AUD (Assets Under Management) - What does that mean?

If you're looking to invest in someone else's deal (also known as a syndicated deal), you might be looking at proformas and see the abbreviation AUD. What does AUD stand for? Assets Under Management. With respect to housing, this refers to the number of properties that a person is managing. For example, if I were a property manager for 10 houses that were each valued at $1 million each, then I'd have $10 million worth of Assets Under Management. The same idea works for stocks and other investments. For example, Warren Buffett, through his company Berkshire Hathaway, has several billions of dollars of Assets Under Management (the value of the stocks that his company controls).

For a budding real estate investor, assets under management is an important concept as an asset manager can negotiate a percentage of the asset to manage the asset. Typically, in the financial world, the percentage is about 2% of the total Assets Under Management.

So, if I were getting paid 2% by investors to manage the $10 million in properties in the above example, that would mean that annually I would earn $200,000 ($10 million X .02) as a fee.

Usually AUD fees are "conditional" on making a certain return. For example, I might have to promise my investors that they'd make an 8% return on their $10 million investment first, before I receive my 2% management fee. So, after subtracting all expenses, mortgage payments, etc. the properties in the above example should earn $800,000 a year ($10 million x .08) in profit before I receive my $200,000 a year management fee.

This conditional return is referred to as a "preferred return" or sometimes called the "hurdle."

So, if you hear someone say, "There's a 20% hurdle, with a 2% fee and 50% equity split," that means in plain English, "I'll promise a 20% return, take a 2% fee if that's met, and then we'll split whatever profits after that, 50/50." If the profit were 10%, 8% goes to the investors and 2% is split 50/50 between you and the investors.

If you have any questions, let me know!

Warren Buffet, by the way, in his first financial investment offered investors: A 4% hurdle, no asset management fee, 50/50 equity split (after 4% was meant), and he promised to cover 25% of any loss, meaning that if his fund made less than 4%, he'd personally use his own money and pay 25% of that "loss." The Oracle of Omaha!