Post Covid LP returns?

[Account Closed]

Hello everyone, before Covid I was analyzing deals from various syndicators and when Covid hit I decided to wait it out before investing money into a syndication. What kind of returns (CoC, EM, IRR) are you syndicators expecting to give to your limited partners POST Covid? Does 8% pref still exist? What kind of returns can I expect in a 5 year old and a 10 year hold?

Thank you for your time

[Brian Burke]

I doubt you'll see returns much different than pre-Covid.  Projected returns are really a function of investor demand--meaning the more investors that are interested in placing money into private placements, the lower the projected returns.

Right now there is intense interest on behalf of investors for real estate.  These investors, both small high-net-worth investors as well as the institutional mega-funds, are placing money into real estate offerings because they see it as a great alternative to other investment options.  As a result, operators (syndicators) are flush with cash and are competing for acquisitions, which drives up prices.  Syndicators can project lower returns and still raise money because of the investor demand.  Good thing, because in most cases higher prices do mean lower returns.

Contrast this to 2010. Back then raising money for real estate was like pulling teeth. If a deal wouldn't produce over a 20% IRR no one was interested. That lack of capital meant less competition in the acquisition space, which drove down prices and kept projected returns high.

Today there are hundreds of billions of dollars on the sidelines for real estate.  This demand will likely keep yields compressed for the foreseeable future.  

As to your question about 8% prefs--that's a different question.  A preferred return isn't a projected return nor is it an indication of performance--it is simply a deal structure point, giving priority to cash flows until hitting the hurdle.  You could see a tilt in deal structures due to the intense investor demand, but I doubt it, at least not yet.  There are lots of options out there in the passive investing space and sponsors who lower their preferred return hurdles might make it more difficult for themselves to compete against sponsors that do not.