Originally posted by @Lane Kawaoka:
I think a lot of new LPs look at fees a bit too much where at the end of the day its LP returns in your pocket. We all don't care how much Apple profits on our iPhone... what really matters is the product or value we get or in this terms the ROI on our principal.
The fees can be broken down in the three main fees (so you might have to combine some of the above fees under one of the categories below):
- Acquisition fee (paid % of the asset price) - normally 1-3%
- Asset management (paid % of the income the asset produces) - normally 1-3%
- Distribution or exit fee (paid % of the sold asset price) - normally 1-3%
- Development fees (this is present in development deals) - example
NOTE: Just because these fees are high or the split structure has too much going to the GP does not disqualify it. This is what unsophisticated investors think who have a surface level of understanding of these deals. Again its all in how much meat there is on a deal. For example, our process on setting fees and splits is to underwrite conservatively for LPs to get 80-100% ROI on their money in 5 years. If the deal is very fat due to our deal finding ability...we will bump up our fees. Hopefully you are starting to see these investments as products and they have a set market price. Your job is to determine if under the hood of these packages is it is underwrote properly and with a good sponsor.
Great post Lane. To me your last words are the key to these things - A GOOD SPONSOR. A good sponsor is someone you can trust, that does good due diligence, is fair to both sides, etc.... If you focus too much on how much the GP gets you might miss out on the best deals. If you want to be hands off then the most important factor is a good sponsor. I am not looking to weigh in with my expertiese but I am nothing more than the football fan who yells at his TV about what the quarterback should have done. I want to find pros I can trust and let them make the plays! In my opinion a lot of these syndicators are new and haven't been through recessions so time will tell....
