🛠️ Investment Fund Key Terms, Part 5

🎉 Happy Friday, funds family!

Today, we have Part 5 in our many-part series walking through each term in an investment fund term sheet in detail.

Last week, we discussed 🛠️ LP minimum check size. Today, we'll learn about the GP Commitment. 

The general partner (GP) often commits to invest alongside the LPs in funds and syndications. LPs like to see a healthy GP co-invest amount, as it aligns incentives and ensures the GP has skin in the game.

Here’s an example of how this might be written:

➡️ How much should the GP invest? 

In multi-asset funds, the GP usually invests somewhere between 1-10% of the total fund size. Obviously, the more the better (from the LPs’ perspective). In some rare cases, the GP doesn’t commit any capital.

In single-asset syndications, the GP often invests somewhere in the 5-10%+ range. The total amount of the raise is usually smaller on single-asset deals, so the absolute dollar value of the GP commitment is often less than in multi-asset funds.

The above are just general guidelines – GP commitments in any particular deal might be higher or lower.

➡️ Does the GP pay fees and carried interest?

In many funds and syndications, GP capital does not pay management fees or carried interest. However, in a minority of funds, the GP pays fees, carry, or both.

➡️ How does the GP fund their commitment?

There are three primary ways GPs can fund their co-invest amount:

1. Cash. This is the simplest way. The GP contributes cash pursuant to capital calls, the same way LPs fund their cash commitments.

2. Property. GPs sometimes fund their commitment by contributing property to the fund or syndication. For this to work, the property must be exactly the type of property the fund is investing in. For example, a California multifamily fund could accept an apartment building in SF, but it could not accept Series B Stock of a technology startup.

3. Fee Waivers. Some GPs fund a portion (but usually not all) of their commitment by waiving management fees (or other fees) over the fund’s life. For example, if the GP is entitled to $100 of fees each quarter, it could elect to take only $80 in cash and get “profits interest” credit for the $20 difference. This is a complex move with tax consequences, so please work with a lawyer. You can learn more about this here: 💰️ Fee Waivers to Fund Your GP Commitment.

🗓️ Next up in Part 6, we’ll discuss the fund’s term.

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.