Syndicators/LPs : What kind of MOIC are you seeing?

OP

Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes

7y

@Todd Dexheimer

I read through that recent thread and I don't think I saw much if any mention of MOIC. Obvious MOIC is a product of cash on cash and total return and can be extrapolated. Are most investors simply interested in COC and IRR and aren't as focused about 2xing, 3xing their capital? Or is it that by the time an investor sees an 18% IRR they already view the deal as having a good return and the MOIC is just another indicator that is seen a tertiary metric (that's how I've viewed it in the past)?

What kind of IRR/MOIC do you see on the sponsor side from your co-invest or from fees rolled into the deal as equity/promote units?

Most of the returns in the previous thread were mostly, if not all, LP returns. I'm curious as to what other sponsors are shooting for.

OP

Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes

7y

@Sam Grooms thanks for the response. It makes sense and only prudent that GP level returns are secondary to making it work for LPs and providing them with a good return first and above anything. That being said I know everyone is modeling their own return as a Sponsor as well (I mean, why wouldn't you?)

So whether you are doing a 10%+- co-invest and/or rolling your 1-2% acquisition fee into the deal as equity - what does your MOIC and IRR look like and do you have somewhat a target in mind?

Todd Dexheimer

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

7y

We look to double money in 5-6 years. I think anyone getting a 14-16% IRR in 5 years will double money in 5-6 years. We invest along side our investors, so we are getting the same returns.

OP

Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes

7y

@Todd Dexheimer what about your LP level returns from any real co-invest (cash, not fees rolled in) + LP returns from any fees rolled in as equity + your % of the 30% GP/Sponsor promote?

I'm assuming your deals aren't pref + 100/0.

Alina Trigub

Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes

7y

@Spencer Gray

My feedback is along the lines of what others said, Equity Multiple runs around 2x's for 5-7 year plan, and then it tend to bump up towards 2.5x after that.

That being said, I want to reiterate the importance of evaluating all of the quantitative components of each deal together with qualitative ones.

Are you evaluating deals as a passive or active investor? What are you trying to achieve here?

OP

Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes

7y

@Alina Trigub Thanks for responding. I definitely agree with having a holistic approach for deal analysis. My question is more in regards to taking a very macro level analysis of wealth creation via multifamily investing and in that analysis comparing the returns of LPs in a deal vs the returns of the GP group.

We invest both passively as an LP in some deals but primarily we co-sponsor/GP syndications and are active in those projects.

Since LP level returns seem pretty consistent (2x for 5 years and increasing with duration) I'm more interested in what range other sponsors are receiving on their end to better understand how different groups are using OPM. IRR is probably a better metric to use, but I was also curious if sponsors are looking at their own MOIC is.

Maybe that's it's personal and proprietary for some and it's not unreasonable to keep that information close to ones chest -so no worries if it is - but for as much discussion goes into project level returns and LP level returns, not as much is discussed about the returns on the GP side when using OPM. Depending on the structure of the deal there's going to be a wide range, especially if the GP side has little to no skin in game.

Paul B.

Rental Property Investor · Dallas, TX · Member since 2015 · 503 posts · 504 votes

7y

Originally posted by @Spencer Gray:

@Todd Dexheimer

Or is it that by the time an investor sees an 18% IRR they already view the deal as having a good return and the MOIC is just another indicator that is seen a tertiary metric (that's how I've viewed it in the past)?

I think this one is true for me. If the IRR is good, and it's a 3-5 year hold, then a strong (1.75-2) MOIC is implied so I don't bother thinking about that particular metric.

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Todd Dexheimer

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

7y

Originally posted by @Spencer Gray:

@Todd Dexheimer what about your LP level returns from any real co-invest (cash, not fees rolled in) + LP returns from any fees rolled in as equity + your % of the 30% GP/Sponsor promote?

I'm assuming your deals aren't pref + 100/0.

As stated earlier LP returns are expected to be around a 14-16%+ IRR on a 5 year.

GP has no IRR. We put money in the deal - usually around 8-12% of the raise, but that is treated as an LP investment, which is most common. GP profit will be based on performance. Overall project expectation is 20%+ IRR and 10% CoC

2 Reply

Brian BurkePro Member

Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes

7y

It seems that my investors focus primarily on IRR and CoC, and different investors prioritize one over the other. We have some investors that are multiple focused but that's rare for us. Certainly multiple is part of the overall analysis of whether it's worth it for them to invest, but I just don't often see it as the driver. It's more of the passenger.

In terms of evaluating our IRR, CoC, and equity multiple on the sponsor side, the funny thing is I don't even calculate it. Oddly, I've never even thought to. I've always just viewed my return the same as the LPs because I'd be investing as an LP and would receive the same pro-rata returns as they do.

I see performance indicators as a way to compare one investment to another. Looking at LP+Promote level performance indicators might be an interesting exercise, but it doesn't produce much value to me because I'm not doing it to compare one investment option versus another, I'd be doing it just to see how high my IRR or multiple is. Maybe if I were solely focused on syndication as a wealth-building strategy I'd be really interested in that. But I view this as a business, and as such there are many other benchmarks that I use to translate the level of success.

5 Reply

Kay Kay Singh

Rental Property Investor · Fort Wayne, IN · Member since 2016 · 258 posts · 177 votes

7y

I as a LP in syndication deals do care about the equity multiples because I like to see how many years will it take to double my money versus COC and IRR .I do look at these metrics too but for me most important is the the track record of the sponsor and then the actual deal and the market.

4 Reply

Alina Trigub

Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes

7y

Spencer,

I have discussed this topic with others in mastermind groups, haven't seen it pop up on BP yet. A lot depends on how much one values their time. What is your time worth versus the investment and the effort you're putting in. How fast/slow do you want your syndication business to grow. Are you expanding it into other territories (aka niches or complementary businesses). Who are you partnering with. What are your partners capable of. In other words, I don't think there's a straight-forward to calculate your ROI as GP without taking into consideration a number of external factors.

Originally posted by @Spencer Gray:

@Alina Trigub Thanks for responding. I definitely agree with having a holistic approach for deal analysis. My question is more in regards to taking a very macro level analysis of wealth creation via multifamily investing and in that analysis comparing the returns of LPs in a deal vs the returns of the GP group.

We invest both passively as an LP in some deals but primarily we co-sponsor/GP syndications and are active in those projects.

Since LP level returns seem pretty consistent (2x for 5 years and increasing with duration) I'm more interested in what range other sponsors are receiving on their end to better understand how different groups are using OPM. IRR is probably a better metric to use, but I was also curious if sponsors are looking at their own MOIC is.

Maybe that's it's personal and proprietary for some and it's not unreasonable to keep that information close to ones chest -so no worries if it is - but for as much discussion goes into project level returns and LP level returns, not as much is discussed about the returns on the GP side when using OPM. Depending on the structure of the deal there's going to be a wide range, especially if the GP side has little to no skin in game.

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

7y

Total deal IRR 25%, 70/30 split, 8% pref is a decent starting point for the recipe to the secret sauce that you are asking for but, as everyone knows, it will vary widely from there (particularly in other asset classes and strategies).

Taylor L.

Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes

7y

My investors have not expressed focus on MOIC, but that is certainly something I'll be asking them about soon, to get a better picture of who is and who is not paying attention to it.

Personally, I don't pay attention to that metric specifically. From a numbers standpoint, I pay more attention to CoC.

Qualitatively, I want to be in deals that will perform well in the next recession. So as an LP I'll model the assumptions, look at some downside cases, and see how poorly the property has to theoretically perform before we start risking losing the property.

I interviewed @Brian Burke at one point, he has a harrowing story about keeping a deal out of foreclosure during the last recession. He did succeed at saving it, IIRC, but I want to avoid being in that situation if I can!!

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Brian BurkePro Member

Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes

7y

Originally posted by @Taylor L.:

I want to avoid being in that situation if I can!!

You've got that right, Taylor! You definitely don't! :) I tell that story to underscore the value of experience. Once you've seen how hard this business can be you earn so much more respect for it than you ever would have otherwise.

On another note, today I saw the result of an investor survey from CrowdStreet. They asked investors what components of a commercial real estate investment are important to them. IRR led the pack with 75% saying it is important. Current Yield (CoC return) was 58%. Equity multiple was 50%. I'm not surprised by the order, but I am a bit surprised that equity multiple scored even as high as 50%. It's just not talked about as much.

3 Reply

John Sayers

Specialist · Austin, TX · Member since 2017 · 137 posts · 109 votes

7y

Originally posted by @Kay Kay Singh:

I as a LP in syndication deals do care about the equity multiples because I like to see how many years will it take to double my money versus COC and IRR .I do look at these metrics too but for me most important is the the track record of the sponsor and then the actual deal and the market.

Same here Kay Kay. IRR can be massaged to confuse the many sophisticated investors. 2 deals with the same IRR and term can yield a quite different multiple. Depends some on return OF or return ON investment, the type of cashflow over the term etc. Some don't realize they may need to be more active reinvesting sooner in some deals vs others and thus more work than they thought to keep all their funds truly at work. A multiple seems less easy to confuse on what the deal will "do" without the passive investor's intervention along the way.

Taylor L.

Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes

7y

@Brian Burke would you agree that IRR is the most esoteric, easiest to B.S. metric out of all of those?

That's my feel. Interested in your thoughts. Do more experienced passive investors lean to other metrics?

My intuition is Crowdstreet tends to attract newer accredited investors. Once they get experienced they tend to go toward privately marketed deals?

Upvote for your thoughts?

Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

7y

The multiple is important to some investors, so we do look at it. But, only as an output, never as an input. This is to say, we do not underwrite to it, but track it.

ON a 5-year hold basis, with the IRR and COC doing what they need to do, the multiple shakes out around 2x. On a 10-year basis 2.5x - 2.6x. This is at the investor level. I really do not track and don't have much concern with what these numbers are at the deal level.

Again, most of our investors want to see the IRR and to a lesser degree COC.

2 Reply

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OP

Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes

7y

@Taylor L. it's absolutely the easiest to manipulate. A 100 bps decrease in exit cap can easily translate to a 300 bps increase in IRR.

All a sponsor has to say is "well, that's where the market is today and we don't know the future." Exactly - no one knows what the market is going to be like in 10 years, let alone the next 1-3.

I still think more sponsors should provide a sensitivity analysis table for Exit Cap and Exit NOI that illustrates the range of IRR on a given deal. This way it's easy to look at a worse case scenario to prepare investors for a below average market or performance, but on the flip side you can show the deal in a better case scenario (while avoiding the absolute best).

@Ben Leybovich thanks for the feedback - makes sense.

2 Reply

Brian BurkePro Member

Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes

7y

Originally posted by @Taylor L.:

@Brian Burke would you agree that IRR is the most esoteric, easiest to B.S. metric out of all of those?

That's my feel. Interested in your thoughts. Do more experienced passive investors lean to other metrics?

Naw, I don't agree with that at all. IRR is not the easiest to manipulate. They are ALL easy to manipulate. IRR, CoC and EM (Equity Multiple) are the resulting calculations of a set of cash flows, either forecasted or actual. Actual cash flows are not easy to manipulate and thus the resulting output isn't either.

But FORECASTED cash flows are easy to manipulate. Overestimating first-year performance is extremely common. Forecasting too low of a vacancy factor, or too high of rent growth, or too high of a "post-renovated rent" that isn't supported by the comps. Neglecting to include, or reducing the impact of, other economic vacancy factors such as loss to lease, bad debt, concessions and non-revenue units. Improperly calculating debt service, underestimating capital expenditures, and improperly forecasting future expenses, especially property taxes that re-assess at a higher value after acquisition are all common mistakes. Not to mention simply underestimating acquisition and renovation costs that result in less capital to be raised in the sources of funds. This slants returns higher in the forecast, only to be quietly reversed later when additional capital needs to be raised to complete the purchase or the renovation, but the forecasts don't get updated.

All of these variations in forecasting result in a different set of forecasted cash flows, and as a result, the output is a different IRR, CoC and EM. As the old saying from the computer world goes--"Garbage In, Garbage Out."

This is why passive investors considering an investment into a private offering should not simply scan a grid of forecasted IRRs, CoCs, and EMs and land their finger on the one with the highest number and "click the button to invest." Instead, investors should carefully do their due diligence on the sponsor and the offering, and closely examine the assumptions that were made to arrive at the forecasted cash flows. Then, choose to invest in the offering from the best sponsor with the most reasonable assumptions that result in performance indicators that fit their objectives, rather than chasing the shiny object of the highest forecasted return.

7 Reply

Scott Morongell

Investor · Charlotte, NC · Member since 2017 · 791 posts · 479 votes

7y

@Spencer Gray Our cost of capital or multiple that our investor (LP) like to see is a min of 1.8x on a 5 year hold. When you mash it all up, this is 70/30 split after a 7 pref, and a 14-16IRR.