Retention math: is IR spend defensible before you have a second fund to raise into?

I price work like this and $4,200 for 46 investors across two deals is a rate for the calendar, not for the volume. 46 investors is a light month. What you're really buying is that quarter-end happens whether or not the sponsor is dealing with a busted HVAC contract.

Which is why I'd argue the spend belongs earlier than your math suggests. Not because the retention pays off sooner. The habit is what you're building. A sponsor who has never once produced a report on a schedule will not suddenly start when 200 investors are watching.

@cobalt is right about the calendar but $4,200 is still buying more than 46 investors need. I'd scope that down to reporting production and portal hygiene, drop the inbound question handling back onto the sponsor, and land somewhere near half. The inbound handling is where clients think they're saving time and it's actually the piece that requires the person to know the deal cold, so they end up forwarding everything to the sponsor anyway.

Trying to work out where I'd fit in this and the thing that jumps out is your 55 basis points is on committed capital, which stays flat. If the sponsor's plan is to triple AUM in three years then the same $50k is 18 basis points at the end. Fixed cost against a growing base looks completely different than the snapshot.

@plumb that only works if the IR cost really is fixed, and it isn't. Onboarding 100 new investors on raise three is real hours. Doc collection, wire instruction verification, subscription agreement chasing. I've watched a friend do it and it's the worst three weeks of the year.

Dumb question from the trades side. What actually happens to a sponsor who just doesn't send anything for a year? Do investors leave? They can't sell their units.

@solder they can't leave, that's exactly the problem. The money is locked so nothing appears to go wrong. They just don't answer the phone on the next deal, and the sponsor thinks the market got harder.

I see the same thing on the property management side. An owner who never hears from us assumes we're doing nothing and starts shopping. Silence gets read as bad news every time.

@thicket you framed it as a spend against fee income but if the sponsor has no third deal in sight the real question is whether they should be spending anything on anything. That's a pipeline problem wearing an IR costume.

I'll ask the embarrassing one. Why is the sponsor paying for this out of the asset management fee instead of the deal paying for it? I've read LPAs where investor reporting is a fund expense. Is that just a negotiation, or is there a line you can't cross there?

@compass it's in the docs and it varies wildly. Some LPAs list fund administration and investor reporting as fund expenses, some make everything the manager's cost out of the fee. Which one you're in changes @thicket's whole calculation, because if it's a fund expense the 55 basis points isn't coming out of the sponsor's pocket at all. Whether a given expense is properly chargeable to the fund is a question for the sponsor's counsel, not for me.

As an LP I read that section before I read the waterfall now.

Lenders look at this too, or at least the ones I talk to do, in a soft way. A sponsor who can produce clean quarterly financials on request is easier to underwrite than one who needs three weeks to assemble a trailing twelve. That's not IR exactly, but the same discipline produces both.

The number that decides this thread is the reinvestment rate, and @thicket's setup doesn't have one yet.

At 46 investors and $9M, the defensible test is what share of raise three you expect to come from the existing base. If the honest expectation is 20 percent, $50k a year buys very little, because you're paying to retain a group that isn't going to fund the next thing at scale. If the expectation is 60 or 70 percent, the comparison is against what it costs to raise that same equity cold, which for most sponsors is months of calendar plus whatever they pay for the funnel. Those are the two numbers to put next to each other, not the fee line.

The answer depends on one assumption: that there is a raise three. Deferred retention value only exists if you have somewhere to collect it. A sponsor with no pipeline and no target date is buying an option with no expiry they can name, and @bramble is right that this is a sourcing question in different clothes.

On the fixed cost point, @plumb and @halyard are both partly right. Steady-state reporting scales well because the incremental cost of investor 47 is close to zero. Onboarding does not scale, because doc collection is per-person labor. So model it as a flat reporting cost plus a variable per-investor onboarding cost during raise windows, and the snapshot basis point figure stops being useful.

Also confirm in writing which expenses your LPA lets the fund bear before you assume the sponsor eats it. @sable is right that this varies by document, and it's a question for the fund's counsel.

Small multifamily so no LPs, but I got dragged into the passive side of a friend's deal and the thing that kept me in wasn't the reporting quality. It was that he called me the month the boiler died instead of waiting for the quarter. Good news on a schedule, bad news immediately. Whoever's producing the reports can't do the second half of that.