The 2 percent on committed capital is bugging me on a sponsor I like

@vellum yes, that's the distinction, and fee on committed during the investment period is common in institutional funds. The reason it exists is that the manager has to pay staff to source deals before any deal closes.

@canton the clauses I'd go find before you decide:

Fee offset. Some PPMs credit some or all of the acquisition fee against the management fee. If yours doesn't, you're paying twice for the same work.

Clawback. Whole-fund waterfall is better for you than deal-by-deal, but check whether there's a clawback with a real mechanism behind it (escrow, personal guarantee, something) or just a sentence saying the GP will return excess distributions.

Key person and removal. Two principals, first fund. What happens if one leaves. And what vote percentage removes the GP for cause, and how is cause defined.

Organizational expense cap. Formation legal on a fund is not cheap and somebody pays it.

Have a securities attorney read it, not me.

Run the fee base as arithmetic before you argue about whether it's fair.

2 percent on $40M is $800k a year, flat, for five years, if the base stays on committed the whole time. That's $4M of fees. If deployment takes three years and the average deployed balance across the investment period is somewhere near $24M, the fee expressed against money actually working is above 3 percent. The whole answer depends on the call pace, so ask them directly what their capital call schedule looks like and whether they've signed anything yet.

Two structural questions change the picture. First, whether the management fee is charged on committed capital or on called capital during the investment period. Some funds only charge on capital drawn, which aligns the fee with deployment. Second, whether the 1.5 percent acquisition fee offsets the management fee in whole or in part. Both of those are written in the PPM and both are negotiable at the margin for a meaningful check, though $150k in a $40M raise gives you less pull than you'd like.

On the GP commitment: 1 percent is on the low side of what institutional LPs push for, and the more useful question is whether it's cash from the principals or a waiver of fees credited as their commitment. Fee-waived commitment is not the same as money at risk.

One more thing to check. Nine deals with three realized is a partial track record. Ask for the realized gross and net multiples on those three and the current unlevered basis on the six still held, in writing. A first-time fund is priced against the track record, so make the track record produce numbers.

A securities attorney should review the PPM before you subscribe.

Go to the expense allocation section, it's usually buried around the middle and nobody reads it. On the last fund PPM I went through, the fund could charge organizational costs up to a stated cap plus "ongoing fund expenses" with no cap at all, and ongoing fund expenses included travel, technology, and an allocation of the manager's internal personnel time. That last one is the door.

Then find whether an affiliate of the GP will do property management on fund assets and at what rate. If it's 4 percent of collections to a company the principals own, that's a third fee stream on top of the 2 and the 1.5, and it doesn't show up in the fee summary page at the front.

Also look for the successor fund clause. If they can start raising fund II before fund I is substantially deployed, your fee dollars are paying for staff who are chasing the next raise.

Basic question because I'm new. If they raise $40M and only find four deals they like, what happens to the rest of the money? Do you just get it back?

@rigging normally there's a stated investment period and anything uncalled at the end of it is released, and in some funds the uncalled portion also stops carrying a fee. @canton that's another line to find.

On the fee itself, 2 percent on committed with a step-down to invested cost afterward is roughly market for a fund that size. The stack is what I'd push on. 2 plus 1.5 plus whatever the affiliate PM charges starts to eat a lot before the pref is earned.

And I'd ask what vintage those three exits are. Anything bought in 2015 and sold in 2021 tells you about a market, not about a manager. Six deals still held is where the actual answer is, and if they won't hand you the current rent rolls and debt maturities on those, that tells you something on its own.