How to find a good Syndication?

Question

Do syndication of any limits when raising money from accredited investors?

Chris Seveney · Answer

Great question. First thing you need to do is identify if you are wanting an income play or appreciation play. These are two completely different investment strategies.

So step 1 is figure out what you want to invest in

Step 2 is to grill the sponsor on questions. We have a checklist of about 100 questions to ask a sponsor.

Some tips:

1. Do not fall in love with projected returns. They are projected. Just like they project sports teams on how many wins they will get each year. How often are they correct? Especially if they lose a key player?

2. Do your own due diligence, the "my buddy said this was a good investment" is never a reason to invest.

3. Seek help if you need it. Ask questions in forums, google the syndicator - ask experienced LP's. People are very willing to assist.

Regarding limits, the PPM will note the min and max investment in the offering.

Ian Ippolito · Answer

Finding *a* syndication is easy as there are typically thousands of new offerings that become available each year.  What makes a syndication a *good* one, will differ greatly from investor to investor (because each has their own unique risk tolerance, initial situation and goals). And depending on how picky the investor is, that can take quite a bit of work.Below is how I do it. Others will do it differently...and that's fine and expected.And to answer your second question: the syndication since the limits of how much money they're raising. There is no legal limit, but there is almost always a practical limit because a sponsor can only deploy so much money before they have to lower their underwriting standards etc.

--------When vetting a syndication, different investors will do it differently... because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone who's more aggressive. Here's how I do my due diligence:1) Portfolio matching: (takes 30 seconds per deal)a) Have an educated opinion on where I think we are in the real estate cycles (financial and physical market cycles)b) Then and only then do I pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I am a little concerned about some aspects of the business cycle recovery and a potential for a double-dip so I lean toward the safest part of capital stack which is debt (or low-debt equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the cycle, they might have a different opinion than me on all of this.2) Sponsor quality check: (takes about 45 minutes per deal)I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience or that lost anything more than a small amount of money (and prefer no money lost). Again, other might feel differently here.b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.

Evan Polaski · Answer

@Ian Ippolito, I did understand your position on timing, and agree.  It is easy to say, for instance, I believe office conversion to apartment is too risky in this market, so if I received a deck from a syndicator for a project like that, in about 30 seconds I can see what the plan is, and then discard the deck.

As always, appreciate your inputs in assessing passive investments.  There are so many ways a syndicator can "add risk" to the deal in order to hit a marketable return for LPs, that any LP really needs to understand the ins and outs of real estate operations, market cycles, financing structures, fees and carried interest, etc if they want to fully assess a deal.

Evan Polaski · Answer

@Justin Brin, I think Ian and Chris both bring a good list of things to look for.

I want to focus on Ian's point on "portfolio matching".  The one area I disagree with him is his time requirements, since he says 30 seconds, but then leads into 1) a. Have an educated opinion.

This educated opinion takes a lot of time to develop.  So if you follow macro and micro-economic trends regularly as it is, it will only take about 30 seconds.  I.e. I don't have the risk tolerance for office given all the remote work.  I also don't have a knowledge base to truly understand the intricacies of what makes this market work and shift.  As such, I won't go into any syndication in office space.  If I want to dabble I will go into an office REIT: high liquidity, low entry cost.

But let's look at multifamily, for instance.  Pro: Everyone needs a place to live.  Pro: There is still a national housing shortage (but each market will have its own nuances).  Pro and Con: The leases are only 1 year, so adjusting rates, while ultimately market driven, have a better ability to keep up with inflation during high inflation times.   But also in recessionary times can come down, versus average 5+ yr leases in industrial, retail and office.

Getting into a syndication now, there is a possibility of a larger market correction coming soon due to rates staying higher longer and all the floating rate loans that were placed in 2021 and 2022.  Sellers still want near top dollar on properties.  Cap rates are generally lower than prevailing interest rates.  Long-term fixed rate debt is being underwritten to 50-60% LTV.

So, back to your educated opinions, you sort of need to see all the opportunities and risks that are there and can impact a deal before you start deciding what type of syndication is good.  Professor Scott Galloway was recently posting on social media "sector dynamics will trump your talent".  And uses the example, "someone of average talent at Google has done better over the past decade than someone of great at General Electric".  The same is true for real estate versus other industries, and also sectors of real estate, i.e. office versus industrial vs multifamily.  And since you are investing to make money and not because you "love" one versus the other, you need to understand the headwinds and opportunities that could create outsized returns for you.

The market will drive 90% of any syndicators returns.  Picking one group over another will ultimately have very little impact on your overall returns.

Ian Ippolito · Answer

I agree with you, Evan that it takes significant time and effort for an investor to come up with an opinion on where we are in the cycle.  And I wasn't trying to say that it takes 30 seconds to do this (but can also see how what I wrote could be read as saying that).I was trying to say that as a re-requisite to doing the portfolio matching (which for me takes only 30 seconds) is to already have an opinion on that. And then when a new deal comes to me, it's very quick to weed out what will probably many offerings that don't fit.But I already have an opinion at that point (and am not coming up with it from scratch and on every new deal).

How to find a good Syndication?

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