A seeder's revenue share turned into the manager's lost profit, with the break-even fund size and what extending the share to Fund II does to it.
A GP seeding deal costs the manager its revenue share, and because the management company's costs stay with the manager, the share of profit given up is much larger than the share of revenue. On an illustrative 300 million real estate fund, a seeder taking 25 per cent of fee and carry revenue takes 15.38 million, 36.3 per cent of the manager's profit, and 64.0 per cent if the fund pays no carry. The deal pays only if, without the seeder, the fund would have raised less than 225.0 million.
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 →
Seeders, sometimes called strategic or anchor partners, offer a first-time manager what it lacks most: a large commitment on day one and cash for the management company. In return they take a slice of the business, usually a share of gross revenue from the fund or funds they back. The arithmetic is short, and it should be done before the term sheet is signed rather than after.
| Input | Value |
|---|---|
| Fund I target, with the seeder | 300.0 |
| Seeder's commitment to Fund I, on standard terms | 75.0 |
| Working capital lent or invested in the management company | 3.0 |
| Seeder's share of Fund I gross revenue, fees and carry | 25% |
| Management fee: 1.5% on commitments for 4 years, then on invested capital (75% of commitments) for 4 years | 1.5% |
| Carried interest in the base case, illustrative, per cent of commitments | 10% |
| Management company costs over eight years, 2.4 a year | 19.20 |
Fees = 300.0 × 1.5% × 4 + 300.0 × 75% × 1.5% × 4 = 18.0 + 13.50 = 31.50
Carry = 300.0 × 10% = 30.00; revenue = 61.50; profit before any seeder = 61.50 − 19.20 = 42.30
Every unit of commitment earns the manager 0.105 in fees over the fund's life and, in the base case, 0.10 of carry: 0.205 of revenue per unit of fund size.
Seeder's take = 25% × 61.50 = 15.38
Manager's profit with the seeder = 61.50 − 15.38 − 19.20 = 26.92
Share of profit given up = 15.38 ÷ 42.30 = 36.3%
In Excel: =Share*Revenue/(Revenue-Costs)
The seeder shares in revenue, not in costs, so its 25 per cent of the top line becomes 36.3 per cent of the bottom line. In the case that matters most to a first fund, where the fund does not clear its hurdle and pays no carry, revenue is the 31.50 of fees, the fee margin is 12.30, and the seeder's 7.88 is 64.0 per cent of it. The worse the fund does, the larger the seeder's share of what the manager keeps.
The seed is worth it if the manager ends up with more profit than it would have had raising alone. Without the seeder the fund would be some smaller size F0, with the manager keeping all of its revenue:
0.205 × F0 − 19.20 = 26.92 ⇒ F0 = 225.0
Generally, with revenue proportional to fund size: F0 = (1 − share) × fund size with the seeder
The manager is better off with the seeder only if it would otherwise have raised less than 225.0 million: the seeder must be responsible for at least 75.0 million of the 300 million. That happens to equal its own commitment, so the deal pays if the seeder's money would not have come anyway and nothing else would have filled the gap. If the seeder also brings other investors, or if the 3.0 of working capital is what keeps the house alive through the raise, it pays more clearly. The 3.0 is about 15 months of burn at 0.2 a month; why the fee on a first close rarely covers that burn is worked in does a first close cover the management company's costs.
| Seeder's share of revenue | Seeder's take | Manager's profit | Share of profit given up | Break-even fund size without seeder |
|---|---|---|---|---|
| 10% | 6.15 | 36.15 | 14.5% | 270.0 |
| 15% | 9.22 | 33.08 | 21.8% | 255.0 |
| 20% | 12.30 | 30.00 | 29.1% | 240.0 |
| 25% | 15.38 | 26.92 | 36.3% | 225.0 |
| 30% | 18.45 | 23.85 | 43.6% | 210.0 |
Seeding terms often extend the revenue share to the next fund, or to every fund until a sunset. Suppose Fund II raises 450.0 with or without the seeder and the 25 per cent share applies to it too. Fund II earns 92.25 of revenue and the seeder takes 23.06 of it, 38.44 across both funds. To come out ahead, the manager must now have been unable to raise more than 112.5 million on its own for Fund I. The second fund's share costs more than the first fund's, because by then the manager no longer needs what the seeder provided.
Negotiate the sunset, not the percentage. The table moves by 15.0 of break-even fund size for every five points of share. Removing the Fund II share moves it from 112.5 to 225.0. A buy-back right at a pre-agreed multiple of the seeder's take, or a share that falls once the manager reaches a size threshold, is usually worth more than a few points off the headline.
The common mistake is to compare the seeder's percentage with the size of its commitment: 25 per cent of the revenue for 25 per cent of the fund looks like a fair trade. It is fair only on revenue. On profit the manager gives up 36.3 per cent, or 64.0 per cent in a no-carry outcome, because the costs of running the house are not shared. And the comparison ignores the counterfactual entirely: the question is not what the seeder brings, but what the fund would have been without it.
Take the seeder's share of revenue, divide by the manager's profit rather than its revenue, and compare the fund size with the seeder against the size the manager could have raised alone. Here 25 per cent of revenue is 36.3 per cent of profit, and the deal pays only below a stand-alone fund of 225.0 million, or 112.5 million if the share runs into Fund II. How an anchor's fee discount compares is worked in what an anchor investor's fee discount costs the GP, and the management company budget, the cap table and the anchor asks are among the working documents on the companion page for this book.
Terms vary and are negotiated, often as a share of gross fee and carry revenue for one or more funds. The illustrative table runs from 10 to 30 per cent: at 10 per cent the seeder takes 6.15 million of a 300 million fund's revenue, 14.5 per cent of the manager's profit; at 30 per cent it takes 18.45 million, 43.6 per cent.
Compare the fund size with the seeder against the size the manager could raise alone. With revenue proportional to fund size, the break-even is one minus the seeder's share times the seeded fund size: 225.0 million for a 25 per cent share of a 300 million fund. Below that stand-alone size the seed pays.
Because the seeder takes its share of revenue before the management company's costs, which stay with the manager. On 61.50 million of revenue and 19.20 million of costs, the seeder's 15.38 million is 36.3 per cent of the 42.30 million profit; with no carry it is 64.0 per cent of a 12.30 million fee margin.
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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