Syndication - GP/LP

13 Replies

Bigger Pockets Members,

I'd like to ask some of the experienced investors out there how many of you put your own money into the deal on the LP side as well as acting as the GP and syndicator?  Secondly, do LP's find this to be comforting that the syndicator has their own skin in the game?  I'm sure this all depends on the deal. 

Lastly, If you do join in on the LP side do you pay yourself returns equal to that of other investors. For example your syndicating a deal and the capital raise is $1,000,000 and your bringing in 9 LP's including yourself all throwing in $100k. If the COC return is 9% i'm wondering if you would pay yourself and the other 9 investor $9k each on their intial investment.

If you need more information to answer I will fill in the gaps.

Thanks in Advance.

Same here, yes, I have invested my own capital in all deals.

Having said that there are legit reasons that some sponsors / syndicators would put nothing into a deal.  The main reason is for liquidity purposes.  If his/her cash position gets a little low they may decide not to put any of their own money in a deal.  To sign on loans, which the syndicator does, they need to have a minimum level of liquidity post close to satisfy the lender.  If this gets low they may decide not to put their own $$ in.

Ideally they would put their own money at risk as well as yours but sometimes and for good reason they won't.  I would ask why they aren't and would need to feel comfortable with their answer.  If they give an uncomfortable answer or refuse to answer I would not invest with them, there will always be another deal.

We put money into all our deals as well, and always on the LP side.  That money is treated the same as any other LP money.  

Agree with @Bruce Petersen that you don't have to as a sponsor and there are many reasons they might not.  But if you are just getting started (which is sounds like you are) I think it will be a challenge to find investors if you don't personally have skin the game.  That said, you can get a little creative there.  For example--do you have immediate family putting money in the deal?  We usually do, and I tell investors that I personally am putting $x into this deal, and that my immediate family (brother, dad, etc) are putting in $y.  

At the end of the day, you need to show alignment of interests between the GP and LP--putting your own money in the deal is probably the best way to show/prove that. 

Good luck!

@Ian McDonald yes you typically need to have or find (give up some of your GP depending on the size deals you're doing) skin in the game.

google "pari passu." It's the legal term for how most syndications are setup but in short ALL dollars (GP or LP) invested are treated the same.

As an investor investing in syndicated deals, I always ask this question to syndicators if they are putting any money of their own in the deal. I do not necessarily look for a 'yes', but the answer provides just another window into the syndicator's  thought process. Good syndicators will always qualify their answer with the reasons they are acting one way or another and that is much more important to me. 

While the question has utility for vetting a syndicator the first time, after you have invested with a syndicator on multiple deals, this question becomes somewhat irrelevant. 

@Ian McDonald The principals of my firm (a fund manager), generally put about 10% of their own capital into our funds as LPs. They pay themselves the same pref that all other LP investors get and then collect the promote from the GP side for returns that we earn over the pref. I think investing 10% of the total deal like you used in your example is a good rule of thumb for proving your alignment with investors...it really shows that you are not buying a deal just to earn a fee, but its a deal you feel comfortable investing that amount of your personal money in too.

-Vince

@Ian McDonald

I'll add to the great comments above.

One of the first questions investors have asked me is how much of my own money I am planning on investing into each deal.

A great framework that has helped me (stolen from Charlie Munger - "invert, always invert" framework) is to put myself into a typical investor's shoes. Given my background/network, my typical customer profile is that of a 30-45 year old finance/doctor. These are, mostly, conservative individuals who are, in all likelihood, new-ish to syndication. Hence, I have to "guide" them through the investment i.e. simplify by assuming they invest $1 into the deal and how does that $1 go from start to end.

Some of the concerns include:

  • How much money of my own am I investing?
  • What are the benefits and what the risks? The investors I have encountered have to be taught that the 3-5 year lockup period is not "weird" (they always think of REITs as commercial real estate investing) and in fact, allows the syndicator to get the maximum bang for the investor's buck.
  • As a concept of social proof, I also have them get in touch with investor's sharing a similar background to ease them in.

Essentially, what I am saying is that while you have great questions (I had similar when starting out), you should instead continue to focus on the "emotional" aspects of why your investors are investing. Often time, seemingly "major"/quantitative details (8% or 9% preferred, 16% or 18% IRR) are minor in the eyes of the investor. They are investing in you first... work on building that angle.

@Ian McDonald Hey Ian, investing is mostly emotional whether we like to admit it or not. Likewise, the rule is the same for syndications. Investors who are willing to give you their hard-earned capital not only want to make sure that your interests are aligned with theirs but also that you are willing to try your own offering. 

Now, if you do not have your own capital to invest, a scenario which isn't rare, then articulate that to the investors, but then mention that you will be covering the initial costs (if you would be) and the sweat equity of putting the deal together. 

Undoubtedly, investors would want to see that you have skin in the game (in form of your own capital); however, if you have a really good deal and family or friends who believe in your work ethic, surely not having a 100k to throw into a deal on the LP side isn't the end of the world. Hope that helps. Good luck. Thanks! - Ola 

@Vince DeCrow

This is how we are proposing we structure our deals.  Much appreciated for your feedback.

-Ian

@Omar Khan @Ola Dantis

Very good points to consider on the emotional side of the investors and understanding their view/position.  I am encountering this right now.  Having skin in the game is not the issue as this has been the plan all along (depending on how much liquidity the lender will require).  The largest hurdle right now is building all the right relationships with investors in order to bring them a deal.  In my case I have a deal, a partner, and a good team around us, but the investors are the lagging component.

Much appreciated everyone!

-Ian

@Ian McDonald we invest in all of our deals as an LP along side our investors. My investors than have done business with me in the past would invest if I didn't put money in, but are happier if I do and my new investors are much more comfortable and expect me to invest. 

We pay all investors, including ourselves the same percentage. 

@Todd Dexheimer Given the capital is sufficient within the entity I would prefer this route whenever possible considering it provides a return on both the GP and LP side of the deal. Thank you.

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