A lot of sponsors ask me this question. It’s a grey area. I don’t really think there’s an exact definition. From my experience, there are four types of co-GP investors. To be clear: None of these are official definitions, but they represent the kinds of co-GP groups I come across in my day-to-day capital raising efforts.
This is a rare form of co-GP. It’s hard to find a private equity group that specializes in this type of investing. Such a co-GP would be an equal partner in the venture. A true partnership co-GP:
– signs on debt
– shares in all downside risk
Such a partner would need to agree with the sponsor on the division of responsibility. But, most commonly, their contribution would be to backstop the LP equity. By signing on debt and backstopping LP equity, this capital could cost a lot. Very often, even more than 50% of the GP interest. But, as I mentioned, it’s tough to find a group that specializes in investing this way. Mainly because signing on debt is a risk very few private equity funds would ever be willing to take.
Such a co-GP brings investors to the table, but really does nothing else. They won’t sign on debt, and do not share in any day-to-day management responsibilities. All they do is bring capital to the table, and they ask for an interest in the GP’s fees for doing so. I’d say this is the most common form of Co-GP, especially among sponsors who are less experienced. Very often you’ll find sponsors partnering with two or three other “co-GPs” who are doing nothing other than bringing investors to the table. As individual sponsors develop their reputation, they tend to move away from needing such partners. It is important to note that, according to SEC guidelines, a co-GP of this sort would be required to be materially involved in the sponsorship, at the risk of violating securities law. But that issue is for another article.
This Co-GP would solely invest in the GP part of the stack (typically a minimal investment that is done in good faith), and will NOT bring LP investors. They will offer their balance sheet to help secure favorable debt. For doing so, even though they have not brought any LPs, they will take a piece of the GP interest. From my experience, these partners typically charge 10% to 20% of the GP interest for their services.
This kind of investor only exists to provide liquidity to operators with a BIG pipeline. While traditional JV’s are done with a 90/10 split, what happens if the deal is so large that the 10% sponsor contribution is too big to take down? In comes our fourth type of GP that partners with the operator on just THAT part of the capital stack. As an example, let’s say a sponsor is doing multiple $100M deals. Each deal is being levered 60%. For each one of these deals the sponsor wants to do, they’d need to personally invest $4M, which is a lot of money.That’s where these GP investors come in handy. They’ll help swallow the $4M and will take between 20% to 30% of the GP interest for doing so.
I want to stress again that none of these are official definitions. But as someone with years of experience in the capital raising world, these are the forms of co-GP investing I come across most often. What has your experience been?
Bio: Jonathan Livi is the Managing Principal of Livi Kapital.
Livi Kapital specializes in sourcing middle market institutional equity for experienced CRE sponsors.
Livi Kapital also provides investment opportunities to retail investors, giving them opportunities to invest alongside institutional capital in a cost-efficient manner.
