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Hello, everyone! Today I want to clear something up: debt vs equity investors… What’s the difference?
If you’re asking yourself, “Should I choose debt or equity investors for my fund?” Then I’ve got an answer for you!
When an investor puts money into your limited partnership (fund), it is generally agreed that they pay a 2% management fee.
The rest of the money is usually split 80/20.
If the fund doesn’t get good returns, the investors don’t get a big payout and you, the fund manager, get nothing!
So, an equity investor is someone that takes the risk with you.
Let’s say an investor puts $1 million into the fund, on the condition that you pay them back 8% per year no matter what.
This is a debt investor.
This is a good option when your fund has a 35% return, but it could hurt you if your return was only 4%.
So, will you use debt or equity investors, or both?
Like I said in my video…
“A debt investor will be cheaper money if you perform well.”
Why? If you get a 35% return, then you pay 8% (for example) to your debt investors, and you get to keep the other 27%!
Typically, I see fund managers get 80% of their capital from equity investors, and the rest from debt investors.
“The best thing about running a fund is that you get to make the rules.”
Crunch the numbers and pick whichever makes most sense to you.
However, understand that using debt investors is high risk/high reward!
That’s it for today!
Thanks,
Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
