Happy Saturday, Funds Family!

I thought it would be helpful to discuss what “market” is for various kinds of funds and SPVs.

(Note - This is the only email that will go out on Saturday. I wanted to send this yesterday but Beehiiv wouldn’t let me send two emails back-to-back.)

What is “market” anyway?

“Market” terms are loosely the “average” or “fair” terms for funds currently being raised in real life.

Of course, people have different ideas about what “market” really is. And any particular fund might have terms that are (fairly or unfairly) much different than market.

Nevertheless, here we go.

Real Estate Funds

• Management Fee: 1.5-2% of commitments during the investment period. 1.5-2% of invested capital after the investment period.

• Other Fees: It depends, but common fees include: (i) 5% development fee; (ii) 1% acquisition fee; (iii) 3-7% property management fee (depending on the asset class); and (iv) 0.5-1% loan guarantee fee. Some funds have disposition fees, which are often 1%. Funds vary in the number of these fees they charge.

• Preferred Return: 6-12%, with lower preferred returns for “core” (lower risk) funds and higher preferred returns for “opportunistic” (higher risk) funds. Value-add is somewhere in the middle (often 8%).

• Catch-Up. Very common (though not ubiquitous).

• Carry Splits. 80/20 LP/GP for institutional funds. Smaller funds might have a second “hurdle” (like 12-15%) after which the split goes to 70/30. Some funds start at 70/30, but that’s at the high end of market in my opinion.

Private Equity Funds

• Management Fee: 2% of commitments during the investment period. 2% of invested capital after the investment period.

• Other Fees: Often there are no other fees. In some cases, there may be “closing fees” (which are basically acquisition fees). However, these are more common in independent sponsor deals than comingled private equity funds.

• Preferred Return: ~8%.

• Catch-Up. Very common (though not ubiquitous).

• Carry Splits. 80/20 LP/GP for institutional funds. Less likely to get to a “premium” carry than a real estate fund in my experience, but they sometimes do.

Venture Capital Funds

• Management Fee: 2% of commitments during the investment period. 1.5% of commitments after the investment period. Some emerging managers front-load the fee (for example, taking 3% the first few years then 1% thereafter).

• Other Fees: Typically no other fees.

• Preferred Return: None.

• Catch-Up. N/A.

• Carry Splits. 80/20 LP/GP. In some cases, they might go to 70/30 after a MOIC (multiple on invested capital) hurdle, such as 3x or 5x.

Private Credit Funds

• Management Fee: 2% of commitments during the investment period. 2% of invested capital after the investment period. Sometimes the fee is based on invested capital the whole fund life.

• Other Fees: Typically no other fees.

• Preferred Return: ~8%. Can sometimes be higher depending on the situation.

• Catch-Up. Very common (though not ubiquitous).

• Carry Splits. 80/20 LP/GP for institutional funds. Sometimes, the preferred return is very high, and the ultimate split is more GP-favorable.

Hedge Funds

• Management Fee: 2% of NAV (net asset value of the fund).

• Other Fees: Typically no other fees.

• Preferred Return: 8%. Sometimes there is no preferred return.

• Catch-Up. Not common.

• Carry Splits. 80/20 LP/GP.

Funds of Funds

• Management Fee: 1-2% of commitments during the investment period. Less after the investment period. Some funds also do direct investments and may charge a higher fee for those investments.

• Other Fees: Typically no other fees.

• Preferred Return: Depends on the underlying asset class.

• Catch-Up. Depends on the underlying asset class.

• Carry Splits. 90/10 LP/GP, sometimes with a premium carry after a hurdle. Some funds also do direct investments and may charge a higher carry split for those investments.

Note on smaller funds and syndications

Often smaller funds and SPVs (especially smaller real estate syndications) charge higher fees than what I’ve described above. Depending on the circumstances, the GP, and their track record, these fees may be reasonable.

For securities SPVs (investing in a round of a venture financing, for example), the fees are often lower (similar to a fund of funds). In many cases, they don’t charge a management fee at all.

Please let me know if you have any comments - would love to hear what you’re seeing in the market!

Talk soon,
Michael

⚠️ 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.