Risk and Opportunity in Late-Stage Fundraises
May 2025
Background
Committing to a closed-end fund late in its fundraise has always carried both risk and opportunity. A later investor typically (i) buys into a fund’s investments at cost plus some fixed rate of “catch-up interest”, (ii) pays management fees back to the initial closing date, and (iii) bears its pro rata share of other fund expenses, along with interest. This mechanism is designed to put later investors on roughly equal footing with earlier investors. But the actual result can vary.
In some markets, a late commitment presents the opportunity to buy into an existing portfolio at a discount – either because the market has improved or because some value-add activity has already been completed. Under these conditions, a late investor can receive a significant boost out of the gate.
In other markets, investors may begin in a hole – because of accrued management fees and other expenses, because asset values have declined, or because asset values have simply failed to keep pace with “catch-up interest” and accrued expenses.
The calculation itself is simple:
Recent Developments
A few recent developments have combined to make late-close investing more challenging:
- Extended fundraising periods have caused retroactive management fees to stack up.As shown in the accompanying graph, real estate funds that held a final close in 2024 took an average of 18 months to get from their first close to their final close. (This excludes the fundraising period that preceded the initial closing.) For a new investor entering a fund at its final close under those conditions, a $100 million commitment would be met with a retroactive management fee of $2.25 million (assuming that a typical 1.5% management fee is charged on committed capital, and assuming that the manager does not make an accommodation).
- Rising interest rates have increased the cost of “subscription line” debt. Some managers use revolving subscription lines as equity placeholders, limiting the amount of equity that is actually called from earlier investors and, in turn, limiting the amount of “catch-up interest” that new investors have to pay to prior investors. With rising interest rates, subscription lines now have a real cost, which is borne by all investors regardless of when they close.
- Flat or declining asset values, partially driven by higher interest rates, have eroded the embedded value (from both income and appreciation) that can sometimes be found in developing portfolios.
Result
Today, investors committing to a fund late in its fundraise may be starting in a significant hole. We have seen examples where a deficit is as high as 3% of an investor’s total commitment almost entirely because of fees and interest.
Diluted across a full fund lifecycle, the impact is certainly not fatal – particularly for a good fund with the right strategy and a strong manager. But it is, in our opinion, an important factor that should be considered in today’s environment when evaluating various investment options.
As markets shift, this dynamic will invert at some point, and greater focus will be placed on seeking opportunities to buy into funds that have built embedded value. And even today, determined investors can find embedded value in some cases.
1Includes both gains and losses that have been recognized on a fund’s books and an estimate of unrecognized gains and losses.
2Includes the initial capital call and “catch-up interest” which is typically paid outside of the commitment.
Source: Townsend. Townsend’s views are as of the date of this publication and may be changed or modified at any time without notice. This document has been prepared solely for informational purposes and is not to be construed as investment advice or an offer or solicitation for the purchase or sale of any financial instrument. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of preparation, neither Townsend nor any of its affiliates have made any representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of any of the information contained herein (including but not limited to information obtained from third parties unrelated to them), and they expressly disclaim any responsibility or liability therefore. Neither Townsend nor any of its affiliates have any responsibility to update any of the information provided in this summary document. The investments mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors. There is no guarantee that Townsend will have access to similar types of investments or opportunities in the future. There can be no assurance that the investment will achieve comparable results, that underwritten returns, diversification, or asset allocations will be met or that the investment will be able to implement its investment strategy and investment approach or achieve its investment objective. Investing involves risk, including possible loss of principal. Past performance is not indicative of future results. Actual results and developments may differ materially from those expressed or implied herein.