A new PPM every deal is getting expensive, so what would a $25M fund cost

Question

I've been doing single-asset syndications, four investors to twelve investors, new PPM every time, and the legal bill each round is starting to feel stupid. Someone at a meetup told me once you're doing three or four deals a year you should just raise a fund and stop paying for a new offering doc every deal.

I don't really know what I'd be buying though. I get that a fund pools money and I deploy it across deals, and I've seen 2 and 20 written down, but I don't know what the annual carrying cost of having a fund is. Admin, audits, whatever software people use. And I genuinely don't know if I'd need a license I don't currently have. Right now I'm a sponsor who files a Form D and moves on. Is running a fund a different regulatory animal 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? I assumed the fund administrator did it, but from the pricing above they're clearly two different vendors.

laurenkim53 · Answer

That fixed cost point is the whole story for me. I'd be raising maybe $5M for small rural multifamily, and $8k a month of admin plus a $30k audit against a 2% fee on $5M ($100k) is negative before I pay myself anything. I've stopped looking at funds and gone back to doing deals one at a time with the same eight people.

sonia_alvarez · Answer

hollow, the alternative some people 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, not lighter, because you're also paying a loan servicer.

dpatel_re · Answer

Quarry, the number I'd model before anything else is when fee income covers your platform. At 1.5% you need something like $40M to $50M of AUM to pay two salaries and the vendor stack, and you won't 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.

A new PPM every deal is getting expensive, so what would a $25M fund cost

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