Happy Thursday!
Most LPs spend 95 percent of their diligence on the IRR (reminder to not do that), the rent comps, or the pro forma. The place I usually start is the S&U (Sources & Uses) table, which some decks don’t even have.
In short, a S&U table is exactly what it sounds like - it explains what the sources of your capital are for this transaction and the uses of those funds, line item by line item.
Today, I wanted to take some time to explain why I value it so much and what things to look out for as an LP (and why it’s definitely among the things you should have prior to investing in a deal).
Here are the top 5 things I look for:
1. Acquisition Fees
Always check the Uses for acquisition fees.
A normal fee might be 1 to 2 percent. Anything above that deserves a conversation - more on that and other common missteps here
On a 20M deal, every 1 percent fee is 200k. That is real money that you and the asset must earn back - more on fees eroding returns with an example here
2. Working Capital
Working capital is normal. In fact, you want them to have a cushion because running out of cash is bad for everyone involved