REPE Fund Structures

Chinese RE Guy's picture
Rank: Gorilla | 711

Hey guys, wanted to get your opinion on typical REPE fund structures you have seen.

Say you are a private equity fund like Greystar, you raise a multifamily fund where you have LP investors including pension funds, insurance companies etc., and Greystar itself contributes 10% to the fund. You have your typical hurdle, pref, catchup, carried interest structures where "available cash flows" are distributed as pref, catchup, carried interest etc.

Now my question is, what is the source of the "available cash flows"? Say the above example, Greystar is now gonna deploy the capital from the fund. They found a good multifamily asset they want to invest in, but because Greystar's expertise in MF operations, they decide to be the GP in that specific asset, and have an equity partner like Blackstone put in say 80% equity. Essentially the Greystar fund is the GP (20% equity) in that asset, and Blackstone is the LP (80% equity). Say Blackstone agree to pay the Greystar fund a promote if cash flows from the specific MF asset meet certain hurdles.

Now for the LP's in the Greystar fund (the pension funds, insurance companies, etc.), what are counted as "available cash flows"? Does it include all the cash flows the Greystar fund get from the MF asset, or does it exclude the Promote Blackstone pays to the Greystar fund?

I know every deal is different in REPE, but would appreciate any insights and experience on this!

Comments (16)

Nov 25, 2015

True available CFs would be at Greystar's share. Using your example, that would be 20% of the cash flows until the pref and other hurdles are hit.

Greystar has access to capital (they just launched a $1bn fund) and has operational expertise. So one question that I have is what would be their motivation to take a GP position? They could own and operate the deal(s) by themselves and retain more ownership. Entering in a GP position could help them buy more deals, but at the end of the day it wouldn't seem worth it.

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Nov 25, 2015

GP's use LP money for the same reason a deal would use leverage - to diversify your capital across various deals and because the cost of capital is less than the gross project returns (positive leverage). It allows the GP to achieve higher returns on their money than without a capital partner.

I work for an LP. When we see a deal that returns 20% on a project level, the Sponsor will typically return 30-35%+ (depending on how strong of a sponsor it is, they can negotiate lower hurdles and higher promotes).

If Greystar is returning 35%+ on their fund-level from many deals - it will allow the firm to reap in huge returns on their fund-level promotes as well.

Nov 25, 2015

Right, but if a firm already has access to the $, why sacrifice 60-90% of the deal and take a GP position? I get the returns might be more attractive in that situation, but the profit will be lower than if they pursued the deal on their own, no? It seems like they would be sacrificing the excess profit when they don't necessarily have to.

Nov 25, 2015

In your example, if Greystar is the GP, I assume that they would contribute capital as an LP pari passu with BX, which those cash flows would then be distributed to their investors - either directly or through another waterfall (their fund waterfall). In their fund JV doc's, they probably have something outlined about acting as a GP (if they Co GP with a developer, or act as the sole GP, or w.e.) and how they "share" a certain percentage of their promote with the fund investors.

This is how I have seen developers structure deals with their LP fund investors. This may be very different for Greystar, but I would say it's a fair assumption to make.

Nov 25, 2015

Because cap rates are low right now, cash flows do not typically reach the initial hurdle (6% cap rate < 8-10% pref) so the excess cash flows are likely distributed pari passu.

In that case, it's simple arithmetic. Image below assumes $1.0MM in available cash flow

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Nov 26, 2015

I hate to thread jack and ask a noob question, but can someone please explain LP and GP? And even more, a simplified version of the situation?

Much appreciated!

Nov 27, 2015

You're talking about two different promote structures the corporate/fund level and the asset level. From the asset level both cash flow and promote would be considered available cash flow to the parent Greystar (also any acquisition fees, developer fees, Asset Management fees, etc. ). Lets pretend this isn't real life (so not complicated) and then all of that money would start going through the fund level promote structure after expenses. It's hard to hit return thresholds without leverage, including debt, equity, operational so you bring in BX in this case. If it's BX then they also bring connections, expertise and other intangibles to the table as a partner, which helps the whole go round.

Nov 27, 2015

Lets not forget that many companies like Greystar are huge Asset Managers like PF CRE noted. My guess is the management fee (3% of EGI?) collected on every single asset is not shared. While they are big enough to not need partners, they can grow their fee income simply by acquiring and outlaying very little capital relative to the deal.

Nov 27, 2015

I've read the OP's question 3 times now...maybe I'm going crazy at this point in my Friday but here is my question to answer your question:

Greystar is a GP of a MF fund with a bunch of LP's, why would Greystar use BX's (an outside looking in firm--not connected to the fund) money for a MF deal as an LP if they already have LP money for MF deals? I think the question you're trying to ask is "what if Greystar does a deal and uses the LP/GP commingled money from their fund to be a GP in another firm's deal---a firm that is not connected to Greystar's fund neither in GP or LP?" My answer is "no idea" but my answer as an LP would be "hey Greystar, why the hell did you just do that? Use your fund's funds to do this deal and find the deals yourself" and I'd write it in the PA to prevent it from happening and disallow any 3rd party LP's to participate in my invested fund. Am i misinterpreting the question?

Wow my head hurts

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Nov 30, 2015

Greyco Fund I ("Greyco") = A fund created to invest in 100 real estate transactions. The fund has a managing member (Greystar) and members with limited interests (their LPs, provide majority of capital but have passive rights).

Greyco fund totals $100MM with Greystar investing $10MM and LP's investing $90MM. The Fund then takes the $100MM of capital and invests as GP in the 100 individual assets which require total equity investment of $1 Billion. Greyco sources LPs at the individual asset level to fill the $900MM gap. With these LPs, Greyco can leverage their capital further and earn fees and a promote for each individual investment.

Next, the GP level (at the individual deal level) cashflows including the promote will flow to Greyco. These cashflows will then be run through the waterfall between Greystar and their Greyco LPs, with Greystar earning a promote and fees.

You can earn substantially higher returns this way

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Jul 21, 2016

Basically, Greystar is able to leverage their initial 10MM once by creating the JV fund, and then once again via another JV?? Does this mean that at the secondary level (the acquisition of the asset) is just a JV structured deal, or would you create another fund to do so?

Do JV fund agreements have clauses that prevent you from going out and creating an unlimited amount of funds with the fund in question's capital??for purposes of risk management, or to not make people's brains hurt?

Regarding the promote structure- They have two opportunities to collect a promote in case of hurdle-excess returns?

Jul 23, 2016

I have never seen fund docs that limit the amount of JV's within a single transaction. From personal experience the pain of having multiple JV's on a single transaction acts as a natural force against it happening.

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Best Response
Jul 21, 2016

Your question actually requires some fund structuring knowledge but here it goes. It's best to think of each GP and LP fund as its own entity. Some people get mixed up with the concept of that fact that there can be 3-4 layers of GP/LP relationships in these investment vehicles at the end of the day.

Typically if a Greystar sponsors the fund and Blackstone comes in for 80% of the equity as the primary LP into the fund, BX will pay carried interest on the fund structure to the sponsor, in this case Greystar (GP). For the vast majority of funds (I have never seen a GP that contributes $$$ into the fund pay out carry to itself, that would be nonsensical unless it was paid out to a separate Promote entity which is unlikely).

Food for Thought #1: There is also a distinction of how promote is paid over the preferred ie: American Style (Deal by Deal Carry + Clawback) or European Style (Whole Fund Carry).

Food for Thought #2: Funds themselves can also can distinguish OCF (asset operating cash flows) and capital event cash flows and distribute them differently, such as a 10% carry on OCF from each asset. Sometimes even have 2 different Carry payouts for OCF and Capital Events with a whole fund Preferred True Up at the end of the fund life (more common in MF funds).

So Greystar in your example is receiving carry from BX in your case, let's say $10 of Base Capital and Returns + $2 of Carry. That total $12 then will flow back to Greystar's GP/LP structure (if it was capitalized in that manor) and then flow through that respective structure etc.

BTW: It can be structured that the carry dollars aren't fully returned into the Greystar side waterfall but the inside Greystar LP's will almost always structure it that way. They invested in the sponsor fund to enjoy the carry upside as the LP of the GP to be additionally promoted through another LP. Think of this as Julian Robertson funding and seeding another hedge fund.

TLDR: Available cash flows must be defined more clearly

Note: Carry & Promote are legally 2 different definitions

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Jul 23, 2016
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