From an LP’s Perspective What Makes a Well-Run Syndication?

Question

I’ve connected with a number of LPs through BiggerPockets and have found they generally fall into two categories. The first are investors who want to start passively in order to learn the business before moving into direct investments. The second are investors who are  interested in passive investing as part of their long-term investment strategy. Under both scenarios, the same critique consistently comes up, which is a lack of communication.

Investors who want to learn feel they lack visibility into what is actually happening with the investment, while purely passive investors still want to be kept meaningfully informed without being overwhelmed. It would be helpful to hear from LPs on what they view as an ideal level of communication and reporting from a sponsor.

Another common takeaway is that many LPs are unclear on how investments are structured from a distribution perspective, including how and why distributions are made over the life of a deal. I personally place more of this fault on the LP but what can be done differently to help LP's better understand the investment opportunity?

More broadly, it would be useful to hear any additional feedback or critiques related to how syndications are managed from an operational standpoint. To be clear this is not about investment performance, but about the processes and practices that shape the LP experience.

Chris Seveney · Answer

@Stuart Udis - a lot of FOMO from all the Facebook and instagram ads offering 20%.

Stuart Udis · Answer

I’ve been thinking about Reg A offerings and whether they’re being used conscientiously today, given that social media allows sponsors to reach unsophisticated investors at a scale that never existed before.

This isn’t meant to reopen wounds for investors who were burned, but public examples like RAD Diversified naturally come to mind because of how widely they were marketed. It’s fair to ask whether companies like that could have reached so many retail investors without modern social media amplifying their message.

Stuart Udis · Answer

@Ian Ippolito  Thanks for chiming in. Poor communication is one of the most common complaints I hear from LPs I speak with. In many cases, it seems investors watch a presentation, decide whether to invest based largely on that presentation, and move forward without closely reviewing the PPM—let alone the operating agreement.

I say this because a significant number of LPs later express dissatisfaction with the underlying investment, when in reality it becomes apparent they were never fully aware of how the investment was structured in the first place, particularly with respect to the distribution schedule and timing.

Ian Ippolito · Answer

My minimum acceptable threshold is having quarterly status reports (which provide real details  on progress and/or problems and not just fluff), at least yearly financials (and quarterly is better) and at least yearly capital account statements (and quarterly is better).Distributions (and waterfalls) are often detailed in the operating agreement in dense legalese (and differ alot from deal to deal).  So it's nice when they take the effort to be  transparent and put this in investor deck and in the investor's language.