List of Syndicators/GPs to AVOID?
Most Popular Reply
Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesAs always, it will be a case by case basis.
This thread is about GPs to avoid. Many LPs thanked their sponsors for good returns with millions of dollars in guaranteed fees, and tens of millions in carried interest. To those sponsors, LPs shouldn't say "thank you." They should say, "you're welcome."
GPs solicited investors by promising huge returns and citing their track records. Some did this very publicly. Then those GPs "earned" fees just for buying the buildings... the same buildings that will now result in many cases in total wipeout for their investors. Some of them are now asking for more capital to bail out these buildings and have very real risk of losing that too.
LPs absolutely have a right to be mad, and a total or near total wipeout of invested capital in the last 3-5 years absolutely invalidates a decade of performance in many, but not all, cases, in my view, especially in the 2010s, when almost anyone with a pulse could make money in multifamily.
However, what matters more to me than whether a fund or deal is wiped out, is how the sponsor handles it.
"Good" in the context of losing, to me, looks like this:
Sponsor honestly appraises the situation, and provides a blunt assessment of where they made a bad bet, failed in due diligence, operated poorly, or were totally irresponsible with leverage and timing. Sponsor realistically and honestly susses out this from market challenges, which of course are real.
Sponsor tells investors that they are committed to operating their current business and stewarding investor capital. Sponsor recommits full-time attention to their job, which is to oversee the tens of millions, hundreds of millions, and/or billions of Assets they deploy.
Sponsor is regularly seen on-site at every property in their portfolio, regardless of personal cost.
They raised the big bucks, and things aren't going well. Are they going to be on vacation? Are they going to start up the next fun side project or fund? Or are they going to go to work and do everything they can to make their investors whole on their CURRENT deals?
I'm in a deal that's gone south as an LP. My sponsor is doing "Good" in the context of losing.
We all knew what we were getting into. We knew the bet. He executed it. It's his full-time job. It's all he does. He lives within an easy drive of every property in the portfolio.
Doesn't change that I am getting flushed on the deal. But, I may/will invest with him again. He operated it well. Executed the plan, keeps the units occupied. Just supply and interest rates crushed us. I expect many investors will not be happy, but they also won't publicly roast him for fleecing them.
Other sponsors aren't doing "good" in the context of losing. They will get roasted.
Some deserve it.
134 Replies
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Chris Seveney:
Quote from @Carlos Ptriawan:
Quote from @Chris Seveney:
This post has 30+ comments, but has anyone actually roasted a GP yet?
Chris I have list of 25 GP to avoid.
But if I post this I would have 30 people mad at me and maybe the BP CEO too.
Why I shall take the risk ?That video you shared "no one could see interest rates rising..." Really, hmmm lets print $6T and think that they will stay at zero....
that's the attitude of those gp, just blame the fed for their inability to do basic financial DD.
- 2yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
Quote from @Forest Wu:
As someone also on the outside looking in, I'm stunned that there is little to no info on BP about LPs' experiences from investing with syndications over the past few years. The only thing that I see are self-promotions or suspicious accounts promoting some GPs.Quote from @Amit M.:
@Jay Hinrichs regarding your point #8, what is interesting going forward is seeing how capital calls play out. What percent of GPs making capital calls will actually manage to minimize losses vs GPs that end up loosing all that money too for the LPs?
Unfortunately LPs, in addition to being in bad deals are also deciding on capital calls. Personally I think more often than not it will be throwing out good money after bad, but seeing which capital call end up saving the day and which won’t will be interesting.Another good question is if the syndication failure rate will be lower or higher than during the Great Recession of 2008-2010. Of course we didn’t have as active of a BP, social media, etc. scene back then. But flipping SFHs was out of control during that time and got a lot of media attention. I think syndications were less known to the general public back then compared to this cycle
Some interesting post-mortem analysis to be had for sure; I’m just relieved that I’m sitting on the outside looking at all this. But it’s times like this that create valuable investing lessons to be had nevertheless.
It could just be that some LPs are unaware of what's happening but I highly doubt that. There are enough keys being handed back to the bank that I feel like there should be some level of discourse hereForest - we have a forum created 3 months ago specifically for this topic:
https://www.biggerpockets.com/forums/960
There are many, many more threads discussing syndicators on the site, threes are just the ones we’ve moved into that forum so far. I moved this post into that forum, for example.
You can see plenty of thorough discussions there and it is just ramping up.
We also plan to do more investigative style journalism, come this summer with PassivePockets. Here’s an example of that:
https://www.biggerpockets.com/blog/did-western-wealth-capita...
Last week we did a show dedicated to capital calls with Mr Burke.Most of the investors on this site are active investors. However we plan to meet the growing demand that is extremely clear from people like yourself with PassivePockets. By end July, you will see this topic extremely well represented on our platform and with major investment.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Scott Trench:
Quote from @Forest Wu:
As someone also on the outside looking in, I'm stunned that there is little to no info on BP about LPs' experiences from investing with syndications over the past few years. The only thing that I see are self-promotions or suspicious accounts promoting some GPs.Quote from @Amit M.:
@Jay Hinrichs regarding your point #8, what is interesting going forward is seeing how capital calls play out. What percent of GPs making capital calls will actually manage to minimize losses vs GPs that end up loosing all that money too for the LPs?
Unfortunately LPs, in addition to being in bad deals are also deciding on capital calls. Personally I think more often than not it will be throwing out good money after bad, but seeing which capital call end up saving the day and which won’t will be interesting.Another good question is if the syndication failure rate will be lower or higher than during the Great Recession of 2008-2010. Of course we didn’t have as active of a BP, social media, etc. scene back then. But flipping SFHs was out of control during that time and got a lot of media attention. I think syndications were less known to the general public back then compared to this cycle
Some interesting post-mortem analysis to be had for sure; I’m just relieved that I’m sitting on the outside looking at all this. But it’s times like this that create valuable investing lessons to be had nevertheless.
It could just be that some LPs are unaware of what's happening but I highly doubt that. There are enough keys being handed back to the bank that I feel like there should be some level of discourse hereForest - we have a forum created 3 months ago specifically for this topic:
https://www.biggerpockets.com/forums/960
There are many, many more threads discussing syndicators on the site, threes are just the ones we’ve moved into that forum so far. I moved this post into that forum, for example.
You can see plenty of thorough discussions there and it is just ramping up.
We also plan to do more investigative style journalism, come this summer with PassivePockets. Here’s an example of that:
https://www.biggerpockets.com/blog/did-western-wealth-capita...
Last week we did a show dedicated to capital calls with Mr Burke.Most of the investors on this site are active investors. However we plan to meet the growing demand that is extremely clear from people like yourself with PassivePockets. By end July, you will see this topic extremely well represented on our platform and with major investment.
Your investigative report on WWC is very good.. its all basic information that any investor should know going in.. but at the time I think they just invested without really understanding the risks. - 2yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votesLPs in this position have some factors they can consider when evaluating the chances of a successful outcome.
Quote from @Amit M.:
Unfortunately LPs, in addition to being in bad deals are also deciding on capital calls. Personally I think more often than not it will be throwing out good money after bad, but seeing which capital call end up saving the day and which won’t will be interesting.
1. An incompetent sponsor—good outcome unlikely.
2. A loan maturity in the next 3-5 years—good outcome unlikely.
3. Primary financing is bridge debt with a wide spread—good outcome difficult.
4. Capital call just to buy the next one-year rate cap—good outcome unlikely and expect another capital call.
5. Capital call to pay down the loan a little so the lender will extend the maturity out another year—you are back in #2.
6. Capital call is just to plug holes for a year or two and by then the market will come back and we can sell and get all our money back—good outcome not very likely.
7. Competent sponsor, no loan maturity for at least 5 years, not bridge debt with a wide spread, property generally stable, and capital call anticipates several years of liquidity—good outcome more likely than not.
8. Competent sponsor, capital call large enough to completely escape existing toxic loan with cash-in refinance to a lower-balance loan with a long maturity—good outcome possible, even probable, if there is no other “hot money” in the deal such as preferred equity or priority share classes.
There are surely other nuances I’ve missed here, but this is a start. - 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Brian Burke:
LPs in this position have some factors they can consider when evaluating the chances of a successful outcome.Quote from @Amit M.:
Unfortunately LPs, in addition to being in bad deals are also deciding on capital calls. Personally I think more often than not it will be throwing out good money after bad, but seeing which capital call end up saving the day and which won’t will be interesting.
1. An incompetent sponsor—good outcome unlikely.
2. A loan maturity in the next 3-5 years—good outcome unlikely.
3. Primary financing is bridge debt with a wide spread—good outcome difficult.
4. Capital call just to buy the next one-year rate cap—good outcome unlikely and expect another capital call.
5. Capital call to pay down the loan a little so the lender will extend the maturity out another year—you are back in #2.
6. Capital call is just to plug holes for a year or two and by then the market will come back and we can sell and get all our money back—good outcome not very likely.
7. Competent sponsor, no loan maturity for at least 5 years, not bridge debt with a wide spread, property generally stable, and capital call anticipates several years of liquidity—good outcome more likely than not.
8. Competent sponsor, capital call large enough to completely escape existing toxic loan with cash-in refinance to a lower-balance loan with a long maturity—good outcome possible, even probable, if there is no other “hot money” in the deal such as preferred equity or priority share classes.
There are surely other nuances I’ve missed here, but this is a start.Brian out of curiosity. Of the deals done in the last say 3 to 5 years that seem to be having these issues. What would you guess as to the % of deals that were done fall into the high risk category.
We have to think there are many deals were the loans are fixed and long term with very experienced competent sponsors.
I seem to recall look at a Sponsor Oh maybe 3 to 5 years ago that ONLY paid cash .. So I got to think obviously they are fine.. I would also have thought they would have attracted only the most conservative investor whose primary goal was protection of principal not how do I get the highest IRR ..
I know on the debt side of these offerings it was/is hard to compete with the Blue sky IRR that is posted by MF or other syndicators promoting 20 to 40% IRRs .. And as debt we have our vanilla make 8 to 15% with no upside.. but being first position debt downside is limited, of course you could have some loss in those deals but a 100% wipe out would be pretty rare indeed. - 2yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
I’ll begin by saying I have no objective data to support my opinion, but I do have some subjective data, so take it for what it’s worth.
I think the trouble is pretty widespread, particularly among newer syndicators (defining that by less than 10 years in the business, so never having survived an adverse cycle). Larger, experienced shops likely less so, but with these groups even if they have some problem deals it’ll amount to a headwind to overall performance of a very large portfolio rather than a disaster that brings down the firm.
The 2020 to 2023 period saw several very active “newer” groups who were rapidly scaling and in some cases dominating acquisitions. I stopped buying in 2021 but when I was still actively submitting offers around 2019-2021 we were getting blown out by a wide margin. I asked brokers back then, “how many of these bidders are using high-leverage bridge debt?” The reply, “All of them.”
That response is one of the catalysts to our decision to start selling. When we were selling, we asked bidders what type of financing they were using, and the answer among the highest set of bidders was nearly always bridge debt. Fast forward 2-3 years, about half of the properties I sold have come back around with the new owners trying to get out of them, some to no avail.
Having said that, even though brokers looked at me like I had two heads when I told them we were underwriting an agency execution, someone besides myself must have been using agency debt because agency volume hit caps every year during that period. Whether that came from earlier deals refinancing out of bridge to roll to long-term debt or if it was for acquisitions, I don’t have data to answer.
To your question about competing against high IRRs when raising capital—you are right. I built our portfolio slowly, in part because it’s difficult to buy with discipline in an undisciplined market, but also in part because investors didn’t choose to invest with us because our projected returns weren’t as attractive as other groups. So despite a core team with 100,000 units of experience going back multiple decades, I watched newly-minted groups out-scale us. But I couldn’t be happier—I’m not in this business to scale, I’m here to last. We’ll see how this all plays out.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Brian Burke:
LPs in this position have some factors they can consider when evaluating the chances of a successful outcome.Quote from @Amit M.:
Unfortunately LPs, in addition to being in bad deals are also deciding on capital calls. Personally I think more often than not it will be throwing out good money after bad, but seeing which capital call end up saving the day and which won’t will be interesting.
1. An incompetent sponsor—good outcome unlikely.
2. A loan maturity in the next 3-5 years—good outcome unlikely.
3. Primary financing is bridge debt with a wide spread—good outcome difficult.
4. Capital call just to buy the next one-year rate cap—good outcome unlikely and expect another capital call.
5. Capital call to pay down the loan a little so the lender will extend the maturity out another year—you are back in #2.
6. Capital call is just to plug holes for a year or two and by then the market will come back and we can sell and get all our money back—good outcome not very likely.
7. Competent sponsor, no loan maturity for at least 5 years, not bridge debt with a wide spread, property generally stable, and capital call anticipates several years of liquidity—good outcome more likely than not.
8. Competent sponsor, capital call large enough to completely escape existing toxic loan with cash-in refinance to a lower-balance loan with a long maturity—good outcome possible, even probable, if there is no other “hot money” in the deal such as preferred equity or priority share classes.
There are surely other nuances I’ve missed here, but this is a start.These are very good lists how LP should quantify the data and risk before even investing. By approaching from the "objective analysis" rather than "who is the good and bad guy", you are really educating a basic investor.
Capital call is a myth/method created by the lender as a temporary measure by the lender to avoid foreclosure.Nonetheless, these capital call is created because the lender itself is willing to take a such very high risk investment that should not happen in the first place.
A DSCR loan of 0.85 80% LTV should not happen in the first place. In Real Estate you want 10 year fixed debt. Period. Pre-Payment is feature and advantage.Focus on Risk and not Return. An Apartment investment should be very easy in DD as people always renting.
- Member since 2019 · 2 posts · 2 votes2y
I have interviewed 4 different investment advisors. Each one has talked similar but had different reasons why them to go with.
One just said get into 1031 that get bought into reit and be done with rolling over ever 5-7 years. Less fees.
Others have all said they can offer same deals but might have better or different vetting of offers to protect clients. The fees are real but assessing where those are in the deal are most important. Some don’t push leverage some do….
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Paul Higgs:
I have interviewed 4 different investment advisors. Each one has talked similar but had different reasons why them to go with.
One just said get into 1031 that get bought into reit and be done with rolling over ever 5-7 years. Less fees.
Others have all said they can offer same deals but might have better or different vetting of offers to protect clients. The fees are real but assessing where those are in the deal are most important. Some don’t push leverage some do….
For some companies it is a must to invest on all market cycle , they can’t close shop even if there is bear market , that’s why we can’t blindly blaming the GP.
it is similar like asking why my REIT stock is down when TLT is down , in theory CRE correlates a lot with bond market. One need stable bond market to invest, hence the best hedge to avoid financial risk is to use long term debt. Even then there is no guarantee because I give example yesterday Invesco still losing money even after 8 years as cap rate decompress. - Specialist · Austin, TX · Member since 2017 · 137 posts · 109 votes2yClosest may be where Frank Sichelle posted 2 short lists: "Category #1 - Inexperienced Sponsors:" and "Category #2 - Malicious/Greedy sponsors:"
Quote from @Chris Seveney:
This post has 30+ comments, but has anyone actually roasted a GP yet?
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @John Sayers:
Closest may be where Frank Sichelle posted 2 short lists: "Category #1 - Inexperienced Sponsors:" and "Category #2 - Malicious/Greedy sponsors:"Quote from @Chris Seveney:
This post has 30+ comments, but has anyone actually roasted a GP yet?
Thanks
I missed that one
7e investments53 Reviews - Member since 2019 · 2 posts · 2 votes2y
Quote from @Carlos Ptriawan:
Quote from @Paul Higgs:
I have interviewed 4 different investment advisors. Each one has talked similar but had different reasons why them to go with.
One just said get into 1031 that get bought into reit and be done with rolling over ever 5-7 years. Less fees.
Others have all said they can offer same deals but might have better or different vetting of offers to protect clients. The fees are real but assessing where those are in the deal are most important. Some don’t push leverage some do….
For some companies it is a must to invest on all market cycle , they can’t close shop even if there is bear market , that’s why we can’t blindly blaming the GP.
it is similar like asking why my REIT stock is down when TLT is down , in theory CRE correlates a lot with bond market. One need stable bond market to invest, hence the best hedge to avoid financial risk is to use long term debt. Even then there is no guarantee because I give example yesterday Invesco still losing money even after 8 years as cap rate decompress.Agreed! I own a building as an example and the value goes through same market cycles. The value of asset can change and a GP will not sell in bad market cycle to protect investors. (A good one anyway). Next place is how do they take care of investors through that and keep monthly payouts. Understand track record of the investment in doing this. DST should be a more defensive play and GPs that don't take care of investors or sponsors are toast if they do not from future investors.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Paul Higgs:
Quote from @Carlos Ptriawan:
Quote from @Paul Higgs:
I have interviewed 4 different investment advisors. Each one has talked similar but had different reasons why them to go with.
One just said get into 1031 that get bought into reit and be done with rolling over ever 5-7 years. Less fees.
Others have all said they can offer same deals but might have better or different vetting of offers to protect clients. The fees are real but assessing where those are in the deal are most important. Some don’t push leverage some do….
For some companies it is a must to invest on all market cycle , they can’t close shop even if there is bear market , that’s why we can’t blindly blaming the GP.
it is similar like asking why my REIT stock is down when TLT is down , in theory CRE correlates a lot with bond market. One need stable bond market to invest, hence the best hedge to avoid financial risk is to use long term debt. Even then there is no guarantee because I give example yesterday Invesco still losing money even after 8 years as cap rate decompress.Agreed! I own a building as an example and the value goes through same market cycles. The value of asset can change and a GP will not sell in bad market cycle to protect investors. (A good one anyway). Next place is how do they take care of investors through that and keep monthly payouts. Understand track record of the investment in doing this. DST should be a more defensive play and GPs that don't take care of investors or sponsors are toast if they do not from future investors.
I agree dst structure is the best
Albeit our Lp friend never try to understand why REiT dividend is only 3 percent lol , same like dst where it would give you 2 to 4 net after all fees
Regarding my initial question on capital calls, my reading of said tea leaves says that 80-90% of capital calls in this current cycle will fail.
LP’s out there: think things through carefully before agreeing to capital calls!
- Investor · Bremerton, WA · Member since 2018 · 7 posts · 7 votes2y
Following this thread closely. Thank you for all your input.
I was (and still am to an extent) very inexperienced jumping into syndication investing when I first started so I made alot of mistakes. I am in AVAF1 and some others that with succumbed to allure of big IRRs and risky short term bridge debt. I would not call out most of these sponsors because I would blame sponsor/investor (my own) inexperience and market FOMO more than an "incompetent" sponsor.
The one sponsor that I did walk away from is Aaron Meriman of LMDG (.net) I didn't actually lose any money on this investment, in fact, it generated a small return. However, the reason I am mentioning this is that this was early 2018 when I first invested. The other investments I made during this period all did spectacularly. However, this one fell far short of the mark, IMO, primarily because the sponsor fees were horrendous on top of a downturn in the target market. I mentioned this as a reminder to really look at the fine print. It was the very first syndication I invested in and I found the sponsor here on Biggerpockets. As I grew in knowledge and experience, I started to learn what the average fee structure looks like and decided to pass on future investments with this sponsor.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Amit M.:
Regarding my initial question on capital calls, my reading of said tea leaves says that 80-90% of capital calls in this current cycle will fail.
LP’s out there: think things through carefully before agreeing to capital calls!
it would fail because their original loan was 90% LTV for DSCR 0.90x 4% initial rate,
new rate is 9%other word to compensate you have to raise rent by 1.4-5x to reach DSCR 1.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Jonathan Gordon:
Following this thread closely. Thank you for all your input.
I was (and still am to an extent) very inexperienced jumping into syndication investing when I first started so I made alot of mistakes. I am in AVAF1 and some others that with succumbed to allure of big IRRs and risky short term bridge debt. I would not call out most of these sponsors because I would blame sponsor/investor (my own) inexperience and market FOMO more than an "incompetent" sponsor.
The one sponsor that I did walk away from is Aaron Meriman of LMDG (.net) I didn't actually lose any money on this investment, in fact, it generated a small return. However, the reason I am mentioning this is that this was early 2018 when I first invested. The other investments I made during this period all did spectacularly. However, this one fell far short of the mark, IMO, primarily because the sponsor fees were horrendous on top of a downturn in the target market. I mentioned this as a reminder to really look at the fine print. It was the very first syndication I invested in and I found the sponsor here on Biggerpockets. As I grew in knowledge and experience, I started to learn what the average fee structure looks like and decided to pass on future investments with this sponsor.
the way LP should look at the problem is not from the waterfall but from the financing structure IMO.
There're very few funds that are doing well hitherto because they maintain they want to buy assets with DSCR 1.5 only and above and using fixed/debt combined with assumable loan (one can always assume loan) with discount.THe fact that many LP doesn't know these are possible (and there're offerings like these) .... is why people losing money unnecessariy
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Carlos Ptriawan:
Quote from @Chris Seveney:
Quote from @Carlos Ptriawan:
Quote from @Chris Seveney:
This post has 30+ comments, but has anyone actually roasted a GP yet?
Chris I have list of 25 GP to avoid.
But if I post this I would have 30 people mad at me and maybe the BP CEO too.
Why I shall take the risk ?That video you shared "no one could see interest rates rising..." Really, hmmm lets print $6T and think that they will stay at zero....
that's the attitude of those gp, just blame the fed for their inability to do basic financial DD.
also those GP are still in high school during 2008.
everyone that knows little bit of macroeconomic structure knows that when the fed is adding m2 supply by the size of 4% every month from march 2020 (until q1 2022), that action would trigger asset valuation (and devaluation) followed by inflation followed by stagflation/recession. That money has to be absorbed and it would take time for the mess to be reduced ( I am thinking in 2026/2027 we should see more financial stability). Now the fed choose to press the brake as inflation is sticky at 3%, we would see what's going in 2025.
but from the fed mandate to reduce inflation, they want the rent growth to be flattened, so they would sacrifice the CRE (aka equity ownership).
this is way also why lp investor has to invest in common sense, if the boss want the rent to be reduced, don't go against the boss.... just don't invest.
I am a LP in over 50 deals invested over the years so could name groups that are capital calling or losing capital calling right now. Some of splashier defaults/foreclosures seems to be tied to Sumrock and his mentees including the Applesway guy but WWC and GVA is pretty much selling large chunks of their portfolio at a loss right now. There is also a whole ecosystem of capital raisers for these people that have basically misled investors in their involvement in the GP and dont have much to offer as deals go bad. I could name dozens and that are active in the BP forums.
Rather than recreating the wheel, I would just go to LP centric forums/groups like 506b or PIC group that dont allow GPs or capital raisers so people can post their bad experiences without intimidation. Wall street Oasis also but that seems to be geared more toward industry insiders than from the LP perspective.
- New to Real Estate · Dallas- · Member since 2021 · 23 posts · 6 votes2y
@John Cho
Thank you for your input. Can you please tell us those LP group . I would like to join.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @John Cho:
I am a LP in over 50 deals invested over the years so could name groups that are capital calling or losing capital calling right now. Some of splashier defaults/foreclosures seems to be tied to Sumrock and his mentees including the Applesway guy but WWC and GVA is pretty much selling large chunks of their portfolio at a loss right now. There is also a whole ecosystem of capital raisers for these people that have basically misled investors in their involvement in the GP and dont have much to offer as deals go bad. I could name dozens and that are active in the BP forums.
Rather than recreating the wheel, I would just go to LP centric forums/groups like 506b or PIC group that dont allow GPs or capital raisers so people can post their bad experiences without intimidation. Wall street Oasis also but that seems to be geared more toward industry insiders than from the LP perspective.
Interesting as I am seeing more "fund of fund" models which are really just people raising money for these sponsors (will not get into legalities of this on whether it is in a gray area or not).
I am curious to hear what other thoughts are on this compared to working with a broker-dealer / advisor who invests in alternatives? I have found the investment advisors due diligence has been pretty significant because they have the fiduciary duty (while holding FINRA license) compared to FoF manager. Not saying all FoF managers should be avoided, i know a few who I think do a great job on underwriting, but several I have seen are literally just marketing / sales people.
7e investments53 Reviews Quote from @Chris Seveney:
Quote from @John Cho:
I am a LP in over 50 deals invested over the years so could name groups that are capital calling or losing capital calling right now. Some of splashier defaults/foreclosures seems to be tied to Sumrock and his mentees including the Applesway guy but WWC and GVA is pretty much selling large chunks of their portfolio at a loss right now. There is also a whole ecosystem of capital raisers for these people that have basically misled investors in their involvement in the GP and dont have much to offer as deals go bad. I could name dozens and that are active in the BP forums.
Rather than recreating the wheel, I would just go to LP centric forums/groups like 506b or PIC group that dont allow GPs or capital raisers so people can post their bad experiences without intimidation. Wall street Oasis also but that seems to be geared more toward industry insiders than from the LP perspective.
Interesting as I am seeing more "fund of fund" models which are really just people raising money for these sponsors (will not get into legalities of this on whether it is in a gray area or not).
I am curious to hear what other thoughts are on this compared to working with a broker-dealer / advisor who invests in alternatives? I have found the investment advisors due diligence has been pretty significant because they have the fiduciary duty (while holding FINRA license) compared to FoF manager. Not saying all FoF managers should be avoided, i know a few who I think do a great job on underwriting, but several I have seen are literally just marketing / sales people.
They are just middlemen looking to extract another layer of fees and promote on top of what the real operator charges. Sponsor gets the benefit of getting one big check and out sourcing their investor relations so they dont have to deal with the headache of multiple individual investors at small amounts.
Early in my investing career, I made the mistake of investing through one of these people and I came to realize they have no real role in the operating GP and are a just useless layer preventing the LPs from getting answers from the GP when a deal is underperforming or losing money. You can pretty much tell who these people are as they are prevalent on podcasts looking to get leads from uninformed investors. They all quit their former jobs to pursue passive income . They all seem to have the same boilerplate website. Easy tip off is if they paid money to be on the "Forbes real estate council" to get social proof.
My understanding is that fund of fund models allow capital raisers to evade broker dealer rules. I would love to see some of these people get nailed by the SEC but I havent heard of any active or past case. All this shadiness didn't matter when LPs made money but now people are losing their capital and LPs are pissed.- Specialist · Austin, TX · Member since 2017 · 137 posts · 109 votes2y
Quote from @Chris Seveney:
Quote from @John Cho:
I am a LP in over 50 deals invested over the years so could name groups that are capital calling or losing capital calling right now. Some of splashier defaults/foreclosures seems to be tied to Sumrock and his mentees including the Applesway guy but WWC and GVA is pretty much selling large chunks of their portfolio at a loss right now. There is also a whole ecosystem of capital raisers for these people that have basically misled investors in their involvement in the GP and dont have much to offer as deals go bad. I could name dozens and that are active in the BP forums.
Rather than recreating the wheel, I would just go to LP centric forums/groups like 506b or PIC group that dont allow GPs or capital raisers so people can post their bad experiences without intimidation. Wall street Oasis also but that seems to be geared more toward industry insiders than from the LP perspective.
Interesting as I am seeing more "fund of fund" models which are really just people raising money for these sponsors (will not get into legalities of this on whether it is in a gray area or not).
I am curious to hear what other thoughts are on this compared to working with a broker-dealer / advisor who invests in alternatives? I have found the investment advisors due diligence has been pretty significant because they have the fiduciary duty (while holding FINRA license) compared to FoF manager. Not saying all FoF managers should be avoided, i know a few who I think do a great job on underwriting, but several I have seen are literally just marketing / sales people.
I avoid them. If I wanted cryptic levels of communications and management where I am even more layers away from the RE asset/deal itself, I could invest in Wallstreet where it seems to be slightly more regulated.
A GP that really needs (vs optional) to rely on FOF players is already a flag for me. - Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@John Cho and @Chris Seveney, I have some experiences with both the Broker Dealer and several of these unlicensed groups. I have not invested with either, as I try to go straight to the source.
With the right person, I can see a value to broker dealers or these "fund of funds" capital raisers, as, presumably, they are more sophisticated and can provider better diligence on the operators than the typical investor can.
But, in reality, while there are some of these out there, most that I see posting on social media are either at the same level of sophistication, and in some cases, I believe less sophisticated than the investors they are raising from. And it also adds another level of due diligence to the investor. Not only do you need to trust the fund of funds manager is not going to steal your money, but also the group that they then invest in is also not going to steal your money.
But at the end of the day, my issue with most fund of funds is, they simply don't offer any value and likely are dilutive to the underlying investment. The Fund of Funds manager isn't doing this for free. They have their own filing and overhead costs they need to cover, which is paid by the LPs. The underlying fund has the same costs, so any fund of funds investor is covering both.
Additionally, the Fund of Funds likely has its own direct fees and carried interest. Let's say, I can go to an investment sponsor and, with a $50k investment, get a 70/30 split over a pref. But going to the Fund of Funds, the Fund of Funds gets an 80/20 split from the main sponsor, but then the fund has its own 80/20 split with the same pref. By going to the Fund of Funds, I am not only incurring some additional fees (i.e. the Fund will have its own accounting fees, on top of the main sponsor), but my carry is really a 64% share of the profits, since the Fund of Funds is only getting 80 cents of each dollar from the main sponsor, then I get 80 cents of each dollar that the Fund of Fund receives. Admittedly, there is a point, where it becomes net equal to investing direct, but in reality, investing in a Fund of Funds is MORE risky than direct into the investment, so I should not be treated equally but rather should get a net BENEFIT from the Fund of Funds investment. (Why is it more risky? Well, there are more layers of people involved that can mess things up).
And to your point Chris, of seeing more Fund of Funds, it is because there is a prominent syndicator that has launched a capital raising business with the goal of bringing more capital raisers into the space. And since the SEC is skeptical of the "active involvement" the co-sponsor route drew criticism for, the Fund of Funds model is a way for all these people that sign up for one of the many capital raising courses out there to get around the intent of the SECs rules. But, I will assume, while this is a pretty blatant sidestepping of intent (to me) it does abide by the letter of the rules, as I understand them.
It also takes a lot more liability off the main sponsor, since the lead sponsor is just signing people up that are independently selling securities. So the Fund of Funds manager can take the fall for SEC violations. And as long as the lead sponsor keeps selling the "how to raise money" course, they will continually have a pipeline of new capital raisers on the hook to bring in their friends and family. It is all very MLM (multi-level marketing) to me. I can't wait for the Fund of Funds managers to start launching their own courses to build their own army of raisers, whose investors will be seeing 3 levels of fees and dilution of carried interest...
Lastly, what I am seeing in the market are not really Fund of Funds, but rather Feeder Funds, since they are commingling capital to, typically, invest into a single offering, versus Fund of Funds that commingles funds to place into multiple offerings. - Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @John Sayers:
Quote from @Chris Seveney:
Quote from @John Cho:
I am a LP in over 50 deals invested over the years so could name groups that are capital calling or losing capital calling right now. Some of splashier defaults/foreclosures seems to be tied to Sumrock and his mentees including the Applesway guy but WWC and GVA is pretty much selling large chunks of their portfolio at a loss right now. There is also a whole ecosystem of capital raisers for these people that have basically misled investors in their involvement in the GP and dont have much to offer as deals go bad. I could name dozens and that are active in the BP forums.
Rather than recreating the wheel, I would just go to LP centric forums/groups like 506b or PIC group that dont allow GPs or capital raisers so people can post their bad experiences without intimidation. Wall street Oasis also but that seems to be geared more toward industry insiders than from the LP perspective.
Interesting as I am seeing more "fund of fund" models which are really just people raising money for these sponsors (will not get into legalities of this on whether it is in a gray area or not).
I am curious to hear what other thoughts are on this compared to working with a broker-dealer / advisor who invests in alternatives? I have found the investment advisors due diligence has been pretty significant because they have the fiduciary duty (while holding FINRA license) compared to FoF manager. Not saying all FoF managers should be avoided, i know a few who I think do a great job on underwriting, but several I have seen are literally just marketing / sales people.
I avoid them. If I wanted cryptic levels of communications and management where I am even more layers away from the RE asset/deal itself, I could invest in Wallstreet where it seems to be slightly more regulated.
A GP that really needs (vs optional) to rely on FOF players is already a flag for me.Basic (Commercial) Real Estate transaction itself is already difficult to make money and on top of that people that's finance expert just want to add another layer so they can get quick and easy commission.
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