The Wealth Elevator Syndication eCourse

Vetting the General Partner (GP)

The General Partner or GP is the party that puts together and operates the deal. There are a lot of terms out there that pretty much mean the same thing such as sponsor, co-sponsor, lead, syndicator, operator, general partnership, fund manager, or deal sponsor so as we progress we will use these terms interchangeably.

Make note of the 3 P’s: people, process, & performance which we will use as a framework for vetting the general partnership

Documents to be aware of (however it may not be appropriate if you want to follow good LP etiquette, especially as an individual investor under 5-10M net worth):

Audits Since the Inception of the Company

The independent auditor’s report is critically important, as it will reconcile assets, portfolio balances, and performances, and often provide insights on portfolio construction, liquidity of underlying assets, and back-office protocols.​ (Appropriate for a larger institutional or private equity fund)

Independent Prime Brokerage Report as of Last Completed Audit

This allows us to see more detail on the portfolio from the time of the last audit and allows us to reconcile the audit with the actual portfolio. If anything doesn’t line up with the audit, it only means that either we or the auditor are missing out on some information.​ (Again, this is appropriate for larger institutional funds or a private equity firm)

Reference List

They will all obviously be glowing references, but the choice of references can be very important. Make note of how the reference is connected to the GP entity.

Note: It may not be appropriate for a limited partner to ask for references. Think about it, the sponsor does not know you and may not want to give up past LP investor information for their privacy. If you are an accredited investor with a net worth is over 5-10M then it might be fair game to ask.

Service Provider Contact Information

Make note of the service provider (e.g., property management, third-party accounting firm, syndication lawyer), and perform due diligence on the service providers to get an understanding of the terms and length of the relationship. If you could see the same names come up again and again in different deals, then this is a good sign.

Internal Risk Reports

This gives us a sense of how the sponsor measures risk, what risks they control for, and how they fall within those parameters.​ (Appropriate for larger institutional funds)

Regulatory Registration Documents Such as Form ADV for Advisers

This is more confirmatory information, but can also show critical pieces of information such as assets under management as of a particular date, key principals, number and type of clients, and compliance with the law.​ (Appropriate for larger institutional funds)

Investor Letters

This gives us a sense of the quality of communication, investment ideas, research, and insight into the manager’s personality and approach.​ Investor reports need to keep investors abreast of the happenings of the project but there is a fine line in giving too much information.

Do you tell your boss every little issue you are working through throughout your day?

Spend Some Time on The Sponsor’s Website

A deal-maker’s site should be clean and well-designed, contain quality information, and be easy to navigate. You should, for example, be able to quickly locate the photos and bios of team members. The bios should be complete and updated detailing their experience with the projects.

In short: the site should evoke professionalism and reflect the quality of the deal sponsor and his or her team. You should get a sense of their level of commitment to excellence and to the success of their investors. Remember, we are looking for exceptions that stick out.

Now, yes, I realize that websites can be deceptive and manipulative and can whitewash some very bad companies to the point where they look awesome. (think Theranos and Bernie Madoff, etc.). However, when you insert the art of reviewing websites into the rest of the protocol, you’ll see that doing so will give you some useful information.

Review Their Marketing Material

Similar to your review of the sponsor’s website, make sure you use the same process to review their marketing material before you make your investment decision, whether it be webinars, podcasts, or even their answers on websites like Quora.

Are they constantly pitching and excluding real information? And when they are asked a question, are they answering it in an insightful manner, or are they evading it like a politician? 

Post 2019: It seems like everyone has a podcast and can create a fake celebrity status!

Here are two examples of podcasters who built up a fan base, but used their power incorrectly.

1) Clayton Morris – Class D Turnkey Rentals

2) The Income Store Ponzi Scheme

Quick List of Red Flags:

• The sponsor does not have any background in business. They might be successful academics or W2 workers but that does not translate to entrepreneurs. That said, a college education is not everything but it does show that an individual did stick around at least four years to accomplish a goal. I like to work with professionals and have at least a college education when picking partners – a fire-breathing entrepreneur only gets you so far.
• Do they have a flawless or litigation-free past? Beware of clean pasts! We want to see how they handled problems and made it through. It’s not possible to have a flawless record.
• They are not professionals in the definition of the word where they are full-time. And this is on the side of an IT job or engineering gig. I’m all for people going after their dreams but not with my money.
• Is this a team of good digital marketers appearing to be institutional operators?
• What is their net worth? I never liked anyone who was not over $1M net worth. This is why I never liked doing BRRRs (check out the full discussion here) because primarily the folks you would work with are lower net worth team members who would be tempted to steal money because it’s worth a lot to them.