As a new subscriber, I have enjoyed reading your work. However, this post rubbed me raw. As a GP perhaps I might offer a different perspective. Rather than evaluate the GP’s contribution as a % of the capital stack, try evaluating as a % of the GP’s liquidity and net worth. You might find the GP is “all in” even though they don’t have a trust fund to allow them to invest at an “ideal” level. Further, I can honestly say that my effort towards a deal has never been influenced by a couple % more or less of capital that I’ve put in, and further the idea that I would treat F&F is worth less than my own is simply offensive. At the end of the day, people do business with people and trying to quantify an ideal GP based on an average, I believe, is a flawed analysis. I’m not an average GP regardless of my skin in the game.
Thanks so much for your note - and for subscribing. I really appreciate your perspective. You're right that skin in the game looks very different depending on a GP’s personal balance sheet, and evaluating it as a percentage of net worth or liquidity can tell a very different (and often more accurate) story.
That said, from the LP side, especially for those who diversify across many GPs, capital contribution is an important metric. Is it be-all end-all? Certainly not.
The most important metric is GP's character, but it's also the hardest one to evaluate. As you know, not all GPs operate with your level of care, and some probably shouldn’t be raising capital at all. For LPs, co-investment is just one of many ways to help filter for that alignment.
Appreciate you sharing your take! Conversations like this make the entire universe of private placement deals better.
Thank you, Steve. I was initially surprised to see the diminishing returns once GP co-invest exceeds 10% - but it makes sense, esp. if that sum represents a high % of GP's net worth.
Interesting that the research said that the GP became 'too conservative' if their co invest went up. I would argue that is what I would want since the GP has all ready vetted the property. I try to find out how much the GP is investing vs their average investment. Higher than normal co invest is a big plus for me.
Interesting, Leyla. I don't know if this comes up in PE deals, but here is one pernicious story from REITland. One sponsor who started and managed (externally) a REIT ended up later holding more than 20% of the equity, after they got pushed into buying out someone they were said to have lied to. Then they started bragging about how aligned they were.
But really their fees were so large that their benefit dwarfed that of the equity. They grew the portfolio to grow the fees, and it did not really matter to them what the stock price did.
An attempt to oust the manager, relying on votes from the institutions that got sucked into the deal at the start (I had this from an inside source), were defeated by a rights offering.
This is crazy! Goes back to the classic Munger quote: "Show me the incentive, and I'll show you the outcome"
On the private side, I've seen a fund where the GP contributed effectively $0 capital in cash, and then sold part of the stake via GP stakes fund. Infinite returns (to the GP)..
As a new subscriber, I have enjoyed reading your work. However, this post rubbed me raw. As a GP perhaps I might offer a different perspective. Rather than evaluate the GP’s contribution as a % of the capital stack, try evaluating as a % of the GP’s liquidity and net worth. You might find the GP is “all in” even though they don’t have a trust fund to allow them to invest at an “ideal” level. Further, I can honestly say that my effort towards a deal has never been influenced by a couple % more or less of capital that I’ve put in, and further the idea that I would treat F&F is worth less than my own is simply offensive. At the end of the day, people do business with people and trying to quantify an ideal GP based on an average, I believe, is a flawed analysis. I’m not an average GP regardless of my skin in the game.
Thanks so much for your note - and for subscribing. I really appreciate your perspective. You're right that skin in the game looks very different depending on a GP’s personal balance sheet, and evaluating it as a percentage of net worth or liquidity can tell a very different (and often more accurate) story.
That said, from the LP side, especially for those who diversify across many GPs, capital contribution is an important metric. Is it be-all end-all? Certainly not.
The most important metric is GP's character, but it's also the hardest one to evaluate. As you know, not all GPs operate with your level of care, and some probably shouldn’t be raising capital at all. For LPs, co-investment is just one of many ways to help filter for that alignment.
Appreciate you sharing your take! Conversations like this make the entire universe of private placement deals better.
Keep up the good work!
This is a great and much needed post. I like to ask the non CEO employees how much they and their families invest in every deal and if not why?
Thank you, Steve. I was initially surprised to see the diminishing returns once GP co-invest exceeds 10% - but it makes sense, esp. if that sum represents a high % of GP's net worth.
Interesting that the research said that the GP became 'too conservative' if their co invest went up. I would argue that is what I would want since the GP has all ready vetted the property. I try to find out how much the GP is investing vs their average investment. Higher than normal co invest is a big plus for me.
Interesting, Leyla. I don't know if this comes up in PE deals, but here is one pernicious story from REITland. One sponsor who started and managed (externally) a REIT ended up later holding more than 20% of the equity, after they got pushed into buying out someone they were said to have lied to. Then they started bragging about how aligned they were.
But really their fees were so large that their benefit dwarfed that of the equity. They grew the portfolio to grow the fees, and it did not really matter to them what the stock price did.
An attempt to oust the manager, relying on votes from the institutions that got sucked into the deal at the start (I had this from an inside source), were defeated by a rights offering.
This is crazy! Goes back to the classic Munger quote: "Show me the incentive, and I'll show you the outcome"
On the private side, I've seen a fund where the GP contributed effectively $0 capital in cash, and then sold part of the stake via GP stakes fund. Infinite returns (to the GP)..