Price the fee discount and the carry share on the same basis, then turn the total into the extra capital the anchor has to unlock to pay for itself.
An anchor investor's concessions cost the GP the present value of the fees and carry given up, and the deal pays only if the anchor unlocks enough other capital to replace them. On an illustrative $400M real estate fund, a $100M anchor taking 50 basis points off a 1.50 per cent fee and 10 per cent of the GP's carry costs $3.22M in present value. Since a dollar of full-term capital is worth 9.15 cents to the GP, the anchor has to bring in $35.3M of commitments that would not otherwise have closed.
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 →
A manager raising its first or second real estate fund is offered a $100M commitment, a quarter of the target, conditional on two terms: a lower management fee for the life of the fund, and a share of the GP's carried interest. The anchor is valuable because other investors wait for one: it makes a first close credible and gives the placement process a name to point to. The question for the partners is what those two terms cost, on a basis they can compare with what the anchor brings. All figures are illustrative.
| Input | Value |
|---|---|
| Fund target | 400 |
| Anchor commitment | 100 |
| Headline management fee | 1.50% |
| Anchor fee discount | 50 bp (fee of 1.00%) |
| Anchor share of the GP's carry, whole fund | 10% |
| Expected carry, share of commitments | 7.5% |
| Fee base: years 1 to 4 on commitments, then invested capital | 85%, 65%, 40%, 15% |
| Carry received | half in year 7, half in year 8 |
| Discount rate: fees / carry | 10% / 15% |
The fee base adds up to 6.05 fee-years over an eight-year life: four full years on commitments, then a declining base as assets are sold. Carry is discounted at a higher rate than fees because it is contingent on the fund clearing its hurdle; fees are contractual once the capital is committed.
Fifty basis points on $100M is $0.50M a year while the fee runs on commitments. Over the life of the fund the anchor's fee base is 6.05 fee-years, so the nominal discount is $3.03M. That is a third of the anchor's fee, 33.3 per cent of the $9.08M it would have paid at the headline rate.
PV of fee discount = Anchor × discount × Σ baset / (1 + r)t = 100 × 0.50% × 4.34 = 2.17
Excel, with the base in B2:B9: =100*0.005*NPV(10%, B2:B9)
The carry share is usually written on the GP's carry from the whole fund, not on the anchor's own capital. At 7.5 per cent of commitments, a $400M fund is expected to generate $30.0M of carry, and 10 per cent of it is $3.00M. Received in years 7 and 8 and discounted at 15 per cent, it is worth $1.05M today.
The anchor's own $100M generates $7.5M of carry. A 10 per cent share of the whole fund's carry hands back 40 per cent of that, and the share rises with every dollar the GP raises from other investors.
Added together, the concessions cost $6.03M nominal and $3.22M in present value. The carry share is 32.7 per cent of that present value. The comparison the partners need is with the value of capital raised on full terms. One dollar committed at 1.50 per cent over the same fee base, with full carry, is worth:
| Component | PV |
|---|---|
| Management fee, 1.50% over 6.05 fee-years | 6.51 |
| Carry, 7.5% of commitments, years 7 and 8 | 2.64 |
| Total, per $100 committed | 9.15 |
Break-even capital = PV of concessions / PV per dollar of full-term capital = 3.22 / 0.0915 = 35.3
The anchor pays for itself if, without it, at least $35.3M of other commitments would not have closed. That is 35 per cent of the anchor's own ticket and 8.8 per cent of the target. Put another way, the whole deal costs 12.4 per cent of the $26.04M present value of the fund's fee revenue at full terms.
The two concessions trade against each other, and the carry share is the one partners tend to concede too easily because it is paid late and feels contingent.
| Fee discount | No carry share | 10% of carry | 20% of carry |
|---|---|---|---|
| 25 bp | 11.9 | 23.4 | 34.9 |
| 50 bp | 23.7 | 35.3 | 46.8 |
| 75 bp | 35.6 | 47.1 | 58.6 |
A 25 basis point discount with 20 per cent of carry costs about as much as 50 basis points with 10 per cent, or 75 basis points with none. If the anchor insists on a carry share, the cheapest place to give back is the fee, and the reverse. Fund size moves the answer too: at a $300M final close the break-even is $32.4M, at $500M it is $38.1M, because the carry share is paid on capital the anchor did not commit.
The usual error is pricing the fee discount and treating the carry share as a sweetener. On the fee alone the break-even is $23.7M, a figure most anchors can plausibly claim to unlock. Including the carry share lifts it by half, to $35.3M. The second error is quoting the $6.03M nominal figure, which overstates the cost because half of it, the carry share, arrives in years 7 and 8. The fee concession, by contrast, starts in the first quarter, when the management company is least able to absorb it, as shown in whether a first close covers the management company's costs.
The break-even also has to be tested honestly. Capital that would have come anyway does not count, and capital that arrives earlier because of the anchor counts only for the fees on the months gained. A partner who argues the anchor brings $35.3M of incremental commitments should be able to name the investors.
The book treats the anchor's asks as terms to be priced against what the anchor brings to the first close, and the free workbook for this case runs the first close on a calendar, with the working documents that price the anchor asks. For how the carry itself is split, the real estate waterfall model runs the distribution tiers.
Anchor terms are negotiated, so there is no standard figure. In this illustrative case a 50 basis point cut on a 1.50 per cent fee gives up 33.3 per cent of the anchor's fee, $0.50M a year during the investment period and $3.03M over an eight-year life. The discount is often paired with a share of carry or of the management company, which should be priced in the same exercise.
Because it is usually a share of the GP's carry on the whole fund, not on the anchor's own commitment. Here 10 per cent of an expected $30.0M carry pool is $3.00M, equal to 40 per cent of the carry the anchor's own $100M generates. It also grows with the fund: at a $500M close the share is worth $1.32M in present value, against $1.05M at $400M.
Convert the concessions into present value, then divide by what a dollar of full-term capital is worth to the GP. In the example the concessions cost $3.22M and full-term capital is worth 9.15 cents per dollar, so the anchor must unlock at least $35.3M of other commitments, 8.8 per cent of the target, that would not have closed without it.
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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