Fees are 2 on committed stepping to 1.5, on a fund that closed $18M of $60M

Question

Diligencing a first-time value-add multifamily fund. Terms are 2% on committed capital during a three-year investment period, stepping to 1.5% on invested capital after, 8% pref, 20% carry, European waterfall with a GP catch-up at 50/50 until they're whole. GP commitment is 2% of the fund, half of which they're satisfying by waiving management fee.

First close was $18M against a $60M target. So fee income right now is about $360k a year, less the waived portion, against a team of five plus an acquisitions person they say they're hiring. That doesn't cover payroll. My concern isn't the fee level, it's what a manager does when the fee stream can't fund the platform. Either they lean on acquisition and asset management fees charged at the deal level, or they get very motivated to close the next tranche, or they stretch on deployment to show LPs the money is working. Which of those shows up in the documents in a way I can actually test before I commit?

Rena Expert · Accepted Answer

Test it in the fee offset language first. Ask whether acquisition, financing, construction management and disposition fees charged to portfolio investments are offset against the management fee, fully or partially, and whether the offset survives the step-down. A manager with a $360k fee base and a $700k cost base is going to earn the gap somewhere, and deal-level fees are the usual place. A 1% acquisition fee on $150M of gross purchases across the fund's life is $1.5M, which dwarfs the management fee. If those fees don't offset, your headline 2 and 20 isn't the real number.

Second, look at how the fee base is defined during the investment period. Fees on committed capital mean you're paying on $60M of commitments even in year one when $8M is deployed, and that drag is real in the early IRR. Fees on invested capital solve that and starve the manager instead, which is the tension you've already spotted. Some first-time funds run fees on committed but rebate the pre-investment portion, so read the recovery language rather than the term sheet summary.

The fee waiver satisfying half the GP commitment is the part I'd push hardest on. A waived fee is not cash at risk. It converts a co-investment into a deferred profit interest, and the tax treatment of that structure has been contested, so their counsel and yours should both look at it. Ask what happens to the waived amount if the fund returns less than capital.

The risk you haven't named is fund II. A manager who needs a bigger fee base to survive raises again before fund I's vintage is proven, and your assets are then competing for attention with a newer, larger pool. Ask what the LPA says about successor fund formation and what percentage of fund I has to be deployed first.

chriswalton8 · Answer

The catch-up is the piece I don't follow. If the GP takes 50 cents of every dollar above the 8% until they've caught up to 20% of total profit, doesn't that mean at a 10% gross return the split feels enormous even though the stated carry is 20%? Trying to understand whether meridian should care at that return level or only if the fund lands just above the hurdle.

Fees are 2 on committed stepping to 1.5, on a fund that closed $18M of $60M

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