Hey guys,
this may be a really naive questions but I am trying to wrap my head around true ups for a private RE fund. I get the part about equalizing the paid in capital for later capital call rounds, but I don’t fully understand the rationale for the 8% extra that’s also paid back to earlier LPs.
I’ve looked it up and can only find explanations about the mechanic but not the why it exists and also why is 8% such a standard rate.
Any insights would be greatly appreciated.
Thx!
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It exists as a mechanism to true-up the early vs late closers from a return perspective, and to prevent free-riding. If there was no look back interest, why would any LP commit to a fund before the final close? The early closers would always have a worse IRR than the late closers.
This. OP, you can think about it as either punishing LPs that commit later or reward LPs that invest earlier. I’ve always found it to be an elegant industry standard.
The late interest feature is also common in buyout and VC PE funds as well. Agree with m8, it is some compensation for the cost of capital. However, in a situation where a fund has marked up assets significantly above the cost of capital, the late closers still benefit at the expense of first closers.
Yes, late closers still benefit if the portfolio is written up. The flip side, is that if a portfolio is written up before the final close and doing really well, final closers might not get their full "ask" if the fund becomes over-subscribed, as other LPs begin piling in. This does happen.
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