What's more important? Experienced operator or strong deal?

Question

What do you think?

Is an active operator with less experience, but a strong deal, a better investment than a more experienced, 'mehh' deal?

For example, if you are a passive investor with 100K liquid and are looking for potential investment vehciles what would you find more important?

A strong operator is of course important (and you should vet sponsors rigourously), but would you be more inclined to invest in a managing partner with let's say $50 million under management that underwrote a deal for 17%+ IRR (with the numbers to back it up)?

Taylor L. · Answer

In my opinion, experienced and knowledgeable operator with a middle-of-the-road deal

How should the average investor be able to reliably determine that a sponsor's deal is strong or not? You can (and should) underwrite it yourself and do other methods of due diligence. But investors are always leaning on sponsors to some degree, and a newer sponsor who thinks they have a smoking hot deal might not actually have a smoking hot deal.

There will always be an unknown factor, where we're leaning on the sponsor's judgement, ethics, and skills. Experienced sponsors have a greater degree of judgement and skills. Ethics are another matter, but a track record is a good way to demonstrate good ethics. Newer sponsors can have the best ethics in the world, but too many unknown unknowns of what to expect down the road.

Many experienced operators with smoking hot deals (who know they're smoking hot deals) put a lot of effort into not overselling their deals. Let the numbers speak for themselves. Give modest projections with the opportunity for more upside. That's who I prefer to be in business with.

Bill F. · Answer

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." -Warren Buffet

In my humble opinion, the question starts from a flawed premise. This choice isn't' a false dichotomy between experience and deal, but rather more a trade off between two areas that are each required for a deal to be successful.

Even Sam Zell couldn't get decent returns if he bought an asset in an overbuilt area with a declining population. On the other hand, a fresh graduate of the a syndication bootcamp with little to no previous RE experience will probably punt the vast majority of deals.

So you'd need a sponsor with a certain level of experience, but once that level has been reached, the specifics of the deal take on much more importance.

When you start to really look into those who have lots of success, I think you'll find that they focus a lot on two things. 1. deals where their downside is capped and 2. areas where the economics are in their favor. So the type of deals a sponsor picks plays a large casual role in success.

Bryan Hancock · Answer

Why not deploy your capital elsewhere until you can get both?  The only way the upside is worth the risk for a syndicated asset is for the risk-adjusted returns to make sense relative to placing the money somewhere else with less systemic risk.  To me I'd look for both or I would just use my cash elsewhere or worst case have it sitting in overnight treasuries or some such to get some yield while maintaining optionality.

Josh Walker · Answer

@Shane Thomas - there is no such thing as a good deal with a bad sponsor

Chris Levarek · Answer

@Shane Thomas Experience goes a long way. Still, I am very conservative with my numbers so I get alarmed when I see these massive IRR returns promised across the board experienced or not. We have never been in an economic/pandemic situation like we are today, so to predict some of these exit cap rates I have seen on some of these deals is interesting to watch.

However, many limited partners are depending on the operator to vet the deal and thoroughly understand the numbers. Not everyone will want to double check the deal numbers. The limited partner is depending on a good operator to be the expert so they don't necessarily have to. Thus having that experience could weigh in heavily on choosing the operator.

I think there is a question of character here as well and personal connection/goals.

Personal connection/Goals : A very experienced syndicator or operator might not be willing to educate or assist a limited partner interested in being involved on the deal in a more active role. They simply don't have the time to focus on one single investor whereas a active operator with less experience or deals might be willing to. Or even just have the 1 on 1 contact with the investor at any given time. This in itself could be a very important consideration for an investor.

Character : There have been many business owners or real estate operators over the years with experience who have gone belly up or been involved in illegal activities even. Bernie Madhoff had quite a bit of experience :) Ok, a little extreme there but my point is character is big and in my opinion should be valued as much if not more then experience. Does the operator have similar values or display good character? When a major issue occurs, will the limited partner hear about it or will it be covered up? If an issue occurs, would the operator do everything in there power to protect/preserve investor capital? Do interactions with the operator feel authentic and honest?

All good questions and important ones.

Michael Limbacher · Answer

I would tend to favor the strong operator who will have a strong track record of delivering the numbers promised, even if they are "lower" than another deal. A less experienced operator may project a high IRR, but there could be more variability in achieving that number.

Todd Dexheimer · Answer

I would look for both. Why invest in a poor deal or a poor sponsor. Investing in good deals and good sponsors. Just because a sponsor has experience, doesn't mean they can't mess up and lose on a deal and just because a deal looks really good doesn't mean that the inexperienced sponsor won't mess it up. I am not an either or guy - I chose both.

Jordan Burnett · Answer

Experienced operator.  In my mind this is akin to investing in a company like Tesla, or a company like Microsoft.

Tesla may be a slam dunk, or I may lose all of my money including the original capital. Microsoft has years and years of revenue and earnings to back up the business.

Even worse, syndications are illiquid. If you see the writing on the wall beforehand, you just have to sit back and watch your capital fade away in front of your eyes.

A 3, 5, or even 7 percent bump in IRR is not worth risking my principal. May as well make 1% in a HYSA.

Brian G. · Answer

@Shane Thomas I’ve never invested passively as an LP in a syndicated apartment deal but I plan to in the distant future. My strategy would be to vet syndicators first and decide which syndicators I want to work with based on track record and experience. Only then would I vet their deals with an intent to invest in one or more of them. Imo the sponsor is way more important than what the numbers might say since the numbers are only as good as the sponsors ability to manage the asset and execute the business plan.

Greg Dickerson · Answer

Experience and competence trumps the deal every time. A Poor or inexperienced operator can mess up even the best of deals. Including  a slam dunk. Also you can make the numbers look however you want. The real question is does the deal make sense even if the business plan or operator fails?

What's more important? Experienced operator or strong deal?

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