Pricing a $25M blind pool fund when existing investors want fewer decisions, not more structure

Question

A syndicator with a track record of closing deals one at a time over several years, working with the same group of roughly thirty investors, eventually runs into a familiar request: investors tired of reviewing a new offering every time start asking whether a fund makes more sense. Pricing that out is worth doing carefully before committing to it. A 25 million blind pool at a 2 percent fee produces 500,000 a year of fee income, enough to fund an acquisitions hire and an asset manager and turn a one person operation into an actual business. Committed capital also means bidding on deals without a financing contingency on the equity side, often the single biggest reason competitive deals get lost. The costs are real too: fund counsel, an administrator, an annual audit, and a fund that has to be filled before a dollar of it can be deployed. Raising 12 million against a 25 million target leaves a fee stream that does not cover the overhead just hired to support it. A pledge fund is the other direction: investors commit soft dollars, each deal gets circulated, and investors opt in or out individually. That preserves the deal by deal relationship investors say they want and keeps the existing fee structure, at the cost of certainty, since bidding still happens with a financing contingency that cannot be removed. A fund of one, where a single family office anchors a 15 million vehicle managed on a separate account basis alongside continued deal by deal syndication for the existing group, is the cheapest structure to launch and the worst for diversifying the manager's own business risk, since the anchor investor can walk away. Structuring any pooled vehicle is securities work that requires a securities attorney, so compliance is not the open question. The open question is which of these three structures actually fits a manager operating at this scale, and the honest answer usually depends more on how much the manager values certainty of capital over flexibility than on which structure looks best on a fee schedule.

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

From the investor side, the pledge fund usually wins this comparison. Not because it's better for the sponsor. It obviously isn't. On a specific building, an investor can decide whether they understand it. In a blind pool they're deciding whether they understand the sponsor, and after nine deals with the same roughly 30 investors, those LPs know the sponsor well enough to keep saying yes one deal at a time. Two people asking for a fund are asking for less paperwork. That's a real complaint and it has a smaller solution than restructuring the whole business. What would change the calculus is proof that committed capital gets better deals. If the last three losses genuinely came down to being unable to remove a financing contingency, that case is worth making with addresses blanked out and the winning bid attached, and a skeptical LP 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?

Pricing a $25M blind pool fund when existing investors want fewer decisions, not more structure

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