Starting your own shop: LP / debt fund vs GP (dev co, value add)
Would like to hear people's general thoughts on this. Let's consider value add or development, for example.
If Im looking to start my own shop, my opinion is that I'd rather be the LP equity in the deal, rather than being the GP or sponsor.As the LP equity, I'd build connections with HNW individuals / family offices / etc and raise money from them. Id structure a waterfall with these HNW individuals in which I would be the GP to them and they would basically by the LP equity for my shop. I'd connect with merchant build / value add shops that execute deals on a syndication basis and essentially be the LP equity slug (just as Carlyle seems to do). In this instance, I have to raise the capital and have the relationships with GP's to source opportunities.
on the other hand, if I was the sponsor, I'd have to source the deal, put up my balance sheet for the loan (balance sheet I don't have), secure debt, raise LP capital, and manage the day to day execution, all while being exposed to the risk in terms of my promote blowing out and being exposed to the loan being callable.
to me, if I was to start my own shop, being an LP seems to be much more feasible. Yes, you have to raise more aggregate dollars, but you have to source debt and equity as a GP too. As an LP, I'm more confident in the returns I can generate (as Im somewhat protected by the pref) and thus have a lower risk of losing credibility with my investor base. As an LP, I can place capital with top tier sponsors. I work at a top tier sponsor right now and when times get hard (as they are now), we take LP equity from smaller groups / LP's and we are a price taker of their terms.
Yes, the Gp collects their development fee. But they are exposed on the back end in terms of promote.To me, it's not about generating a 15 versus a 20. It's about delivering consistent returns and protecting yourself against risk and maintaining credibility.As an LP, I can also collect a management fee. Basically, the only difficulty I see is that, as an LP, I have to raise more money. But at least I don't have to put up my balance sheet and worry about that when it comes to securing debt, while also being removed from the headaches of day to day management.
If we take development for example, I wouldn't have the personal balance sheet to fund pre development spend, especially on a long entitlement deal. But LPs often look to come in when a deal is closer to shovel ready. Again seems to be another benefit.
Broadly speaking, would also apply the LP logic to starting a debt fund.
I mean, if we're just fabricating our dream scenario, why even bother with a fund? Why not skip right to the part where the rich uncle you never knew leaves you $5b after returning from the jungle?
Trying to source equity as an LP is way harder than doing it as a GP. Because a GP or a sponsor has a deal, has a pitch, has something that can be independently evaluated on a one off basis. An LP doesn't have that; you are convincing people with lots of money that you'll do a better job allocating it than literally every other person on the planet. Or at least every other person in your asset class.
And it's somewhat fallacious to say that GPs are exposed on the back end and LPs aren't. GPs still get asset management fees, development fees, acquisition fees, etc. Just the same as an LP. But they get the leverage of the LP's equity. There is more money to be made in being a sponsor than in being a capital allocator, and more money to be made earlier. Sure, if you've got 10b of AUM then you're on easy street because your fees are enormous. But only a tiny, tiny, tiny percentage of people who start LP funds end up with that kind of AUM. Whereas it's not at all crazy for sponsors to make tens of millions of dollars a year, because their returns are much higher