Priced a $25M blind pool, and my existing LPs want the opposite

Question

I've closed nine deals as a syndicator over five years, all deal by deal, all with the same 30 or so investors. Two of them have started asking why they have to review a new offering every time, and one asked whether I'd ever run a fund. So I priced it out.

A $25M blind pool at 2 percent gives me $500k a year of fee income, which pays for an acquisitions person and an asset manager and turns this from me plus a bookkeeper into an actual business. Committed capital means I can bid without a financing contingency on the equity, which is the single biggest reason I've lost deals. The costs are real: fund counsel, an administrator, an annual audit, and a fund I have to fill before I can spend a dollar of it. If I raise $12M against a $25M target I have a fee stream that doesn't cover the overhead I just hired.

The other direction is a pledge fund. Investors commit soft dollars, I circulate each deal, they opt in or out. I keep the deal by deal relationship my LPs say they want and I keep the fee structure I have now. No blind pool risk for them and no certainty for me, which means I'm still bidding with a contingency I can't remove.

Third option is a fund of one. One family office anchors a $15M vehicle, I run their capital on a separate account basis and keep syndicating my existing group alongside. Cheapest to launch, worst diversification of my own business risk, and the anchor can fire me.

Raising any pooled vehicle is securities work and a securities attorney has to structure it, so I'm not asking about compliance. I'm asking which of these a manager at my size should actually run.

ryanmck27 · Answer

The thing I'd want to know before choosing is who's actually going to be selling this. A fund raise is a longer, colder sales process than a deal raise, because there's no property for people to picture. If the answer is you, and you're also supposed to be sourcing and asset managing with the $500k of fee income, the acquisitions hire happens after the raise and the raise is the part with no help.

Also whoever you pay to help raise it may need to be registered, and that's a question for your securities attorney rather than this forum. I only mention it because I've watched two people budget for a fundraising consultant and then discover the compensation structure they had in mind wasn't available to them.

tylerbrooks9 · Answer

I'm on the other end of this as the kind of investor you're describing, and I'd take the pledge fund. Not because it's better for you. It obviously isn't.

When I look at a specific building I can decide whether I understand it. In a blind pool I'm deciding whether I understand you, and after nine deals your LPs know you well enough to keep saying yes one deal at a time. The two people asking for a fund are asking for less paperwork. That's a real complaint and it has a smaller solution than restructuring your whole business.

What would change my mind is if you can show me that committed capital gets you better deals. If your last three losses were genuinely because you couldn't remove a financing contingency, say so with the addresses blanked out and the winning bid attached, and the boring version of me starts listening.

nataliehsu · Answer

What does the infrastructure actually cost? Everyone in these threads says audit and administration and fund counsel like the numbers are common knowledge and I have no idea whether that's $40k a year or $200k. If it's the high end then a $12M first close doesn't just underfeed the new hires, it eats most of the fee.

I'd also want to know what happens to your existing nine deals. Do they sit outside the fund forever, so you're running two sets of books and two reporting cycles, and does anyone on the LP side get uncomfortable about which entity gets your attention when something goes wrong at 2am?

Priced a $25M blind pool, and my existing LPs want the opposite

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