An Honest Assessment of Feeder Funds

I thought I invested into an apartment building.

Instead, I accidentally invested in a "middleman" fund that then invested in the building. I had no idea what a "feeder fund" was, and that mistake cost me real money and left me unprotected.

Feeder funds get a bad reputation because of experiences like mine. The middleman can create drag, opacity, and misaligned incentives. When done correctly, they’re useful for access and diligence. The problem is, almost nobody uses them correctly in retail real estate investing.

Below is a deeper explanation and my own personal checklist for determining if a feeder fund is a good investment or not.

What’s a Feeder Fund?

A “feeder fund” is a vehicle you invest into that then invests into the underlying investment. It’s a middleman. The ‘fund’ you’re investing into is an investor (or Limited Partner) of the main investment.

• Direct Investing: You give your money straight to the person operating.
• Feeder Fund: You give your money to an investment vehicle, which gives your money to the operator.

You're one step removed from the money. This extra layer can be useful, or a disaster, depending on the details.

When This Works

Access

A few years ago I met an operator who had a unique position in the marketplace, a strong team, and the connections to raise a significant amount of money. They set their minimum at $1M, because, well, they could.

Think of some investments like a private club. Demand is high, and the club only sells high-priced tables. As an individual, you can't get in unless you can afford a table, or unless you can get a seat at someone else’s table.

A good feeder fund buys a table and sells you a seat. If they’re really good, they’ll buy multiple tables and get a better price for buying bulk. They may pass part of the discount on to you, while taking a cut. It's your VIP pass to a good deal you could never access on your own.

Better Deals, Terms, and Info

Want to be popular in the investment world? Show up with $1MM or more.

A fund manager who can consistently bundle small checks into millions of dollars is a popular person. Almost every operator will entertain someone who can bring them $1M in one single investment.

This gives the manager negotiating power. They can:

1. Access the Best Deals: They get their pick of the litter and can do the "homework" (diligence) for you.
2. Get Better Terms: They can demand a bigger slice of the profits ("better splits").
3. Get Better Information: They can request view access on the bank account, a seat at asset management calls, or other things that normal investors don’t get.

Why Many Feeder Funds Are a Bad Deal

When the middleman structure is set up poorly, it creates four big problems:

1. Extra Fees (The "Double Dip") The middleman has to get paid, too. This often means you pay two layers of fees: one to the person running the deal, and a second one to the feeder fund. This "fee drag" is like a small anchor, constantly pulling down your returns before you ever see a profit.
2. Secrecy (The "Telephone Game") You're getting information second-hand. By the time it gets to you, it might be slow, incomplete, or modified.
3. No Power (You're Not "On the List") Your legal contract is with the middleman, not the person running the actual deal. If the middleman does poorly and you contact the main operator, they can (and often will) tell you, "Sorry, you're not my investor."
4. Excessive Risk
   This structure can mess up the manager's goals. The fund manager has to make enough profit to cover two sets of fees—the deal's, and their own. They need home runs.
   This pushes them to swing for the fences, chasing riskier deals.

A Real Example

We'll follow $50,000 into the exact same deal. The deal generates a 20% profit ($10,000). The only difference is how the money gets there.

Path 1: You Invest Directly

• You invest $50,000.
• The project generates $10,000 in profit for you.
• After the deal manager takes their share of the profits...
• You Receive: $8,800

Path 2: You Use a Feeder Fund (A Hypothetical Structure)

• You invest $50,000.
• The feeder fund first takes a 2% fee ($1,000) off the top.
• Now, only $49,000 actually goes into the project.
• This smaller amount generates $9,800 in profit.
• Then, TWO layers of profit splits happen:
• 1. The deal manager takes their share.
  2. The feeder fund manager takes another share from what's left.
• You Receive: $8,010

In this specific example, the extra layer cost the investor $790. This doesn't always happen, but it shows why you must understand the fee structure.

Qualities of a Good Feeder Fund

It's easy to conclude that feeder funds are bad. But they're not. They’re a tool, like a hammer.

A hammer can be a weapon, or it can build a house.

The tool itself isn't good or bad. It all depends on how it's used.

Here’s how a feeder fund can be structured to be a good tool for the investor:

1. It's Your Only Way In (The "VIP Pass")

This is the whole point. The feeder fund should get you into a deal that you want in on, but can’t join on your own.

This is very common for exclusive venture capital deals and firms that don’t cater to retail investors.

2. The Manager Gets Paid from Profits, Not Your Initial Check

The manager's payday should come from the success of the deal, not from your pocket. A huge red flag is a large, upfront fee.

3. You Get Paid First

The manager should only get their big payday after you've gotten yours. This makes sure their goal is to make you money, not just collect a fee.

4. The Fund is Big Enough to Be "Efficient"

Running a fund has fixed costs (lawyers, tax filings, etc.). Here's what you need to consider:

• If the fund is too small (like $500K), those bills eat a huge chunk of everyone's money.
• A bigger fund (like $2M+) makes those costs a tiny, "negligible" drop in the bucket for each investor.

It’s worth asking about operating costs. There’s a wide range that funds pay for these expenses, ranging from the low 5-figures to well above 6-figures.

5. They Can Explain The Middleman Impact

The manager should be able to show you the math. Whether it’s a better deal or not, you have the right to understand what you’re paying for.

A GP’s Perspective

Launching feeder funds helped me to build relationships, access higher‑minimum opportunities, and partner with more experienced operators while building my firm.

But the biggest risk is counterparty drift: people, standards, and incentives can change over a 3–7 year hold. You’re asking LPs to trust not only you, but the upstream operator’s future self. Something that you don’t control.

That's why I don't plan to do more feeder funds. My firm has worked to become the direct manager. The best case for an investor is to invest directly. It means fewer fee layers, crystal-clear communication, and goals that are perfectly aligned.

An LP’s Question Checklist Before Using a Feeder Fund

• Access: Can I invest directly? If not, why not?
• Net‑net math: After all fees, expenses, and any spread, how does my outcome compare to going direct?
• Alignment: How and when does the feeder manager get paid? Do LPs get paid first?
• Operator access: Can I speak with the operator directly or join a joint call?
• References: Talk to current LPs in the feeder and prior LPs with the operator.
• Scale: Is the vehicle large enough to make fixed costs negligible?
• Duration and cash flow: Do deal cash flows naturally cover admin/tax without dragging returns?

Closing

Middlemen are everywhere in our economy. Your insurance agent, your grocery store, and Amazon are all middlemen.

They aren't "good" or "bad." They are just a tool.

• Used well, a middleman is a "VIP Pass" that gets you access and does the expert homework for you.
• Used poorly, they just eat your profits and leave you with no one to call when things go wrong.

When in doubt, your safest bet is to prefer a direct investment. But if a feeder fund is the only door into a great deal, and you've checked the math, it can be a smart way to get in.