What a $25M fund actually costs to run compared with a new PPM on every deal

Question

A sponsor doing single asset syndications, four to twelve investors each and a new PPM every time, eventually finds the legal bill each round hard to justify. The advice that circulates at meetups is that once the pace is three or four deals a year, raise a fund and stop paying for a new offering doc every deal. Say the target is $25M. What is being bought with that move is less obvious. A fund pools money and the sponsor deploys it across deals, and 2 and 20 is the number most people have seen written down. The annual carrying cost of having a fund is the missing piece: fund administration, audit, the software people use, and whatever else sits in that line. The other open question is licensing. A sponsor who files a Form D and moves on may or may not be the same regulatory animal as a fund manager. Is running a fund a different regime, or the same one wearing a hat?

Rena Guide · Accepted Answer

Some terms first, since they get used loosely. Committed capital is what investors legally promise to the fund, which the manager then draws down over time. Assets under management is the value of what the fund holds, and the management fee is an annual percentage of either AUM or committed capital, paid whether or not a deal performs. Carried interest is the manager's share of profits, and it only starts after investors receive a preferred return, often stated as 8%.

Costs at $25M, roughly. Securities counsel to draft the limited partnership agreement, private placement memorandum and subscription documents commonly runs $75,000 to $200,000 for a first fund, depending on structure. Federal and state notice filings add a few hundred dollars per state. Fund administration, meaning capital accounts, capital calls and distribution mechanics, is often $2,000 to $8,000 a month at that size, or a few basis points of commitments. An annual audit, if your LPA promises investors one, is frequently $20,000 to $50,000. Then tax return preparation and a K-1 for every investor.

On licensing, running a pooled fund can be a different animal. Whether you need to register as an investment adviser, register in your state, or file as an exempt reporting adviser depends on what the fund invests in and which state you're in. Paying anyone commission-based compensation to bring in investors raises broker-dealer questions. Those are questions for a securities attorney.

The part that surprises single-deal sponsors is that most of that annual cost is fixed. It's nearly the same on a $10M fund as a $50M one, which is why small funds struggle to cover themselves on fees alone.

raj_mehta14 · Answer

Who actually performs the audit? The administrator keeps the books and an independent CPA firm audits them, which is why the pricing above shows two separate vendors.

laurenkim53 · Answer

That fixed cost point is the whole story at the small end. Take a sponsor raising $5M for small rural multifamily: $8k a month of admin is $96k a year, add a $30k audit, and that is $126k against a 2% fee on $5M, which is $100k. The fund is negative before the sponsor draws a dollar. At that size the sensible move is usually to keep doing deals one at a time with the same eight investors, and a fund only pays for itself once the raise is large enough to absorb the overhead.

sonia_alvarez · Answer

Hollow, the alternative some sponsors use at that size is a series LLC or a joint venture with a small number of members rather than a fund, though whether that keeps you out of securities territory is entirely a lawyer question. On the debt side the admin is arguably heavier, because you are also paying a loan servicer.

dpatel_re · Answer

Quarry, the number to model before anything else is when fee income covers the platform. At 1.5 percent it takes something like $40M to $50M of AUM to pay two salaries and the vendor stack, and a first fund will not have $50M in year one. First fund managers usually eat that gap personally or fund it with acquisition fees charged at the deal level, and LPs will ask about the offset.

joe_delgado5 · Answer

I got a quote for fund docs and it came back $140k plus per-state blue sky filings on top. The lawyer's line was that the doc is more expensive than a single-deal PPM because it has to anticipate deals you haven't found yet. Made sense once he said it out loud.

What a $25M fund actually costs to run compared with a new PPM on every deal

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