fund based on IRR waterfalls, hurdles, etc?
Yes. As an LP fund you will generally receive your promote after the last asset is sold in the fund. I'm sure there are exceptions to this, maybe with a clawback provision, but that's atypical.
In an LP fund, I think it depends. If there are a few big shot principals and the firm is not all that institutional, the principals typically kick in 5-10% of the fund equity. I know of a few REITs that sponsor private equity funds and kick in anywhere from 20-50% of the equity. Not sure how this works for a Blackstone/Starwood, but would imagine principals probably kick a small amount of 1-3%, while a majority of the required equity comes from the balance sheet. Do not quote me on the the last part though (BX, Starwood).
Love to hear from someone on the sponsor side about how fees play into the picture. I'm talking: acquisition fees, property management fees, financing fees, disposition fees, etc.
Realizing the bulk of any returns will be from the yield earned during the hold period, as well as the property appreciation realized in the residual sale, do all the above fees earn the sponsor a significant amount above their operating costs or do these fees really just "keep the lights on" and pay for overhead?
I remember reading that in the fall out of the Peter Cooper / Stuy Town deal with Tishman Speyer that BlackRock felt especially cheated because over the period of the investment, TS had probably made its original investment back through fees (to be clear - I'm not sure if this meant BLK paid TS fees in aggregate equal to TS' original investment or enough to equate to TS' original investment as well as enough to have covered related expenses during the period as to be able to walk away not having lost anything) (full disclosure: I'm vastly un-complicating the entire story and trying to generalize as to make an example)
It's not always true the bulk of returns will be from the hold period/sale event. Some firms will front load fees and take a reduced exit. Others will lower fees on the front end and ask for a higher preferential return on the tail. It depends on how much risk the sponsor is comfortable taking on the deal or how the deal is being competitively bid (RFP).
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