By syndicating investments, angels can leverage their LP network, source deals more effectively, and take administrative responsibilities to earn the carry benefits. SPV Hub is a deal syndication fintech platform helping fund organizers with administrative work so that they focus on deal-making and managing investors onboard.
Being an angel investor is an exciting and rewarding endeavor. As an angel, you can invest in promising startups and potentially reap significant monetary rewards. While individual angel investments can be fruitful, there is a compelling reason for investors to consider building syndicates.
In this blog, we will explore why angel investors should build syndicates. We will also understand the difference in returns that an angel investor can earn as an LP v/s a GP.
Difference between being a limited partner (LP) and a general partner (GP) in startup investment
As an LP, your role is primarily to provide capital. You invest your funds into the syndicate to become a limited partner, hence the term LP. Your contribution helps fuel the investments made by the syndicate. LPs typically have a more passive role, relying on the expertise of the GPs to source deals, conduct due diligence, and manage the overall investment process.
On the other hand, GPs take on a more active role in the deal syndication process. They are responsible for various tasks, including deal sourcing, administration, and inviting investors to participate. GPs are like the orchestrators of the syndicate, overseeing the entire investment process for the complete lifecycle of an SPV.
One of the critical responsibilities of GPs is to identify promising investment opportunities and choose the right deal syndication platform to manage SPV. Deal syndication management includes:
- Addressing the legal and regulatory aspects, such as preparing the necessary documentation.
- Ensuring compliance with relevant laws.
- Handling investor onboarding processes.
GPs take care of tasks like managing wire transfers, investor communications, and providing updates on the progress of the investments.
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Why must angel investors consider setting up an SPV?
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Leveraging LP Network:
Building syndicates include the ability to leverage your LP network. As an angel investor, you have likely built a strong network of limited partners (LPs) interested in investing in startups. By forming a syndicate, you can tap into this network and bring together a group of like-minded investors who share your investment thesis and appetite for risk.
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Deal Sourcing and Due Diligence Ability:
Being a GP means having a keen eye for spotting opportunities and conducting thorough due diligence. You need to be able to assess the market and evaluate the Startup’s business model, team, and growth potential. Managing an SPV as a GP allows you to leverage your skills and experience in deal sourcing and due diligence. You can choose the investments that align with your investment strategy and risk appetite. This level of control and involvement in the investment process can be highly rewarding.
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Monetary Rewards – Management Fee and Carried Interest:
Now, let’s talk about the monetary rewards of building a syndicate. As a fund manager or general partner, you can earn a management fee and carried interest. The management fee is a percentage of the total capital committed by the LPs and covers the operational and administrative costs of running the syndicate. Carried interest, on the other hand, is the share of profits earned from successful investments. It is typically a percentage of the profits generated by the syndicate, and it incentivizes the fund manager to make profitable investment decisions.
What is a Carry or Carried Interest?
Carried interest is a fundamental concept in syndicate investing. It represents the share of profits the fund manager receives as a reward for successful investments. The carried interest is usually subject to a hurdle rate, a minimum rate of return that the Startup must achieve before the fund manager starts receiving their share of profits. This ensures that the fund manager is incentivized to generate strong returns for the syndicate’s investors.
Returns as an LP v/s Returns as a GP
Let’s dive into the difference in returns that angel investors can earn as limited partners (LPs) versus general partners (GPs). It’s an interesting comparison that showcases the potential advantages of being a GP in a syndicate.
In Case 1, let’s consider the scenario where you invest as an LP. You decide to invest $15,000 in a promising deal. Over time, the investment performs exceptionally well, resulting in a 500% return or five times your initial investment. Your $15,000 investment turns into $75,000 in profits. Not bad at all!
Now, let’s move on to Case 2, where you take on the role of a GP. You decide to invest $5,000 as a GP with a 10% carry. The carry is the share of profits earned by the GP. In this case, let’s assume the syndicate investment also yields a 500% return. With a $5,000 investment as a GP, you would receive a carry of 10% on the syndicate’s profits.
So, what does this mean for your returns? The syndicate’s total return is $750,000 (5 times the total investment of $150,000, including your $5,000). As a GP, you are entitled to your investment return, which is 10% of the total return, amounting to $25,000. Additionally, you receive your share as a GP, which is $75,000 (10% of the total return).
In total, as a GP with just $5,000 at risk, you made a return of $100,000. That’s a remarkable 20 times return on your initial investment!
This comparison clearly shows the potential upside of being a GP in a syndicate. By taking on the role of a GP and earning a carry on the syndicate’s profits, you can significantly amplify your returns compared to being an LP alone.
It’s important to note that these figures are for illustrative purposes only, and actual returns may vary based on individual investment performance and the specific terms of the syndicate. However, this example highlights the potential for higher returns when acting as a GP and reaping the benefits of the carry.
Concluding thoughts-
Building syndicates as an angel investor can provide numerous advantages, including leveraging your LP network, efficient deal sourcing, shared administrative responsibilities, and the potential for monetary rewards through management fees and carried interest. By pooling resources and expertise, angel investors can increase their chances of finding successful investment opportunities and maximizing their returns. Building syndicates is worth considering if you’re an angel investor looking to enhance your investment strategy and reap the monetary rewards.
About SPV Hub
Don’t let administrative tasks slow you down – harness the technology of SPV Hub to create your SPV, speed up the process by replacing manual signatures with e-Signatures, keep track of the investment journey of every investor onboard, and focus on what matters most – building your investment portfolio.
