First-loss capital is a seeding arrangement in which the manager, or a first-loss provider, puts up capital that absorbs the fund's initial losses, in exchange for a larger share of profits. It lets a manager access a bigger allocation than their track record alone would attract.
A typical structure is the manager committing 10% of a managed account and the provider 90%, with the manager's capital bearing the first 10% of losses and the manager earning a higher performance share on gains. It is common for early-stage and crypto-native managers.
First-loss deals are usually run as managed accounts rather than funds, so they do not build an administered track record, which is one reason managers move on from them.
A manager running first-loss capital today can launch a POD fund alongside it, so that new capital comes into a vehicle with an administered track record.
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