Navigating Performance Fee Models: Key Considerations for Investors

TL;DR

Traditional LP/GP structures typically involve waterfalls, preferred returns, and various types of fees, but performance-only structures are also gaining traction with transparent cost pass-throughs.

Transcript

traditional lpgp structures we're going to spend a real small amount of time on this because most of you are very familiar with this but in case you're not a GP is General partner generally the person syndicating the deal putting the deal together the LPS are the passive investors generally the LPS literally by the name limited partners they have l... Read More

Key Insights

• 🤱 LP/GP structures often include waterfalls, preferred returns, and various fees within a single fund.
• 🤱 Multiple types of fees can impact the alignment of interests between GPs and LPs.
• ✋ Performance-only structures offer a high degree of alignment, where costs are transparently passed through to investors.
• 😊 Weighing the pros and cons of fund structures is crucial, considering investor preferences and regulatory requirements.
• 🤝 Direct deals are often preferred by investors over funds, as they offer more transparency and control.
• 🤝 The attractiveness and leverage of the deal can impact the fees and compensation structure.
• 👻 Performance-based compensation can allow for higher earnings when deals perform well.

Questions & Answers

Q: What is the difference between LPs and GPs?

LPs are passive investors, while GPs syndicate deals and are responsible for putting the investment together.

Q: What types of fees can be found within a fund?

Within a single fund, there can be a range of fees, including capital raising fees, financing fees, disposition fees, acquisition fees, assets under management fees, and performance fees.

Q: What is the advantage of a performance-only structure?

A performance-only structure aligns the interests of the GP and LPs, as the GP only gets paid when the deal performs well. It can involve transparent cost pass-throughs instead of multiple fees.

Q: Is performance-only compensation common in the wealth management industry?

Performance-only compensation is not common in the wealth management industry, as many wealth managers charge fees regardless of performance. However, there is a growing demand for more performance-based compensation.

Summary & Key Takeaways

• LPs are passive investors, and GPs are responsible for syndicating deals. Traditional LP/GP structures involve discussions on waterfalls, preferred returns, and various fees.

• There are different types of fees within a single fund, such as capital raising fees, financing fees, disposition fees, acquisition fees, and performance fees.

• Performance-only structures do not necessarily mean losing money but rather entail transparent cost pass-throughs. Many investors prefer maximum alignment of interests.