Co-investment and re-ups

The real economics of fund management are not in the first raise. They are in the re-ups.

A first-time fund is expensive to raise. Marketing costs, DDQ preparation, roadshow travel, legal fees and the management fee ramp all mean that Fund I is often barely profitable for the GP. Fund II, raised from re-ups and a smaller number of new names, is where the economics turn positive. By Fund III, the raise is largely a re-up exercise and the GP keeps almost every basis point.

Co-investment is how you earn the re-up. When an allocator co-invests alongside your fund on a specific deal, they see how you behave at close, during construction, in a tenant default, and at exit. They learn whether your underwriting was conservative or optimistic, whether your reporting is timely, and whether you protect their interests when things go wrong. A successful co-investment is the best possible sales pitch for Fund II.

Design Fund I with re-ups in mind. Choose LPs who have a history of re-upping, structure the economics so the GP is fairly rewarded, and run the fund as if every LP is evaluating you for the next one — because they are. The platform model works because it keeps the GP in the relationship across funds, capturing the economics on every re-up without the cost of re-raising from scratch.