Navigating Syndication Deals: Unveiling the People Behind the Numbers
Investing in syndication deals involves navigating a landscape filled with intricate terminologies and various roles. One key aspect that often leads to confusion is understanding the roles within the general partnership group. In this blog, we’ll dive into the terminology used for the key player in these deals – the general partner – and explore the importance of due diligence when choosing who to invest with.
The General Partner: Sponsors, Operators, and More: The general partner in a syndication deal goes by various names such as sponsors, co-sponsors, lead syndicators, or operators. These terms might be used interchangeably, but the devil is in the details. It’s crucial to differentiate between them as they can carry different responsibilities and roles within the partnership.
One interesting observation is the size of general partnership groups, which can range from a few individuals to large groups with multiple members. Sometimes, these larger groups are formed to meet net worth qualifications for securing loans and raising capital. However, dealing with such large groups can pose challenges in terms of accountability and decision-making.
Understanding the Sponsor’s Role: In the syndication world, anyone in the general partnership can be a sponsor, and it’s not necessary to be the primary decision-maker. Some individuals focus on raising capital, especially when they are relatively new to the business and lack the required net worth for loan qualification.
However, caution is advised when dealing with large general partnership groups, as they may lack accountability and hinder efficient decision-making. It’s essential to ask the right questions to understand each member’s role, whether they are the operator, capital raiser, or debt signatory.
Legal Aspects and Trust: Syndication deals often fall under SEC regulations, and it’s crucial to ensure compliance. Investments are typically made through 506C and 506B, following specific guidelines for raising money from passive individual investors. Trust becomes a cornerstone in these investments, as legalities might not always guarantee the integrity of the deal.
Investing with people you trust becomes paramount, considering the potential complexities and legal nuances involved. Building a trustworthy network is vital for minimizing risks and ensuring that the individuals managing your investment have your best interests at heart.
Investment Rubric and Due Diligence: Establishing an investment rubric is crucial for investors, and honesty remains a key factor in evaluating potential partners. Due diligence extends beyond visible aspects, encompassing the fiduciary responsibilities of general partners in managing assets, balancing aggressiveness with safety, and ensuring long-term investment longevity.
Choosing Partners Wisely: I want to introduce the concept of vetting the “horse jockey” rather than the “horse,” emphasizing the significance of evaluating the person operating the deal. For new investors or those lacking underwriting expertise, focusing on the track record, street reputation, and investor feedback can guide decision-making.
Spectrum of Operators: Understanding the spectrum of operators is essential, ranging from institutional operators with extensive assets to emerging operators building their track records.
Comparing Fees and Splits: We try to addresses the common concern of comparing fees and splits in syndication deals. It emphasizes that while these aspects matter, they should not overshadow the overall performance and reliability of the investment. A detailed breakdown of acquisition fees, asset management fees, distribution fees, and splits sheds light on the intricacies of fee structures.
Conclusion: Navigating the world of syndication deals involves understanding terminology, evaluating partners, and conducting thorough due diligence. Trust, transparency, and aligning with reliable individuals emerge as crucial factors for successful investments. As investors, focusing on the big picture, rather than fixating on fees, can lead to more informed and fruitful decisions in the syndication landscape.
Key Takeaways:
Track Record Matters: Stressing the importance of working with operators who have a proven track record and successful experience in the field.
Referrals and Personal Relationships: Emphasizing the gold standard of referrals and vetting through personal relationships with individuals who have invested with the operator in the past.
Caution with Online Information: Advising against relying solely on online information, as it can be manipulated, and encouraging investors to build genuine relationships to gain reliable insights.
Operational Experience: Highlighting the significance of an operator’s professional background, net worth, and experience in dealing with challenges that may arise in multi-million dollar deals.
Website and Marketing Material: Expressing skepticism towards the generic nature of institutional operators’ websites and the potential for new operators to mimic them, emphasizing the need for a more in-depth review beyond surface-level presentation.
Red Flags and Due Diligence: Discussing red flags to watch out for in marketing materials and the importance of scrutinizing an operator’s history, education, and work experience.
Investing with Full-Time Operators: Recommending caution when investing with operators who are still working full-time jobs outside of real estate, and suggesting a preference for those with professional alignment.
Beware of “Sponsor Creep”: Advising investors to be wary of operators who increase fees and splits over time, questioning whether it aligns with the investor’s long-term goals.
Differentiating Operators and Salespeople: Encouraging investors to distinguish between operators and salespeople, cautioning against deals heavily reliant on capital raising and emphasizing the importance of accountability in the branding of the operator.
Long-Term Investment Strategy: Discussing the concept of “sponsor creep” and how investors need to align their long-term strategy with the changing dynamics of the operators they choose to work with.
Peer Group Building: Promoting the idea of building a peer group of passive investors over time, noting that it may take time but is essential for long-term success.
Passive Investing as a Hobby: Concluding with the notion that, beyond financial gain, real estate investing can turn into a hobby and a source of enjoyment, especially when shared with a trusted and motivated peer group.
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My name is Lane Kawaoka, and I hope my blog/podcast will help families realize the powerful wealth-building effects of real estate so they can spend their time on more important, instead of working long hours and worrying about their financial troubles. There are a lot of successful families with good jobs (teachers / engineers / programmers / finance) yet they struggle to make ends meet financially. It is their kiddos who ultimately get the short end of the stick. Being a Latch-Key Child growing up, both my parents had to work and I was left home alone after school to fiddle with my thumbs.
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