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The Economics of VCs Recycling Management Fees

Several years ago, I wrote a post titled Why VCs Should Recycle Their Management Fees. From the start of Foundry Group in 2007, we have felt strongly about this. We feel that if an LP gives us a $1 to invest, we should invest at least that $1, not $0.85 (the average fee load over a decade for a typical VC fund is 15%.) Our goal for each fund is actually to invest closer to 110%, which means if an LP gives us a $1 to invest, we are actually investing $1.10. Our long-time friends and LPs at Greenspring recently wrote a great post titled Creating GP-LP Alignment: Why Terms Matter. The post specifically discussed three items: Management Fees, Recycling,…

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Several years ago, I wrote a post titled Why VCs Should Recycle Their Management Fees.

From the start of Foundry Group in 2007, we have felt strongly about this. We feel that if an LP gives us a $1 to invest, we should invest at least that $1, not $0.85 (the average fee load over a decade for a typical VC fund is 15%.) Our goal for each fund is actually to invest closer to 110%, which means if an LP gives us a $1 to invest, we are actually investing $1.10.

Our long-time friends and LPs at Greenspring recently wrote a great post titled Creating GP-LP Alignment: Why Terms Matter. The post specifically discussed three items: Management Fees, Recycling, and Carried Interest.

The entire post is worth reading, but I especially liked their section on Recycling which includes a handy chart showing that recycling means that you only need to generate a 3.65x gross multiple to achieve a 3.00x net multiple to your LPs, vs. a 4.10x gross multiple if you don’t recycle. The section from their post follows:

In addition to management fees, the process of reinvesting realized proceeds into new investments, or recycling, can also meaningfully impact net returns and alignment. While management fees cut into the dollars available for investment, recycling can have the opposite effect, increasing the investable pool of capital while offsetting a proportion of management fees. To illustrate this point, we revisit our $100 million fund example, and in this case show how recycling $15 million, equivalent to the fund’s management fee, positively impacts the fund.

The fund that chooses to recycle fees requires a 3.65x gross multiple to achieve a 3.00x net multiple, whereas the fund that does not recycle proceeds to offset management fees requires a 4.10x gross multiple to achieve a 3.00x target net multiple. As long as re-invested capital is prudently deployed into opportunities capable of generating strong results, recycling is an impactful way for GPs to increase net returns, which ultimately benefits investors and themselves.

Now, imagine if you recycled 110%. Your investable capital would be $110m. You now require a 3.45x gross multiple to achieve a 3.00x multiple. Plus, as a bonus, you get $56m of carry (vs. $50m of carry in the case where you don’t recycle proceeds.)

Many fund agreements, including ours, require us to pay back all fees and expenses before taking carried interest. We think this is another element of GP-LP alignment and have supported this from our first fund. As a result, if you recycle at least 100%, it is more realistic to think of your management fee as a risk-free, interest-free loan against future carried interest, instead of additional compensation.

As a result, our goal is to generate as much of a return on the dollars invested, and get as many dollars invested as we can in each fund. Recycling allows us to do this and brings the gross and net returns closer together, reducing the spread to the carried interest from profits on investments.

While many GPs focus on their gross numbers, in the end the only numbers that really matter to LPs over time are the net multiples.

That’s worth remembering.

Source: https://feld.com/archives/2018/08/the-economics-of-vcs-recycling-management-fees.html

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Private Equity

Carlyle invests in logistics assets as Covid-19 drives e-commerce demand

Sale-and-leaseback transaction involves 27 distribution centres in France and Germany

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Carlyle has acquired a portfolio of logistics assets in France and Germany in a sale-and-leaseback transaction, as a response to a pandemic-driven rise in e-commerce demand.

The portfolio comprises 27 high-quality distribution logistics assets totalling 158,000 square meters of space focused on parcel-delivery. The assets are located near major urban and trade areas across France and Germany, the firm said in a statement.

Marc-Antoine Bouyer, managing director on the Carlyle Europe Realty advisory team, said both countries are “core” to the firm’s investment strategy in Europe. The acquisition reflects the interest in logistics and distribution, which has seen “rapidly growing delivery volumes accelerated by strong growth in e-commerce”, he said.

The investment was made via Carlyle Europe Realty (CER), a €540m pan-European real estate fund, closed in June last year. Financial details were not disclosed.

The CER vehicle targets opportunistic investments across Europe, focusing on “buy and build” platforms in key segments such as logistics, residential, student accommodation, retail, hospitality and co-working.

The private equity house with $221bn in assets under management around the world is not alone in trying to capitalise from the accelerated shift to e-commerce in Europe.

In April, KKR took a majority stake in European investor and manager of industrial and logistics assets Mirastar. In May, the US-based firm continued its move into European logistics real estate with the acquisition of Etche France from the BMF Group and its co-founders.

To contact the author of this story with feedback or news, email Elisângela Mendonça

Source: https://www.penews.com/articles/carlyle-invests-in-logistics-assets-as-covid-19-drives-e-commerce-demand-20201026

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Alternative Investments/ESG: ESG Investments Are Now Mainstream And Core Portfolio Elements

Adrian Lowcock is head of personal investing at Willis Owen. He notes that ESG’s decisive outperformance during the last one, three, and five years shows the investing approach is here to stay. Lowcock points to the 94.6% return from the MSCI ACWI ESG leaders index over five years compared to the 91.3% return from the MSCI ACWI index, as validation of his opinion.

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Alternative Investments/ESG: ESG Investments Are Now Mainstream And Core Portfolio Elements

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Gone are the days when ESG was just “nice to have,” says Adrian Lowcock at Willis Owen.

Adrian Lowcock is head of personal investing at Willis Owen. He notes that ESG’s decisive outperformance during the last one, three, and five years shows the investing approach is here to stay.

Lowcock points to the 94.6% return from the MSCI ACWI ESG leaders index over five years compared to the 91.3% return from the MSCI ACWI index, as validation of his opinion. (WealthAdviser)

ESG is core now

“These funds are core holdings now. Whereas previously, ESG was a secondary consideration, a nice to have tilt to portfolios, the world has been changing. A focus on companies that do less harm to the environment, be that alternative energy, greener food production or waste reduction, is here to stay. Crucially, investors are rewarding them,” he said.

Lowcock also points to the effect of the COVID-19 pandemic. It showed to locked-down citizens the effect of human activity on their environment.

“ESG investing is now a huge part of investing common sense, with many areas that responsible and ethical funds avoid being invested in “old” economy industries in decline,” he notes.

How the digital age is adding more power to ESG’s elbow

Lowcock also observes that advances in digital technology help companies more accurately track their environmental behavior and therefore, be more accountable for their actions.

Investors also benefit because technology helps make their opportunities more “cost-effective.”

Lowcock exhorts investors not to miss the ESG bus.

“Investors who are not on board {these trends} are going to miss out over the long term.”

Related Story:  How To See Through The “Ethical Veneer” (Bancroft Wealth)

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Source: https://dailyalts.com/alternative-investments-esg-esg-investments-are-now-mainstream-and-core-portfolio-elements/

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Private Equity

Digital Assets: JPMorgan Issues Bullish Bitcoin Analysis

JPMorgan (NYSE: JPM) analysts issued a note on Friday that said millennials’ preference for cryptocurrency over gold could lend a bullish tailwind to bitcoin in the coming years. Millennials would constitute an important segment of the investment fraternity and that could tip the scales in favor of BTC versus the yellow metal.

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Digital Assets: JPMorgan Issues Bullish Bitcoin Analysis

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Analysts at JPMorgan say bitcoin (BTC) will benefit at the expense of gold.

JPMorgan (NYSE: JPM) analysts issued a note on Friday that said millennials’ preference for cryptocurrency over gold could lend a bullish tailwind to bitcoin in the coming years. Millennials would constitute an important segment of the investment fraternity and that could tip the scales in favor of BTC versus the yellow metal. (MARKETS INSIDER)

Bitcoin playing catch-up with gold?

While the physical gold market commands a value of $2.6 trillion including ETFs, bitcoin is only a tiny fraction of that. (The market cap of BTC is just $243 billion, according to Bitcoin.com).

“The potential long-term upside for bitcoin is considerable as it competes more intensely with gold as an ‘alternative’ currency we believe, given that Millenials would become over time a more important component of investors’ universe,” JPMorgan wrote in their analysis.

“Even a modest crowding out of gold as an ‘alternative’ currency over the longer term would imply doubling or tripling of the bitcoin price,” the analysts said.

To reach the equivalent of the gold market, bitcoin would have to surge more than 10X from its current price levels.

Adoption too could work in favor of BTC

JPM also said that in the long run, there could be more new use cases for bitcoin – beyond its restricted role as a store of value similar to gold.

Rising crypto adoption could, therefore, add to BTC’s allure compared to the precious metal.

“The more economic agents accept cryptocurrencies as a means of payment in the future, the higher their utility and value,” JPMorgan said.

Meanwhile, Raoul Pal says gold breaking down

Bitcoin has been on a roll in recent weeks, with Square’s $50 million investment and PayPal’s move to integrate the cryptocurrency into its platform.

Technically, the crypto gave a powerful buy signal when it cleared the $12,000 level on high volume.

Coin Telegraph quoted Real Vision CEO Raoul Pal’s tweet as follows:

“Gold is breaking down versus bitcoin, as expected cc: @michael_saylor Everyone take note. The next thing I’m expecting is the correlations between BTC and the dollar and BTC vs equities to break down too… let’s see. #Bitcoin.”

Related Story:  “Front-Running Opportunity Of A Lifetime” (Raoul Pal)

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Source: https://dailyalts.com/digital-assets-jpmorgan-issues-bullish-bitcoin-analysis/

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