Why acquisition fees in a syndication matter

First and foremost, welcome!

I appreciate you signing up and hope you get a lot out of these.

First, some background:

• An acquisition fee is typically a fee that is charged by a GP for putting together a transaction.

• Most acquisition fees are charged based on Purchase Price, but don’t forget to ask and check your documents as this varies across both GPs and deals

• GPs put time and effort into chasing a deal and finding an attractive one, so it makes sense to pay them a fee to compensate them for that effort.

There are two questions to answer about acquisition fees:

• How much should the acquisition fee be? How much is too much?

• Why does the fee matter, and how does it impact me as an LP?

Today, I want to touch on the second point - how to think of the fee, in the context of being an LP. I will touch on the first soon for paid subscribers.

Below is a simple table that illustrates the fact that when an LP pays a fee up front, you are immediately down on (i.e. have lost a part of) your invested equity.

As a result, the investment needs to make up for this to “get you out” of the hole. This is sometimes referred to as a drag on your returns, and as you can see, the drag is very real.

Below is the -24% with an actual example, so you can see the math.

I hope this gives you an initial view of why acquisition fees impact you as an LP.

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I advise LPs on their existing and future positions. Click here to learn more about me or my services.