Sponsor Compensation

Sponsors must judiciously determine their compensation to ensure alignment with the interests of their Limited Partners (LPs). There are primarily two sources of sponsor compensation:

1. Promoted Interest (Carried Interest): Typically involves a 2% management fee on the capital raised from LPs and a 20% share of the fund's profits. To align with LP interests, sponsors often receive this profit share only after LPs have achieved their preferred return.

2. Service Fees: Sponsors can earn fees from various services provided to the fund, detailed as follows:

   • Fundraising Fees: These cover the costs of organizing the fund, drafting offering documents, and soliciting investments, ranging from 0.5% to 2% of equity raised. New sponsors may need to waive these fees or offset them against actual expenses.

   • Acquisition or Disposition Fees: For purchasing or selling fund assets, typically ranging from 0.5% to 1% of the transaction value. These fees can be controversial, with many LPs preferring them to be offset against the promote or waived entirely.

   • Asset Management Fees: For managing the fund's operations, including handling distributions, tax returns, and financial statements. Typically, this is 1.5% of assets under management annually. New sponsors might base these fees on the equity capital balance instead of asset value.

   • Finance and Guarantee Fees: For securing financing and providing guarantees on loans, generally 0.5% to 1% of the secured funds. These are often one-time fees, while guarantee fees accrue annually throughout the guarantee's duration. Securing finance fees can be challenging for new sponsors, who might have to consider waiving them.

   • Property Management, Leasing, Construction, and Development Fees: When sponsors provide these services instead of outsourcing, fees are based on prevailing market rates. Sponsors are expected to justify these fees, demonstrating their expertise and why their service is superior to external providers.

Sponsors should not view the fund as merely a means to generate fees at the expense of LPs, as such an approach likely leads to fund failure. Conversely, a sponsor that brings added value through expertise in the capital markets, development, acquisitions, and property management should feel justified in integrating related fees into the fund's structure, provided they reflect industry standards and are justifiably necessary.

Best Practice: A good rule of thumb for including fees is whether the sponsor would be willing to pay these fees as an LP. Sponsors should demonstrate that their primary motivation is the promoted interest—earning a share of the profits after LPs receive their preferred return. Additionally, transparency regarding the fund's returns, both before and after fees, and both gross and net Internal Rates of Return (IRR) to LP investors, is essential for maintaining trust and alignment of interests.