Deal Warehousing is not just for goods… It’s for deals, too. Warehousing is the practice of a General Partner (GP) using their own capital or borrowings to purchase a startup allocation before they’ve actually raised the money from their Limited Partners (LPs).
SyndiCat showing off his warehousing skills here…
How Deal Warehousing Works
The mechanics are straightforward. A GP identifies an allocation for which the commitments are coming in hot. Founders and existing investors don’t want to sit around while a GP spends six weeks drumming up LP commitments — they’ll give the allocation to whoever moves quickest.
So the GP uses their own capital — personal funds, or own balance sheet, or even a small credit facility — to purchase the allocation and hold it. This reserves their spot on the cap table. Once the deal is sealed, they then go ahead to raise the SPV, approach LPs, collect commitments, and eventually transfer the position into the SPV vehicle at a set price.
Why GPs Warehouse
The cynical read on warehousing is that it’s a mechanism for GPs (like SyndiCat above) to flip deals to LPs at a profit. There is no denying this happens, but the more common motivation is simpler — it’s the only way (by being faster than others) to access some awesome deals.
There’s also a sales dynamic here — it’s much easier to raise an SPV for a deal that already exists, than for a deal that may or may not happen. We’ve seen GPs returning money to LPs because the round closed, and it isn’t pleasant for anyone involved. For the deals already warehoused, LPs (especially those new to alternative investments) can review an executed term sheet, a signed purchase agreement, a real position.
And when a GP puts their own capital at risk first, it is a form of conviction signaling. This is pretty much like IPO underwriting where GPs aren’t just sourcing deals for a fee, they’re writing checks too.
Deal Warehousing Complications
Here’s where the deal warehousing gets complicated:
a. Transfer pricing. Should the transfer from GP’s balance sheet to the LPs be done at-cost, at a mark-up, or a mark-down? Well, this depends on two factors – first, have there been significant positive or negative developments in the company since the GP bought in. And second, GP could seek remuneration for the risk and the cost of own funds in buying out the deal.
b. Selection bias. This could happen when a GP warehouses multiple deals and has to choose which one(s) to bring to LPs first and which ones to bring later (or not at all). There’s an inherent temptation to push the winners to LPs (collect carry).
c. The carry math. In cases of mark-ups, GPs might be preponing the carry (which will be in 15%-20% range, and materialize later too). Works the other way in cases of mark-downs. Either ways, it complicates the overall return math for the GP and IRR computations for the LPs.
d. Regulation in transfer. For registered investment advisers, transferring a position from a GP’s personal account into a fund they manage, can constitute a principal transaction under the Investment Advisers Act — a category that triggers specific disclosure and consent requirements. In some other cases, if the GP has already formed a SPV to park their allocation, Section 4(a)(7) exemption guidelines are required to be followed. You can read my blog on Section 4(a)(7) exemption.
The Bottom Line
Warehousing is just the operational reality of a truly committed GP in superfast private markets. But the practice becomes a problem when warehousing isn’t disclosed, likely because the transfer economics favors the GP at the LP’s expense.
So before investing, it makes sense to ask your GP if the deal is warehoused. If yes, you might want more details on the original deal and question transfer pricing (if different). A GP who is transparent and offers complete disclosure is a GP who’s thinking seriously about LP alignment.
If you’re looking for more information, you are welcome to browse Propel(x) SPVs page. If you want to discuss starting your own SPV…
Cheers!
