With private real estate syndications and funds there are generally two sides to the deal, a deal provider and a capital provider. The deal provider is generally referred to as the “GP”, or the general partner in the partnership or managing member of the LLC. The capital provider is the “LP”, or the limited partner or member of the LLC. The deals are generally structured such that when it goes round trip, the money is distributed as follows:
- The lender(s) is paid back
- The GP and LPs get their capital back
- The LPs get a “preferred return” of 6-10%
- Remaining profit is split somewhere from 50/50 to 80/20 between the LPs and the GP
What is “Promote” in Real Estate?
This 50% (actually typically 20-30%) is called “the promote.” Its purpose is to incentivize and compensate the deal provider for doing the work in the deal. The incentive with this structure is for them to create a really good deal since the better the deal is, the better they do. The effect, at least on a deal that does well, is that the GP has a better return than the LPs. Perhaps you have wondered, “How can I get in on the GP side and get me some of those GP returns?” but then were dissuaded by the difficulty of acting as the syndicator or fund manager. I mean, you're a busy doctor. Well, here is your chance.
It turns out that with a lot of these deals the GP is expected to bring some capital to the deal too. However, they often have a better use for their money and would rather not put it into the deal. A company has stepped in to solve this problem for the GP.
Clairmont Capital [**These Funds No Longer Available**]
Clairmont Capital Group is a Los Angeles-based real estate private equity firm, specializing in General Partner (“GP”) equity co-investments alongside well-known commercial real estate operators, developers and institutional capital partners in major U.S. markets. Basically, they provide some of the capital the GP is expected to bring in exchange for getting the extra return from the promote on that capital. So for their investors, it's the best of both worlds–the higher return available to the GP without the hassle of being the GP.
Clairmont’s executive team has overseen origination, structuring and active management of 37 unique GP equity investments across 4 investment vehicles representing more than $2.33 Billion worth of notional real estate exposure and 14 operating partner relationships. It's not their first rodeo. 4 of their 48 “Co-GP” investments have already gone round trip with an average gross (before fee) IRR of 31%.
Frequently asked questions about “Co-GP” Investments can be found here, but a picture may be worth 1,000 words.
The idea is that if the LPs make 18%, you might make 24% on the GP side, as shown here:
Pretty appealing right?
Clairmont's current available investment is what they call Fund III. This is a 6-8 year fund. It began in December 2018 and has a 30 month “investment period” before distributions will start being made. It has already raised 75% of its projected $40 Million and deployed 33% of it. The benefit of getting in at this point is that you already have good visibility into what you are buying as there are already 15 projects purchased with several more coming online this month. Investments so far are found in 13 states from California to Pennsylvania. Some of these investments are in income tax free states, some are in states that allow the fund to file composite returns, and some are in states that do not allow composite returns and so may require you to file state tax returns for those states.
Fund III’s investment strategy results in concentration bias toward development and value-add acquisition strategies (i.e. riskier strategies) with a predisposition towards four key asset classes: Senior Housing, Student Housing, Industrial/Logistics, and Workforce Housing.
Don't expect any liquidity from the fund for 6-8 years. The fund requires a published minimum of $250K, although they tell me they will drop that as low as $100K (keep reading for a $25K minimum option). It has fees of 2% per year plus 20% of profits after an 8% preferred return. This layer of fees is in addition to whatever the sponsor charges on each individual project in the fund. The fund projects gross returns of > 25%, which would be reduced by the fees.
The “Fund of Funds”
In addition to investing directly into Fund III, there is an additional opportunity here that Clairmont is offering that they are calling the “fund of funds.” Like “Access Funds” that I have written about before, this vehicle allows for a lower minimum investment, at $25K. Naturally, you would expect to pay an additional layer of fees for the privilege of a lower investment amount. However, this fund of funds actually has LOWER fees. Instead of 2 and 20, you would be paying 1.55% and a 16.2% “promote.” The fund of funds is a slightly different investment though. Instead of just investing into Fund III, it invests partially into Fund III (40%) and partially into 5 already identified “sidecar” investments (60%) in student housing and senior housing that are not in the main Fund III. So instead of having visibility into 33% of what you will be investing in, you get to see 75% of what you will be investing in.
They just opened up the Fund of Funds last week and they had already filled 55 of the 99 spots in a week before I sent out that email to those on my Real Estate Opportunity list, so it may be full by the time you read this. They plan to make an initial closure this month and perhaps a second closure next month (although if they hit 99 investors this month I don't know that there will be a second opportunity.)
The advantages of the Fund of Funds over Fund III include:
- Lower minimum investment ($25K instead of $100-250K)
- Lower fees (1.55% and 16.2% promote vs 2% and 20% promote)
- More visibility into investments (less of a “blind pool” effect)
- More exposure to the more defensive asset classes of student and senior housing
My Thoughts on GP Co-Investment Real Estate
Overall, I find this particular investment fascinating, albeit more complex than most of these. This is the first time I've seen the opportunity to invest on the GP side of the ledger, which should result in higher returns. I see the big advantages of this investment as:
- Access to the additional return from the “promote” of the individual deals in the fund. You can read more details about this here.
- The ability to invest alongside some of the “big names” in the industry who are providing the LP capital into the deals. While they didn't let me publish those on the site, they will tell you who they are as part of the due diligence process. They feel that these companies will help minimize the layer of fees at the deal level and provide you access to a high caliber of sponsor, equity partner, and deal structure than you can get elsewhere (i.e. higher returns).
- Broad diversification. Instead of owning one property, you will own dozens.
- Relatively low minimum into a fund like this
So what are the downsides?
- Illiquidity. This isn't a publicly-traded REIT. You do not get your money back for half a decade or more and you won't even get a distribution for another year or two.
- Tax complexity. With diversification comes additional state tax returns.
- Two layers of fees. While it's nice to see an 8% preferred return, “2 and 20” is a big fee and that's in addition to the individual deal fees. The after-fee return is what really matters, of course, but these are not the lowest fees I've ever seen on an investment. If the gross return is really 25%+ then I don't think anyone will be complaining about the fees, but you can be assured Clairmont will make their 2% no matter how poorly the fund does.
# 1 and # 3 actually don't bother me all that much given this rare opportunity to come in on the GP side of the deals. # 2 could be a bit painful on a small investment amount where the tax preparation costs and hassles can add up relative to the earnings. I suppose that provides some incentive to invest a little bit more money. This is really no different from any other multi-state equity fund though. Katie and I are still discussing investing in this one.
[Update Dec 17 2019: Don't rush anything with your investments, but as of today the Fund of Funds only has 19 spots left in it.]
Sign-up to Learn More About Clairmont Capital Fund III and its Fund of Funds!
What do you think? Would it be worth the fees, tax hassle, and illiquidity to be on the GP side of the ledger? Why or why not? Comment below!
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