Comparison of syndication sponsors for an LP post GFC
Investor · Apex, NC · Member since 2017 · 135 posts · 97 votes
As an LP, how should I compare the track record of a sponsor that began with experience in the market prior to the Great Recession and weathered the storm vs a sponsor that spawned post 2012?
How much credence do you give to successful exits between 2017 and 2020 pre-Covid (proper implementation of business plan vs overall cap rate compression)?
I know many of these may come down to case by case, but curious if there are any generalizations.
@John Blanton Take a listen to BP Podcast #378 (Brian Burke is Guest and just wrote a book for LP's on the topic of sponsor selection).
While all the factors mentioned so far are meaningful in the decision making process, your selection needs to start with finding someone who has integrity and who you can trust. Without these, experience and the "numbers" do not matter.
Best of Luck!
As an LP, how should I compare the track record of a sponsor that began with experience in the market prior to the Great Recession and weathered the storm vs a sponsor that spawned post 2012?
How much credence do you give to successful exits between 2017 and 2020 pre-Covid (proper implementation of business plan vs overall cap rate compression)?
I know many of these may come down to case by case, but curious if there are any generalizations.
Many of us who made it through 2009 unscathed have a very unique perspective and an awareness of how bad things can get very quickly but more importunely how to navigate during tough and unexpected times. This time around is a very different animal and could have been a lot worse if not for the fed and treasury. Obviously the longer someone has been successful in the business the better but that doesn't necessarily mean every deal moving forward will work out and there are some very good sponsors and operators that are new to the industry. As we have seen now anything can and will happen and investing is a risk. There are a lot of considerations when choosing to invest with a sponsor like the team, the track record, market preference, type of property, business thesis, return profile, etc.
To answer your question yes market conditions in the past have played a huge role in the success of many deals. CAP rates were very compressed mainly due to low interest rates and demand. Rents have increased exponentially and disproportionately in relation to income growth so that will be an issue moving forward especially right given the current environment. Many states have instituted rent controls and more will likely join that movement now given the current economic environment. This will change the value add game but its a bit too early to know the real affects as the lending environment is a moving target and we don't know how or when the health crisis will end for good.
Thanks @Greg Dickerson! I know it was a loaded question and appreciate the feedback. To your point will focus on more conservative business models regarding value add and rent growth until there is a bit more clarity in the world
Greg offers great perspectives on these unprecedented times. Things can get very bad, very quickly. If your over the age of 50 and have been successful in your marketplace, you probably know a thing or two about how to survive during hard economic times. When it comes to any planning for any kind of operation, we have to effectively identify risk. Any course of action or any plan needs to be able to mitigate risk with the inclusion of various control measures. Most professional planners correction all professional planners have a keen knowledge and appreciation of this.
@John Blanton Take a listen to BP Podcast #378 (Brian Burke is Guest and just wrote a book for LP's on the topic of sponsor selection).
While all the factors mentioned so far are meaningful in the decision making process, your selection needs to start with finding someone who has integrity and who you can trust. Without these, experience and the "numbers" do not matter.
Best of Luck!
A GP who has been through the last recession and didn't lose any properties is definitely an advantage, but as others have said, it still doesn't guarantee anything, and the circumstances here are different than the last downturn. Some areas actually saw apartment rents increase in 2009-2011, due to all the demand for rentals from former homeowners who couldn't pay their mortgage and lost their homes. Today, it seems there may be challenges collecting rent everywhere. April collections looked good at many properties, but it doesn't guarantee May will be the same.
Since a GP's track record is so important, and many people say the GP is the single most important factor when deciding whether to invest, there is an obvious question: why would anyone ever invest with a new, or less experienced GP? I'll play devil's advocate and give a few reasons:
I'm not making a case that you should always favor the newer GPs. In fact, I actually agree with the conventional wisdom that the GP's track record is critical. But I have also invested with less-experienced GPs, and I had confidence in them because they were mentored by a more-experienced one, and in some cases even had someone more experienced on the GP team.
@John Blanton to layer on, having experience through the last recession is only as good as what they learned from it. Did they get lucky last time and not get hurt? If so, was it because of intentional business decisions, or was it sheer luck?
At one point, I worked for a different operator who lived through the previous recession and even ended up giving back properties to the bank that were bought in 2006/07 because the cash flow was negative on non-recourse debt and the investors didn't want this pool of CMBS properties bringing down the others.
When we came out of it, which the company did, and continued to grow, it was like nothing had ever happened. UW didn't get more conservative, leverage didn't drop, asset class (A/B versus B/C) didn't change. It was business as usual.
There was also a story told at BEC20 of an investor that had been investing with the same group for 12 years (so through the last recession), and after 12 years of great business, the sponsor walked off with something like $10mm of investors money and disappeared.
So again, a new GP isn't necessarily bad, and one that survived doesn't mean they are better. It is about what they know, how they are accounting for downsides, and does the business model make sense. Vetting as many as possible is the best bet.
Love this question @John Blanton. What is your conclusion ?
@Jay Helms Very fortunate to get a lot of great feedback on this question. It is going to still be very subjective, but for me the track record of the operator is important to an extent. If they previously faced challenging economic times they at least have some perspective from it, but it isn't always black and white as to how commensurate it is with their next project.
Making sure the operator is being conservative with their underwriting, downside risk and eventual exit. Many assumptions are having to be made right now so a longer track record would lead to more overall experience to unexpected challenges.
For me the most important part is finding somebody that I feel has operates integrity, has similar values, and is capitalized enough to weather any short term bumps that may come along that were unforeseen. Their experience is a key factor, but akin to the story @Evan Polaski mentioned even the most seemingly trustworthy sponsor there is still risk that they may eventually do wrong or have a deal that loses investor principal.
100% agree @John Blanton. I don't invest with anyone I haven't known for at least 6 months. And I mean really know, not we met once, 6 months ago. Do you have similar criteria/timeline for trust/relationship building?
@Jay Helms Yes sounds like we have similar criteria for sure. But I also consider if someone I already trust refers them that may expedite that timeline.
In the end everything has risk--> leaving money in a savings account, investing in the stock market, investing in real estate, investing in commodities, so just being able to define the level of risk you are comfortable with for the projected return is name of the game.
The great recession did not negatively effect most multifamily properties around the country. Rents stagnated, but for the most part they didn't go down. Cap rates expanded for a period and properties sold for cheaper, but if the sponsor didn't have to sell, they were able to then ride the wave in pricing increase and do really well.
I personally feel that the last recession made multifamily investors (both old and new), much too confident in the asset class. So many say that MF is recession proof and point to the last recession, ignoring other recessions in the past.
Look for sponsors with high integrity, conservative underwriting and a strong business plan. Here is an article that I wrote that my help:
I agree. I occasionally would hear opinions that 2008-09 was a once-in-a-lifetime event and the next recession will be more mild, plus it will probably be caused by something other than housing, implying that multi-family won't fare as badly as it did back then, which wasn't bad at all for some operators in some markets. Well, this crisis seems to be another "once-in-a-lifetime" thing.....only this time, the people affected most are often the types of people living in Class B/C apartments and paying rent.
I agree. I occasionally would hear opinions that 2008-09 was a once-in-a-lifetime event and the next recession will be more mild, plus it will probably be caused by something other than housing, implying that multi-family won't fare as badly as it did back then, which wasn't bad at all for some operators in some markets. Well, this crisis seems to be another "once-in-a-lifetime" thing.....only this time, the people affected most are often the types of people living in Class B/C apartments and paying rent.
I've seen people making similar predictions about what the next recession would look like, what would cause it, etc. Problem is, if the general consensus is right about the cayuse of the next recession, then it won't happen! If everyone knew the next recession would be caused by a global pandemic out of Asia, we'd have been more on the look for it and we would not be in the current predicament.