When should I start a fund?

Question

Good day BP family!

I had a question I wanted to throw out to the greater, and more 'in the know' people out there than myself.

For the past year and a half, I have grown our company portfolio of multi family from 0 to  63 units, and still looking to grow more, especially through this possible next 18 month opportunity window.

I've been spending much time reading up on Private Equity Funds, and raising capital through starting a RE fund, and there are a lot of 'YouTube gurus' out there that are selling the dream of creating $50MM funds , but I wanted to ask the BP group what some real thoughts are on this subject.

My thought was to start/create a fund to invest in value add multi family (my speciality and the reason my company has grown so fast and well to date).

What I am unsure of is:

1. Am I still too small and should I forget the idea and just keep growing on my own, adding units as efficiently as possible and revisit when I am at 150 units +

2. Do I have the expertise to raise that sort of capital (25-50MM) or are there people out there, on commission, that do that for you?

3. Whats is the order these things come in (capital raise, deal, docs??)

I appreciate an input that anyone has, especially those that have maybe gone through trial by fire on starting and managing a fund.

Thanks all!

GB

Brock Mogensen · Answer

Syndications and funds are slightly different.  Syndication is a deal by deal raise. Fund can be invested in several properties.  Generally, people start with syndications.  Because raising capital tends to be easier when investors know what deal they are investing in up front.  The end goal does tend to the fund model though.

Evan Polaski · Answer

Account Closed, while I agree that there are groups that can and do raise money for operators, these groups typically won't just put their reputation on the line for any group with a checkbook.  So, while I agree with your comment, there is more nuance to this scenario that Chris is pointing out.

@Glenn Barlow, generally raising money comes down to your relationships and track record.  You have built up a reasonable portfolio, and can use that experience to leverage your relationships to raise money.  Assuming you plan on buying similar properties to what you own, you can leverage that.  You may have a harder time if you are pitching your network on buying a 200 unit complex.  Not to say there isn't carry over, but most investors view the scale differently.

Account Closed · Answer

1. Syndication is a good way to amplify your growth. 2. There are capital brokers who can raise you equity for good investment offerings for a cost.  3. Find a deal, put it UC, start DD while finalizing your investment offering deck, start shopping for debt and equity together, finish you DD, and close.

Chris Seveney · Answer

@Abhishesh Acharya

One key component is experience as well. Starting a fund with multiple assets requires not only management of the assets but the Personnel and financials.

I have seen people start a reg d offering without ever having done a deal before… they were not successful in raising money - any idea why?

Ronald Rohde · Answer

I would think you're big enough now.

Business Plan/thesis for fund, documents by lawyer on fund structure, rules for advertising, accredited/non accredited, etc. 506 is probably your best bet.

Can you sell? Have you talked to investors yet?

Account Closed · Answer

@Chris Seveney, when an acquisition is underwritten, cost of 3rd party vendors, such as management, recordkeeping, taxes, and other required services need to be included. If deals work with all those costs, all one need to do is reach out to a few good providers of the needed services and pay for them. One do not necessarily need to have these abilities inhouse.

I have seen a sponsor who has done dozen plus deals not been able to raise money for a deal as well. A good deal raises money; experiences definitely makes it easy.

Paul Moore · Answer

Hi @Glenn Barlow! Great question and one I think you should be asking. A fund provides a lot of benefits for investors. Most of all diversification. Investors can diversify across multiple assets, geographies, strategies and more. The cost to you as an operator is not much more than doing a single syndication for the most part. The hassle and managing it might be higher, but it will probably be worth it.

My firm, Wellings Capital, is on our 6th diversified commercial real estate fund. PM me if you would like to jump on a call to talk about some of the specifics. I would be glad to help!

Shafi Noss · Answer

I have looked into starting an income fund but ended up not doing it because I wasn't confident the asset class I was looking at would have dealflow. It seemed like the legal startup would be something like $15-25k from a good attorney. There was also a company advertising setup much cheaper using automation but I did not look into that cleanly.

Kaustubh Johri · Answer

I am trying to do my first syndicate as well in the MFU asset class. The investors and I plan to put 30-35% down and rest would be financed. Who would be the signatory in the deal ? Would that be me (GP) or all investors. It is a small syndicate comprising of 3-4 LPs.

When should I start a fund?

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