Buying out your seeder: how a GP finances the deal without selling more of itself

Most first-time managers do not raise their first fund alone. Somebody writes the cheque that makes the rest possible, and in exchange takes a slice of the firm. Sometimes it is a revenue share on management fees, sometimes a share of carry across every fund the firm will ever raise, sometimes both, usually with a seat at the table and a few governance rights. It is a fair trade at the time. Three or four years later, with Fund II in the market and a track record to point at, it starts to look expensive.

That is the moment the seeder buyout comes up. The seed investor may be winding down its own programme and want to crystallise, or the partners may simply want their economics back before the next fund triples the firm’s revenue. Either way, the GP needs capital it does not yet have, because the cash that would pay for the buyout is the same cash the buyout is meant to recover. This piece sets out how that gap gets financed and what a lender actually underwrites.

Why the GP cannot just write the cheque

A manager between Fund I and Fund II is usually at its tightest point. Fund I fees have been discounted for anchors, partly given away to the seeder, and spent on building a team. Carry in Fund I is accruing but not yet paid, and if the fund has a European waterfall nothing comes out until the whole fund is through its hurdle. Fund II fees will fix all of this, but they arrive in tranches as the fund closes, and the final close may be a year or more away.

So the GP is asset rich and cash poor. It owns a growing stream of contracted fee income, a meaningful carry entitlement in a fund that is starting to exit, and a GP commitment that is already funded. None of that is liquid. The seeder wants cash.

What the lender is actually lending against

A seeder buyout facility sits at the management company or a holding company above it, not at the fund. The lender takes security over the firm’s economics, which in practice means three things. The management fee stream across all funds, which is the primary source of repayment and the easiest to underwrite because it is contractual. Carried interest in prior funds, which counts at full value once a fund is through its hurdle and at a heavy discount before that, since it depends on exits that have not happened. And the GP’s own commitments to its funds, which are funded, marked quarterly and behave like a small NAV loan inside the larger facility.

The seeder’s LP interest in Fund I is usually left exactly where it is. The buyout is about the economics in the firm, not the investment in the fund, and trying to finance both at once makes the deal larger and messier than it needs to be. Our GP and fund financing page sets out the collateral types in more detail.

The one thing the lender cares about above everything else is the Fund II raise. If Fund II closes at or near target, the fee stream alone repays the loan several times over. If it stalls, the lender is holding carry in a single fund and a thin manco. So expect the diligence to focus on the LP roster, the re-up rate from Fund I, what is soft circled and what is in documentation, and the fundraising timetable. A manager that can show institutional LPs re-upping is a very different credit from one that is still looking for an anchor.

A worked example

The numbers below are illustrative and combine features of several situations we have looked at. They are not a specific client.

A US growth equity manager raised a $300m Fund I in 2021 with a seed investor that provided $50m of the capital. In exchange the seeder received a 12% share of the firm’s management fees and carried interest across all funds, sunsetting once the firm’s AUM passes $1.5bn, plus consent rights over certain changes to the management company. The seeder also holds a $50m LP interest in Fund I.

Four years on, Fund I is at 1.6x and has started to exit, with carry expected to be paid over the next 18 to 30 months. Fund II is targeting $500m, has closed $140m from mostly existing LPs, and expects to reach half the target by the second quarter and final close within eighteen months. Fund I fees after discounts and the seeder’s share barely cover the firm’s costs. Fund II fees at 1.5% on $500m will add $7.5m a year once fully raised.

The seeder is winding down and both sides want to agree a price for the revenue share only, leaving the LP interest in Fund I in place. Indicative conversations put the number at $15m to $20m, with no contractual buyout formula to fall back on.

What the facility looks like. A $20m term loan to the management company, with security over the fee income from both funds, the firm’s carry in Fund I and Fund II, and the GP commitments. Interest rolled up for the first 18 months while Fund II is raising, then paid in cash from Fund II fees, with a partial cash sweep from Fund I carry as it is received. Three year tenor with the expectation that it is refinanced or repaid early once Fund II fees are fully flowing. Pricing in the 600 to 650 basis points over range with one to two points of arrangement fee. Covenants are built around the Fund II raise, with a step up in pricing if a defined close is missed and a minimum fee income test once the facility moves to cash pay. Our note on how pricing grids work explains the mechanics.

Why it works for the GP. The partners recover 12% of the firm’s economics for a fixed price before the firm’s revenue triples, which on Fund II alone is worth more than the buyout cost within a few years. Nothing is sold, no new equity partner comes in, and the LP interest the seeder holds in Fund I continues as a normal LP position.

Why it works for the lender. Repayment comes from contracted fees on a fund that is already half raised by institutional investors who know the manager, with Fund I carry as a second source and GP commitments as a third. The risk is concentrated in one question, whether Fund II closes, and that is a question the lender can diligence.

When it does not work

Three situations make this hard. If the seeder’s share is very large, say 25% or more of all economics, the buyout price can exceed what the manco can carry and the deal tips into preferred equity rather than debt. If Fund II has no institutional commitments yet and the raise is a hope rather than a process, there is nothing to lend against except Fund I carry, which is not enough on its own. And if the seeder’s agreement gives it consent rights over the manco taking on debt, the seeder has to be brought into the financing conversation, which changes the negotiation.

There is also a simpler alternative that is often overlooked. If the only piece the GP wants to clear is the seeder’s LP interest rather than the revenue share, the fund itself or the other LPs can buy it at or near cost, financed at the fund level, which is cheaper and does not touch the management company at all.

What to have ready

A lender can give a view within days if the manager can share a historical and projected management company income statement, a schedule of GP commitments and NAV in each fund, the latest investor reports, the Fund II deck and an anonymised LP roster showing re-ups, and the seeder agreement or a summary of its terms. With that, indicative terms follow in about a week and closing in six to eight weeks.

If you are a manager with a seeder to buy out, or a seed investor looking for an exit that does not disrupt the GP, send us a short description and we will tell you quickly whether it works and roughly what it would cost. Terms used in this piece are explained in our NAV lending glossary.

Nodem Capital is an FCA-authorised NAV lender providing facilities of $10m to $100m+ to family offices, GPs, LPs and holding companies. Contact Alex Branton at abranton@nodem.com.