The same pipeline under a blind pool and deal-by-deal syndication: fees, carry with and without netting, and the deals that never close without committed capital.
On paper the two pay the manager about the same; in practice the fund pays more and pays it more reliably. On an illustrative 15 deals of 18.0 million of equity, a 300 million fund at 1.5 per cent and 20 per cent carry earns the manager 29.83 million, 14.0 per cent of it contingent, against 30.31 million deal by deal, 37.6 per cent contingent. Once a fifth of the deals are lost for want of committed capital and every attempt carries its own raising cost, deal by deal falls to 21.99 million, 26.3 per cent less.
Worked in full in Raising a Real Estate Fund by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most real estate managers raise their first fund after years of deal-by-deal syndication: find a property, sign it, then find the equity. The choice between carrying on that way and raising a blind pool is usually argued on control and reputation. It can also be argued on arithmetic, and the arithmetic turns on three things: who pays fees on capital not yet invested, whether losers net against winners, and how many deals survive the time it takes to raise equity for each one.
| Input | Blind-pool fund | Deal by deal |
|---|---|---|
| Deals, equity per deal | 15 at 18.0 | 15 at 18.0 |
| Commitments | 300.0 | None |
| Management fee | 1.5% on commitments for 3 years, then on invested equity | 1% of equity a year |
| Acquisition fee | None | 1% of gross cost at 50% LTV |
| Carry or promote | 20% over 8%, whole fund | 20% over 8%, each deal |
| Hold | 5 years | 5 years |
Outcomes are the same deals in both columns: 3 lose money at 0.8x, 5 return 1.5x and 7 return 1.9x, an average of 1.55x on 270.0 million invested. For comparability neither structure has a catch-up, so carry is simply 20 per cent of proceeds above equity compounded at 8 per cent for five years, a hurdle multiple of 1.4693.
Fees in the investment period = 300.0 × 1.5% × 3 = 13.50
Fees afterwards, on invested equity falling as assets are sold (270, 216, 162, 108, 54) = 810 × 1.5% = 12.15
Carry = 20% × (proceeds − invested × 1.4693) = 20% × (417.6 − 396.7) = 4.18
The fund earns 25.65 million of fees and 4.18 of carry, 29.83 in all. The three losing deals net against the winners, which is why the carry is small: the pool returns 1.55x, only just above its hurdle.
Acquisition fees = 15 × 36 gross cost × 1% = 5.40; asset management fees = 15 × 0.18 × 5 years = 13.50
Promote per deal = 20% × max(0, 18.0 × (multiple − 1.4693))
1.9x deals: 1.55 each, 10.85 for seven; 1.5x deals: 0.11 each, 0.55 for five; 0.8x deals: nothing
Excel, multiple in B2: =0.2*MAX(0,18*(B2-1.08^5))
Deal by deal earns 18.90 million of fees and 11.41 of promote, 30.31 in all. The promote is 2.73 times the fund's carry on identical deals, because a loser costs the manager nothing: it simply earns no promote, while each winner pays in full. That is the whole difference in performance pay, and it is paid by the investors. The same mechanics on the investor's side are worked in what deal-by-deal carry costs a co-investor.
The comparison above assumes every deal closes. Without committed capital a manager signs a property and then needs weeks to raise its equity, and sellers price that risk or sell to a buyer who can close. Say 80 per cent of deals close, so 12 of 15, and each of the 15 attempts costs the manager 0.15 million of legal and marketing that the deal does not reimburse.
| Line | Fund | Deal by deal, all close | Deal by deal, 80% close |
|---|---|---|---|
| Fees | 25.65 | 18.90 | 15.12 |
| Carry or promote | 4.18 | 11.41 | 9.12 |
| Raising cost of each attempt | 0.00 | 0.00 | −2.25 |
| Manager's income | 29.83 | 30.31 | 21.99 |
The fund now earns 7.83 million more. More of its income is fees, which are contractual once the capital is committed; deal by deal, over a third depends on deals clearing an 8 per cent hurdle.
| Losing deals | Fund | Deal by deal, 100% | 80% | 60% |
|---|---|---|---|---|
| 1 | 37.7 | 31.2 | 24.5 | 17.8 |
| 3 | 29.8 | 28.1 | 22.0 | 15.9 |
| 5 | 25.6 | 25.0 | 19.5 | 14.1 |
The middle row shows 28.1 rather than the 30.31 of Step 2 because it charges the 2.25 of raising costs even when every deal closes. Deal by deal never overtakes the fund in the table: netting costs the fund carry when losers are many, but each deal lost costs syndication its fees and its promote. Deal-by-deal syndication is a sound way to build a record; as a business it depends on a close rate that rarely survives competitive markets.
Comparing headline terms. A 1 per cent acquisition fee plus 1 per cent asset management fee plus a deal-level promote looks richer than 1.5 and 20, and on a pipeline where every deal closes it is, by 0.48 million. The comparison that matters puts in the deals that never close, the cost of trying, and the fact that fund fees start on commitments rather than on invested equity, the gap set out in management fee on committed vs invested capital.
On the same 15 deals the fund earns 29.83 million, 86 per cent of it in fees; deal by deal earns 30.31 if everything closes and 21.99 if a fifth does not. The fund's case is not the fee rate. It is committed capital, which keeps deals that syndication loses. Raising a Real Estate Fund works the raise itself, from the funnel to the first close, and the free workbook for this case times it month by month.
Because losers do not net against winners. On the illustrative 15 deals, three at 0.8x cost the deal-by-deal manager nothing while seven at 1.9x each pay 1.55 million of promote, for 11.41 million in all; the fund pools them, returns 1.55x against a 1.4693 hurdle multiple and pays 4.18 million. Deal by deal pays 2.73 times as much.
In the illustrative fund, 14.0 per cent: 25.65 million of fees against 4.18 million of carry on deals averaging 1.55x. Deal by deal the same deals produce 37.6 per cent of income from promote, so the syndicating manager carries more performance risk for roughly the same total.
When every deal closes, raising costs little and enough deals lose money to make netting expensive for the manager. With all 15 closing and no raising cost, syndication earns 30.31 million against the fund's 29.83 with three losers, and 27.20 against 25.65 with five; with one loser the fund wins, 37.75 against 33.41. Once a fifth of the deals fail to close, the fund wins in every case in this illustration.
This article is one calculation from Raising a Real Estate Fund. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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