👋Unpopular opinion about sponsor acquisition fees

[Justin Goodin]

 👇Unpopular opinion about sponsor acquisition fees

They are 100% necessary.

If you didn't know, sometimes sponsors charge what is known as an 'acquisition fee' when they buy a deal.

Typically 1-3% of the purchase price of the asset.

Sometimes sponsors spend months (or years) researching and underwriting deal after deal to no avail. The acquisition fee is what keeps the lights on, so to speak.

And helps afford all that time & effort during/between deals.

✅ If you don't agree with the sponsor acquisition fee, you must first understand that sponsors do not share in the profits (most of the time) until the sale, because of a preferred return.

Fees sometimes get a negative connotation...

→ You pay fees for your 401K.
→ You pay fees when you buy a car.
→ You pay fees when you buy a house.

Would you be willing to pay a fee for an awesome investment opportunity?

Sponsors should clearly show any/all fees in our investment summary.

Learning about and understanding the fee structure is one more checkbox checked toward being an informed investor.

[Scott Trench]

As an investor, I want the GP to work full time on and in the business/asset I’m investing in. I am fine to pay them a modest salary, during the hold period in exchange for a full time effort working on the deal or fund that I am invested in. 

If that “modest salary” is partially paid in the form of acquisition fee, management, and disposition fee, I’m cool. GP putting together $8M deal, making $80K after 6 months? Then $80K per year? I’m cool. That’s a living wage.

If, of course, they are working full time on THAT deal. If they have ten deals going on, I want to see ratably lower fees. Not paying you full time for 10% of your attention. 

The thing that makes me shake my head is some of these GPs are buying $500M in assets, making 1-2.5% in a short period of time just for buying stuff. I’m out and I just can’t believe that LPs allow this. I bet, after this year, they won’t. Party’s over.

Incentives are not aligned in that scenario. Some folks claim that this is what takes to pay a team of analysts. To that I’d say … prove it. Show me that high 6 figures or 7 figures is not going into your pocket just for buying the deal, and that are you putting real money - not those acquisition fees - that you worked, sweat, and bled for into the deal alongside me. 

Otherwise, there’s not alignment of incentives. and I’m out.

GP wants a guaranteed high six figure (or seven figure, or EIGHT FIGURE) paycheck upfront? Go somewhere else. Not with my money.