The check that nearly stopped my first fund commitment

Run the load, @canton. 2 percent on committed for five years is 10 percent of your $75k, so $7,500. Expenses at 1.1 percent for the same period is another $4,100. That's $11,600 of drag on a $75k commitment before a single dollar of carry, and you're paying the fee on committed dollars while only part of your money is actually invested in year one and two.

Which means the gross deal returns have to clear roughly 1.15x just to hand you your money back. Not a reason to skip it. It is the reason I stopped comparing fund returns to my own deals on a gross basis, because I don't pay myself 2 and 20.

Did they disclose whether the expense line includes broken deal costs? That's the one that surprises people. Deals they underwrote and lost can land in the fund's expenses, and in a competitive market that can be five or six sets of third party reports a year.

Number 4 is the one I skipped and it cost me. A valuation policy is the written rule for how the fund decides what its assets are worth on a quarterly statement when nothing has sold. For equity funds that usually means a cap rate and a broker opinion. For debt funds it means whether a loan sits at par right up to the moment the borrower stops paying, which is what happened to me.

Ask what triggers a write-down and get it in a sentence rather than a policy document that says the manager will act in good faith.

You checked the economics well. The clauses I'd have wanted in front of me, in rough order of how much they can hurt you:

Key person. If the one person who sources the deals leaves, does the investment period suspend? Plenty of first and second funds have no provision at all, which means the fee keeps running on a manager who has lost the reason you invested.

GP removal. For cause only, or with a supermajority of LP interests for any reason? For cause in most first fund documents means a criminal conviction or an adjudicated fraud finding, which is close to unusable.

Recycling. If the fund can return sale proceeds to the pool and reinvest rather than distribute, your five year fund can charge fees for seven or eight years on the same dollars. Check whether recycling is capped as a percentage of commitments and whether the fee base follows it.

Successor fund restriction. Can they raise fund two while yours is still investing? Whose deals get which pipeline.

How any of that reads in your particular agreement is a question for a lawyer, but those are the four headings I'd have flagged in the margin.

The subscription documents are where I'd spend the second hour. Two things sit in there that never make it into the LPA summary.

First, the indemnity. In most sub docs you are agreeing to indemnify the manager against claims arising from a breach of your own representations, which is fine, and sometimes the language is broad enough to reach beyond that. Read the actual sentence.

Second, co-investment rights. If the manager finds a deal too large for the fund, who gets the overflow? If the answer is the manager's own account or a separate vehicle for the anchor LP, you're in a fund whose best opportunities have a legitimate exit that doesn't include you. I've seen that written plainly and I've seen it left silent, and silent is worse.

You also want to know whether the manager has a fund of one or a separately managed account running the same strategy alongside your fund. Allocation policy between them is the whole ballgame and it's usually one paragraph.

What does a capital call actually look like when it arrives? Is it an email with a number and a date, and what happens if the money isn't there?

@rigging it's a notice, usually 10 business days, telling you the amount and the wire instructions and often what it's being used for. Miss it and the default provisions in the LPA kick in, which in the ones I've read range from interest on the late amount to forfeiting a chunk of your interest. That's why people keep the uncalled portion somewhere boring instead of in another deal.

@canton the comparison I keep making is against my own six doors. My all-in cost of managing those is maybe 9 percent of collections plus my weekends. Your fund costs you 2 percent of capital plus 1.1 in expenses plus 20 percent above the hurdle, and in exchange you never get a call about a water heater at 11pm and you're in more than one market. I've decided the weekends are worth something. I just don't pretend the fee is small.