Sponsor underwriting. Part 2.

[Mikhail Pritsker]

Part 2.

Detailed Due Diligence

Conduct in-depth due diligence, including background checks, reference calls, and site visits to assess the sponsor's operational capabilities. This is one of the most critical steps in the underwriting process. Background checks help verify the integrity and track record of the sponsor. Speaking with references can provide first-hand accounts of the sponsor's performance and reliability. Site visits directly view the sponsor's operations and project sites. This thorough investigation helps identify potential red flags and ensures that the sponsor has the resources and expertise to execute the project successfully.

Financial Analysis

Examine the sponsor's financial statements, funding sources, and capital structure to evaluate their financial health and stability. A sponsor's economic stability is crucial to sustaining and completing projects. This step involves a detailed analysis of their balance sheets, income, and cash flow statements, provided they can provide it. Understanding their funding sources and capital structure provides insights into their financial strategies and risk exposure. A solid financial foundation indicates that the sponsor can handle unforeseen challenges and continue operations smoothly.

Track Record Evaluation

Analyze the sponsor's historical performance on similar projects, including timelines, budget adherence, and overall project success. Past performance is often a reliable predictor of future success. This step involves reviewing the sponsor's portfolio of completed projects to assess their performance. Key metrics include

• # of assets
• Asset types
• Risk Profile
• Date of acquisitions
• Total Capitalization
• Total Equity
• Total Debt
• Sponsor GP share
• Sponsor Role
• # of exits
• Realized IRRs, EMs

Sponsors with a consistent track record of delivering projects on time and within budget are more likely to execute future projects successfully.

Risk Assessment

Identify and evaluate potential risks associated with the sponsor's ability to execute the project successfully. Risk assessment is a critical component of the underwriting process. It involves identifying potential risks that could impact the sponsor's performance, such as market, operational, and financial risks. Each identified risk should be evaluated for its likelihood and potential impact. Developing mitigation strategies for high-risk areas helps reduce the project's overall risk profile. Effective risk management ensures the sponsor is prepared to handle challenges and uncertainties.

Practical Implications

Effective sponsor underwriting can significantly mitigate risks and enhance the likelihood of project success. By following a structured screening process, investors and stakeholders can make informed decisions based on comprehensive evaluations of potential sponsors. Key takeaways include:

• Thorough Due Diligence: Ensuring all aspects of the sponsor's background, financial health, and track record are meticulously examined.
• Consistent Criteria: Applying consistent criteria across different sponsors to facilitate objective comparisons and evaluations.
• Continuous Monitoring: Regularly monitoring the sponsor's performance and financial stability throughout the project lifecycle.

Conclusion

Sponsor underwriting is an essential component of successful real estate and investment management. By adhering to a structured and detailed screening process, investors can identify and partner with reliable sponsors, ultimately driving project success and profitability. The provided framework ensures a comprehensive and objective assessment of potential sponsors.