How a fund manager gets paid

Do you ever wonder how, exactly, Adaptive makes money? Figured I’d break it down for you.

Today, let’s talk about our investment funds. These are discretionary investment vehicles. That means a group of people with capital to deploy commit a certain amount of money (say, $100-250k) to the entity. Then, we, as managers of the entity, take the money committed by all of the investors (typically in the $2-5MM range) and use it to buy, renovate, lease-up and (eventually) sell apartment buildings.

So, how exactly do we, Adaptive, make money from these investment funds? Here’s how:

  • Asset management – Like most money managers, we generally take 1% of the capital committed to the fund as an annual fee. The purpose of this fee is to help offset the cost of running our operation (bookkeeping / accounting / investor relations / acquisitions staff / etc.);
  • Brokerage – If we find the deal, generally Adaptive Realty, Inc. acts as the broker on behalf of the buying entity and therefore collects a 2-3% buy-side commission. Of course, if it’s an off-market deal that comes to us via another broker, that broker takes the commission;
  • Acquisition fee – Whether we broker the deal or not, we typically take a 1.5% acquisition fee to compensate us for the work that goes into finding the deal, negotiating the terms, and undertaking the due diligence necessary to ensure it’s a good fit for the fund;
  • Construction oversight – There is an unbelievable amount of design, purchasing, and construction project management that goes into one of our projects. We therefore charge the fund a construction oversight fee, of 10-15% of the construction budget to off-set the cost to our organization of providing these services; and
  • Property management – For better or worse, we do almost all of our own property management, for which we are paid 5-6% of the annual rents on completed buildings. I almost forgot to add this fee in, because property management is a terrible, loss-making business and neither Jon nor I see a dime of this money.
  • Exit brokerage – When it comes time to sell a deal, we typically act as listing broker under standard industry terms (5-6%), earning ourselves a brokerage commission which we split with the broker representing the buyer.
  • Promote – This is our share of the profits. This comes only after investors have received all their money back and also (usually) a pre-negotiated “preferred” return on their money. The split varies depending on the deal and how high the pref is.

Does the above sound complicated? It is. But we’re providing an incredibly valuable service to investors, one which requires an awful lot of effort and experience, and we obviously need to get paid for it.

Tomorrow, we’ll talk about the brokerage and property management business.

Note: This blog post is not a solicitation for investment or an offer to sell any securities.