And it really rubs me the wrong way when a syndicator puts together a deal in a way that has very little of their own capital in the game, but raises money from other investors in a huge way.

Example:

Syndicator purchases $100M in real estate. Syndicator raises $35M in equity. Syndicator invests basically nothing (less than $1M) of their own capital in the deal.

In this deal, the syndicator, will make, in fees, something like the following:

- $1M acquisition Fee (1% of asset value)

- $2M in management fees (2% of equity per year, for 5 years).

- $1M disposition fee (assuming property value at exit does not change at all)

- $0-5M+ carried interest (20-30% of profits).

Look, this model has been around a long time. I get it. And, if the syndicator delivers, it's a win/win for investors. No issues there.

But, what really makes me scratch my head is the fact that if the syndicator does not put in a meaningful chunk of their own net worth or a meaningful percentage of the equity, then there is almost no downside to them for raising this deal, other than perhaps their reputation.

If I lose everything I invest in this deal, then I feel the syndicator should come out with a negative as well. Net of all fees, net of everything, they need to lose if I am wiped.

There is no real incentive to protect downside risk in some situations, because everything is upside for the deal sponsor.

If it does really well, then they make $4M in fees, and another several million in carried interest. If it does poorly, then they make $4M and lose little to nothing. Heads they win, tails they win.

As an LP, I'm not interested in playing a game where the syndicator can win and I can lose.

Any syndication investment that does not involve a meaningful percentage of the syndicator's wealth (10% of their personal wealth, excluding any acquisition or deal related incentives) in the deal is a non-starter for me personally going forward.

And no, investing the acquisition fee does not count. A sponsor "Investing" the $1M acquisition fee earned just by buying an asset with my money does not count as an investment. I want to see someone who is pitching me on a deal putting their own capital to work in a meaningful way, someone who believes in the deal so much they will put their own money where their mouth is.

I'm listening if 10% of their personal wealth is in the deal. And specifically in The deal that I am being invited to invest in.

I'm interested if 25% is in it.

And I know that they at least, truly think they are for real when they approach 50% of their wealth in the deal.

What do you think? Is this a reasonable stance to take? Do you feel as uncomfortable as I do about giving a syndicator a "free spin" on their next deal, and will you throw out investment opportunities that do not have the sponsor committing a serious chunk of the pie?

Or, am I being unrealistic and idealistic, as has been the case many times before?

Scott Trench

Podcast Guest on Show #223