Anchor investor
A large early LP whose commitment gives other investors the confidence to follow.
Anchors usually commit before the first close and are often rewarded with lower fees, co-investment rights or a share of the management company's economics. Their name and diligence work act as a signal to the rest of the market.
Anchors usually take 10 to 30 percent of a fund's target size. In exchange they may receive a management fee discount, a carry discount, LPAC representation, co-investment priority or, in GP stake deals, a share of the management company's revenue or carried interest.
Anchor economics stay with the fund for its whole life, and MFN clauses can let other LPs claim some of the same terms. It pays to keep anchor terms clearly tied to size and timing, such as committing a set amount before the first close, so they are not handed to every later investor.
Worked example
A GP targeting $100M agrees with a fund of funds to anchor at $25M before the first close. The anchor pays a 1.5 percent management fee instead of 2 percent, receives an LPAC seat and gets 10 percent of the management company's net revenue for the life of Fund I. With the anchor signed, the first close reaches $45M.
Common questions about anchor investor
How big is an anchor commitment?
Usually 10 to 30 percent of the target fund size, large enough to give the first close credibility. The exact share depends on the fund's size and how much other LPs want to see committed before they join.
What should a GP give an anchor investor?
Only what the GP can live with for the full fund life. Common terms are lower fees, LPAC seats and co-investment rights. A share of GP economics is more expensive and should be reserved for anchors that make the fund possible.