Syndication vs Crowdfunding vs Private Equity - Help ?

Many terms are thrown around on Bigger Pockets and I often see questions about what these terms mean. I wanted to share a few understandings and experiences to further educate investors on these topics.

Syndication is simply the pooling of investors capital by a small group or team (aka general partner, syndicator, sponsor) to acquire, manage a particular asset and derive a return for the benefit of all investors. The limited partners are typically providing passive capital and do not have a say in the management of the project or investment. They are limited in a sense that they have limited liability and are at risk of only losing the money they put into the investment but no more. The general manager typically gets some fees and a split of the deal for being the active partner in the deal.

Syndication in assets come in many forms. Most typical are real estate syndications for multifamily apartments, office buildings, retail and strip centers, self-storage, mobile home parks, etc. Essentially anything can be syndicated and we even see single family rental properties as a grouping that can be syndicated. Most syndicates will seek funding organically by offering up opportunities to investors in their network and referrals.

Syndicates who are operators of the asset / investment typically focus on just one niche. I like to see this because I personally believe that the operator can know only so much and I’d much rather invest with one that sticks to their knitting. Hence, if I want to invest with a Multifamily apartment operator, that’s where I want to see their track record.

Crowdfunding came in play more recently by offering syndicates an opportunity to market their deals to a larger audience via the internet. The crowdfunding site works a deal with the syndication group to be the intermediary in helping them raise capital. The crowdfunding site typically operates a technology platform (portal) making it easy for investors to see a lot of deals and syndicates see it as an easier way to seek funding albeit some middleman cost for the facilitation and handling of the investor. Some of the funds offer smaller minimums and that may be appealing to investors who want exposure to a wide variety of syndication deals from different niches, geographies and sponsors at a lower cost. The flip side can be a bit less personal and may not appeal to some investors who are looking to develop a relationship and deeper understanding of their investment.

Private Equity firms have investors that they have developed a relationship over time by offering participation in a wide variety of syndication type deals, this could be just their own deals or they partner with other syndicators to provide their clients more depth and breadth of offerings or some combination of that. I think there are benefits to many investors for all types of approaches here. I have experienced all three and I’ll give you my take.

As a private equity firm, one can offer breadth of opportunities similar to crowdfunding but typically not at the lower entry points say $25K. Most syndicates like to get to $50K minimums for ease of administration. I think private equity can offer more of a long-term relationship with investors similar to the single focused syndicate/operator whereas the crowdfunding sites are setup more for convenience and have less interpersonal contact with the investor. I find in general when folks are dealing with their hard-earned money that a personal connection, someone that can be there to answer any question, be more informed about the investment before and during the holding period is helpful and an advantage.

I had a recent experience working as a partner with another private equity firm in being able to negotiate directly with the syndicator / operator on deal terms and in some cases the private equity firm can derive even better terms for their investor than either crowdfunding or working directly with a syndicator / operator from a single investor view. How can that happen? Private equity firms are a close-knit group and will often share ideas and opportunities with each other. They can band together and provide buying power as needed. Money is power when it meets with the right opportunity. A syndicator / operator may need a lot of cash say over a 6-12-month timeframe to buy say a portfolio of investments (aka pool fund). A savvy private equity firm could negotiate better terms by offering up a significant portion of the equity raise in the first month or so if the operator has deals they want to take advantage of now and not wait to lose out if capital comes in at a slower pace.

I’ll provide an example. An operator offers two investor shares, class A targets 20% return to investor and 10% preferred return if the investor puts up $250K. Class B investor target is 18% and a 8% preferred return. Let’s say the syndicate / operator needs $75m in the next 12 months to acquire all the assets needed to meet these return targets and is offering up a 50/50 LP/GP split to achieve that. A savvy private equity firm might approach the operator and suggest providing up to $15m in capital in the next 30 days if they can negotiate a 70/30 split for them and their investors. A bit of arbitrage happens in that the private equity firm is able to provide A class returns to their investor base by lowering the min for all its investors to $50K investment and a 20% + total return. This also benefits the syndicate in that only one check is written from the private equity firm and they don’t have to deal directly with 100+ $50K investors. In some cases the returns can be better than going directly through crowdfunding sites or the syndicate / operators own website.

The good news is that there are several ways to get into syndication deals. Find and work directly with an operator / syndicate in a space that you want to devote more concentration in your portfolio and develop a deeper relationship with the sponsors. Or, you can go to crowdfunding sites and get more breadth and lower costs but at the expense of a less personal relationship and perhaps not be as informed or educated. Or, lastly, working with a private equity firm you may be able to get not only breadth but better deals and lasting relationships with the firm but may give up some of the lower minimums seen by crowdfunding sites.