🎉 Happy Friday, funds family!

This is the second in a multi-part series on 💼 Negotiating Co-GP Deals. This week, we’re going to discuss the capital provider’s commitment to the underlying investment fund or syndication.

🤔 Do all co-GPs commit capital to the underlying investment fund?

While not all co-GPs (“capital provider” or “anchor”) commit capital to the underlying investment fund or syndication, it’s very common. However, the range can vary widely. Some capital providers might commit as little as 5% of the total fund size, while others might constitute half of the committed capital. Every deal is different.

Note that the exact structure of the capital commitment also varies. In some cases, the capital provider will route its capital through the GP entity into the fund. In other words, the capital provider has a commitment to the GP, which in turn has a commitment to the fund. In these cases, the applicable commitment is ~always on a fee-free, carry-free basis.

In other cases, the capital provider might make some or all of its investment as a limited partner in the underlying fund. In these cases, the capital provider will typically have a side letter granting it special terms in respect of its LP interest. Otherwise, the anchor will be subject to management fees and carried interest just like any other LP.

🧵 Commitments with strings attached

In some cases, the capital provider’s commitment might be conditional upon the fund reaching a certain size. For example, the anchor’s investment might be $50 million; provided the fund raises at least an additional $50 million.

A related concept is the “ratcheting” commitment. The capital provider’s commitment might be the lesser of $10 million or 25% of the fund size, with a floor of $2 million.

In general, at least part of the commitment is typically effective as of the fund’s 🛠️ Initial Closing Date.

People get quite creative with this.

📃 What goes in the capital provider’s side letter?

In general, the side letter provisions that a capital provider in a co-GP relationship might request are similar to any other anchor investor. You can check out a list of typical side letter provisions in this article: 🛠️ "Side Letters" in Funds and Syndications 

Here’s a list of some of the most common provisions:

1. Most favored nations (MFN): The anchor investor gets the right to take special side letter rights granted to other LPs (subject to some exceptions).

2. Fee/carry waivers: The anchor’s investment might get waived (or reduced) carried interest and/or management fees.

3. Co-investment rights: The anchor might get a preferential right to co-invest alongside the fund, often on a fee-free/carry-free basis.

4. LPAC: The anchor investor often gets the right to appoint a member to the fund’s limited partner advisory committee.

These side letters can range from very simple (1-2 pages) to seriously complex (30+ pages).

⚠️ 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.