Vetting a Sponsor
One of the most common questions for investors looking into syndications is, “How do I know if I can trust the sponsor?” Investors will often first look to the investment returns, but the most important component of any syndication is inarguably the sponsor(s) who are leading the deal.
Syndications allow you to be a passive investor in which your capital is put to work. It is an attractive way to invest where you do not have to be active in the daily operations and management. This allows you to save time and effort and is an advantageous way to leverage your portfolio as a busy professional.
Since you are investing as a limited partner, you will have no control, so vetting the sponsor is a critical step as you will be entrusting them with your investment. One of the advantages of a syndication structure is that you have direct access to them as limited partners. Here, we cover the key components to include when vetting a sponsor.
Investors can find out general information from the sponsors’ website, which will often include their investment philosophy, acquisition criteria, and portfolio of their prior projects. Often, their contact information is available and you can reach out to speak to them directly if you are interested in becoming an investor. Remember, just as you are doing due diligence on the sponsor, they also need to do their due diligence to get to know you since syndications are often 5-7 year commitments.
There are several podcasts out there where you can learn more about the sponsor indirectly, as well as multiple real estate conferences for sponsors and investors to meet directly in person. Local real estate meet-ups are another avenue to meet sponsors.
Experience or Track Record
If you are going to be investing $50K into a syndication, it is important to know that your investment is in good hands. One way to build your trust is to find out what experience the sponsor has. How many deals have they closed? How many deals have they exited? You can also find out the specifics of each deal they have done by reviewing their portfolio. This information is often included in the investment offering as well.
Specifically, does the sponsor have experience with the same type of asset or in the same market that the investment is in? If not, what steps have they taken to mitigate any risk of entering a new market, or what research have they done to suggest that this is a good market to enter into?
Other members: often, there are other members of the sponsorship team excluding the lead sponsor. As you can imagine, there are many steps, tasks and responsibilities included in acquiring and managing a property, so you will likely see other team members as part of the General Partnership. As an investor, you should understand who they are and what their roles and responsibilities will be in the deal.
Property management team: this is often overlooked by investors but critical in the success of the deal. The property management team is the boots on the ground and involved in the everyday operations of the property. Everything they do has a direct link to the income or expenses of a property, and your returns as an investor. A good sponsor understands this and will have done a thorough job selecting who this team is.
Alignment with Investors
Fee structure: each sponsor will have different fee structures which will be outlined in the investor subscription documents or private placement memorandum. As an investor, look for structures that show the sponsors’ interests are aligned with the investors. We discussed this in more detail in our prior blog, Nuts and Bolts of a Syndication.
Skin in the game: it is important to know if the sponsor has “skin in the game” so to speak. Most times, this refers to how much capital they are putting into the deal themselves. While not required, it is comforting to know that they are putting their own capital into the deal as well along with their investors.
Communication: while we all hope for a smooth investment, no one can predict with 100% certainty if there will be unforeseen circumstances that may arise through the lifetime of the investment. Good sponsors will provide timely, consistent, and transparent communication to their investors. This is often done on a monthly or quarterly basis.
Access: syndications are often 5-7 year commitments, so it is important to know going in that you will have access to the sponsor if you have any questions or concerns about your investment. This is one of the advantages of investing in a syndication you do not get vs. investing in a stock market or REIT.
You can ask for prior investors’ contact information and speak to them about their experiences with the sponsor.
This will be outlined in the private placement memorandum that is provided to investors for review. Often includes: acquisition fee, asset management fee, disposition fee. There are industry averages, but varies with each sponsor and each deal.
This will also be outlined in the private placement memorandum detailing the roles and responsibilities of the sponsor in the project.
We have outlined the main considerations when vetting a sponsor. There are many sponsors out there syndicating deals, and it is important for you to feel comfortable as an investor to understand whom you are entrusting your capital to. If you’re interested in learning more about syndications, sign up for the Physician Investors Circle to connect with us.