GP investment in syndication deal

7 Replies

I am interested to see what is deemed an acceptable percentage for the GP/sponsor of a syndication deal.  I understand that if the sponsor has some skin in the game, then they will be more likely to make the deal succeed.

Thanks for any answers.

I think it depends. You also have to look at the fees a GP is charging as my opinion is GP's state we are investing 10 percent or close to that in deal but they charge a 2 percent acquisition fee plus a 1 percent disposition fee which pretty much is that 10 percent investment.  Also if it is a value add play to just a class B plus or A deal so just coupon clipping. I would say 5 to 10 percent. Could go less if only charging asset management fee. 

Any number should be net of acquisition fees. If GPs invest $300k but get $200k in acquisition fees, then we don't really have $300k skin in the game. I like to see a number in the six figures, but also consider other liabilities the GPs are taking. Who is signing on the loan, etc. Even if it's a recourse loan, that doesn't mean "do whatever you want without any consequences." So I still consider signing on the loan to be some level of skin-in-the-game.

I believe willingness to make a deal succeed is either there or it's not. Are they going to be there, every day, every week, making the deal deliver? Are they going to step up to the plate with additional capital or creative solutions if things get tough?

@Taylor L. I find this interesting, "If GPs invest $300k but get $200k in acquisition fees, then we don't really have $300k skin in the game." If the acquisition fee is earned income that is then being invested in the deal then how is it not viewed as skin in the game? Would that be any different than the LP making $200k at a W2 and investing it? In both cases, the 200k is earned income that that individual has decided to invest in the deal.

The reason I ask is that I plan on rolling my commission as the buyer's agent into a deal, and I feel that is my skin in the game. Now, this is a much smaller deal and will not be syndicated, not sure if this makes a difference.

Originally posted by @Gregory Schwartz :

@Taylor L. I find this interesting, "If GPs invest $300k but get $200k in acquisition fees, then we don't really have $300k skin in the game." If the acquisition fee is earned income that is then being invested in the deal then how is it not viewed as skin in the game? Would that be any different than the LP making $200k at a W2 and investing it? In both cases, the 200k is earned income that that individual has decided to invest in the deal.

The reason I ask is that I plan on rolling my commission as the buyer's agent into a deal, and I feel that is my skin in the game. Now, this is a much smaller deal and will not be syndicated, not sure if this makes a difference. 

I see it as risk off the table. The funds fall in different buckets from a paperwork standpoint, but money is fungible. The LP who makes $200k at their W2 and invests $100k in a deal doesn't get a check for $75k back day 1 and retain their shares in the investment. GP fees are not a bad thing, but we need to take them in context.

I have no issue with GPs receiving compensation, that's how this business has to function. People need incentives to perform. As LP investors we need to contextualize what these numbers mean to the GPs and decide for ourselves if we think that's the right incentive. What if the acquisition fee is greater than the capital they'd invested? Does that seem good and fair?

Though this topic gets more emphasis than other more important ones, it does show that the sponsor will fight hard for the success of the property knowing that their own capital is at risk alongside the LPs. 

As for BAM, we're usually in the 10-20% GP/co-invest (of the equity stack).

@Richard Ramos

It needs evaluated from the perspective of deal size. If it were always possible, I would say anything north of 10% is ideal. However as the deal size gets larger it simply may not be possible. Further, 10% in a large deal may be a substantial portion of the GP's wealth. I would not expect them to put in more than say 5- 10% of their own net worth into a single deal.

All that really matters is GP is properly motivated from both a risk / reward side. There are plenty of other terms to properly motivate them should equity contribution be a problem.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here