I'm Raising Private Equity - My New Model Threw Me a Curveball.

[Nate Pattee]

Officially my first BP post. Really hoping not to get booed off stage…

My experience to date at acquiring large multifamily properties, raising private equity, executing asset management strategies, then exiting the deals as expected, has been better than I could have hoped.

The challenge with every one of those deals is that they were short 12 - 24 month deals, a model I’m changing moving forward.

My new model will have me acquiring the same type of deals but holding them for 10 years.

During a few initial conversations with investors, the first question I get is a relatively new one (compared to raising equity for short term deals), which is “how do I get my money out before the 10-year deal horizon?” Makes sense. 10 years is a commitment and I’ve got to recognize investor’s needs.

I want to avoid a forced liquidity event (sale or refi) in an effort to keep my basis low in the deal.

So, what are a few options I could consider that would give investors a way out before the end of my 10-year deal? What challenges will I run into down the road with those options?

Boo if you must, I can handle it.  Thanks, Nate!

[Brian Burke]

@Nate Pattee Welcome to BP and congrats on your early success! 

Your decision to plan for 10 year holds is prudent, given where we are in the market cycle.  At some point it's very likely that there will be an adverse cycle, and if that cycle happens at an ill-timed planned exit point of a 2-3 year hold you'd be in trouble.  Ten years allows you time to ride the cycle and exit at the next market cycle peak.  Just be sure to underwrite conservatively so you can actually survive to make it to the other side.

The downside to the 10 year hold is that many investors resist a commitment that long.  You either need to find a way to provide liquidity or find investors that can tolerate parting with their capital for 10 years (and yes, those investors are out there). 

Most investment sponsors provide liquidity by refinancing the property in year 2-5, after adding value to the property, and taking cash out to return to the investors.  In many cases you can get 50-75% of their capital back, sometimes more.  The only other liquidity available to the investor is to sell their interest to someone else, which is easier said than done.

My advice would be to underwrite your deals with a mid-term refinance and only get into deals that perform well with conservative underwriting even with a higher loan balance.  Or look for investors that are looking for long-term commitments.