Sponsor co-invest of 10% versus a fee load half as heavy

Question

Two equity offerings in front of me, same asset type, both targeting low teens IRR on a five year hold.

First one: sponsor puts in 10% of the equity alongside investors, 2% acquisition fee, 1.5% asset management on invested equity, 8% pref, 70/30 split after.

Second one: sponsor co-invest is stated as "up to 1%," 1% acquisition fee, 1% asset management, same 8% pref, 80/20 split after.

On a $25,000 position the fee difference across the hold is real money, maybe a couple of points of IRR depending on how the asset management fee is calculated and whether it steps up. The co-invest difference isn't money in my pocket at all. It's a claim about how much the sponsor bleeds if the project goes wrong.

I've heard both arguments made confidently. One camp says alignment beats everything, because a sponsor with nine figures of their own money in the deal will fund an overrun out of pocket rather than send a capital call. The other camp says fees are contractual and certain while co-invest is a number in a slide deck that can be funded with deferred fees credited as equity, which costs the sponsor nothing in cash.

What I can't resolve is that heavier co-invest tends to travel with heavier fees, and it may be the same behavior described two ways. If a sponsor charges me more to run the deal and then puts some of that back in as equity, I've paid for my own alignment.

Which signal actually moves your decision when the two point in opposite directions?

gregpowell66 · Answer

Co-invest is the thing I watch on the build side, with one qualification. I've been on jobs where the money got tight and the difference between a two week pause and a six month one was whether the equity partner would write a check on Friday without a vote. A sponsor with real cash in gets to that check faster.

But arbor, you named the loophole yourself. Ask them in writing whether the co-invest is funded in cash at closing or credited from deferred acquisition and asset management fees. Those are completely different promises wearing the same number. I've seen a 10% co-invest that was almost entirely fee credit, and when the overrun landed the sponsor's actual out of pocket exposure was rounding error. Also ask whether the co-invest is pari passu or whether it sits behind investor capital. If it's behind you, it's a real cushion. If it's alongside you at the same priority, it's just more equity in the same seat.

priya_n21 · Answer

Fees come out every year whether the deal works or not. Co-invest only matters on the day something breaks, and I can't tell in advance if that day arrives. So I go with the fee number.

stephen_ok9 · Answer

marlow, that logic works if the two deals have the same downside, and I don't think they do. The fee gap you can compute today. The thing you can't compute is what happens at month 30 when the refinance doesn't clear.

arbor, the split difference is doing more work than either of the numbers you focused on. 70/30 versus 80/20 above an 8% pref is roughly a point and a half to two points of net IRR to me at low teens gross, which swamps the acquisition fee gap entirely. So the first sponsor is charging heavier fees, taking a bigger promote, and offering more co-invest. That's not alignment, that's a more expensive deal with an alignment story attached.

I'd want the last three realized deals from each with the actual distributions against the original projections, and I'd want the ones that went badly, not the case studies on the tearsheet. Track record is the only version of this question that answers itself.

Sponsor co-invest of 10% versus a fee load half as heavy

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