Can LPs Ask Too Many Questions?
Alexis HenricksPro Member
Columbia Falls, MT · Member since 2021 · 5 posts · 3 votesCan LPs Ask Too Many Questions?
Most Popular Reply
Mark RobertsonPro Member
Investor · Salisbury, NC · Member since 2014 · 314 posts · 386 votesI think there are two separate issues here.
An LP can certainly become unreasonable by asking questions already answered in the offering documents, repeatedly requesting the same information, expecting custom reporting, or trying to participate in operating decisions. A sponsor is also entitled to decide that an investor's expectations are not a good fit and decline or return the capital. In some cases, that may be the best decision for both parties.
From the sponsor's perspective, time allocation matters. Spending 15 minutes with a sophisticated investor considering a $1 million commitment and spending an hour explaining the basics to a new investor considering $25,000 represent very different returns on the sponsor's time. That does not make the smaller investor less entitled to honest answers, but it does affect how a sponsor structures its investor-relations process. If a sponsor chooses a $25,000 minimum, however, educating and supporting investors at that level is part of the business model it selected.
Material due diligence questions do not become unreasonable simply because answering them takes time. Before investing, I want to understand the sponsor's realized track record, including troubled deals; the complete fee structure and conflicts; debt maturities and extension provisions; capital-call and dilution terms; downside assumptions; and how investors were treated when prior investments fell behind plan. Raising outside capital comes with an obligation to make that information reasonably accessible.
Investor groups can help by consolidating and deduplicating questions, requiring members to read the data room first, and maintaining a shared Q&A so the sponsor does not answer the same question twenty times. The sponsor should have organized documents and a process for escalating questions that uncover something material.
Returning the investment by itself would not concern me nearly as much as the reason for doing it. Were members requesting endless custom analysis, or had they uncovered material background or performance issues that the sponsor did not want to address? I would want to see the actual questions, responses, and timeline before reaching a conclusion.
LPs should not expect operating control or unlimited access. They should be able to understand what they are buying, how the sponsor gets paid, what can go wrong, and how that sponsor has behaved when things went wrong before. If organized, relevant questions overwhelm the team, that is useful information about the firm's investor-relations capacity before the next difficult period arrives.
17 Replies
- 1moHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
OP
A. what are examples of questions that did not get responded to or cause communication to cease?
Or what were the magnitude of questions?
Or what questions outside of a normal deck were being asked?Did the LPs educate themselves before in deal analysis or did they use this GP to learn basic deal analysis?
B. Please provide:
What is Passive Pockets supplying for a deal checklist?
What is each LP bringing to the table as their checklist?C. I have customers who within 5 minutes I know I don’t want to do business with. The same holds true for a GP. From that GPs perspective what caused the return of funds? Not your perspective but theirs?
D. Once a deal starts a GP is not legally required to communicate with you, supply financials or take your advice. If an LP up front starts “suggesting” financing, color schemes, contractors, different marketing studies, etc. It’s best to lose that LP up front. Which issues triggered the GP in your groups discussion from cutting the discussion off?
The above will guide the response to your question. Forget who is right or wrong.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1mo
first and foremost i would say it is very important for lps to ask a lot of questions to make sure they understand what they are investing in. as a gp for the past 8 years have there been investors that we have told this investment is probably not the right fit because of the type of questions and information they wanted and how often they wanted the information? absolutely!
typicalky though it's not as much due diligence but expectation setting:
We are very clear on what information and reporting we provide but when someone wants as an investor their custom reporting or "inside information" that is not something we are gonna provide as if we did that for every person that asked for it we would spend all week providing reports vs doing our job
7e investments53 Reviews - 1moBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
What is a syndicate sponsor’s role if it is not to answer questions from current and prospective investors?
People often confuse managing syndicates as a real estate business. It is not. It is a financial services business. Your competitors are not real estate investors, your competition is other financial service firms such as banks, investment firms, and conventional/retail investments. Because, no capital = no real estate to invest in. Don’t bite the hand that feeds you.
I have a full time employee whose only job is to answer investor questions. When questions are not simple/routine he sends the questions to me and I personally answer them. I spend a significant amount of time doing exactly that. Sometimes I abandon my objectives for the day (at the last minute) and spend the entire day answering questions that were sent to me that morning. Not just one-word answers but well thought-out complete and detailed answers. Why? Because that’s why we are here.
I can see a case for rejecting an investor if the nature of their questions makes it apparent that the investment is unsuitable for them. But I wouldn’t consider the quantity of questions alone as disqualifying. I had one prospective investor recently that emailed about 15 questions, which I answered. Then a month later, 15 more. I thought that would be it, but no…another month later, 10 more, then another 5 a couple weeks after that. Continued answering them all. Then, he subscribed. Some may say he will be the biggest pain in the neck—but I disagree…I’ve seen this both ways and found no concrete correlation between their DD and how they act once in the deal. Perhaps other sponsors have a different experience. Or perhaps their own inadequate reporting forces investors to become a pain in the neck, but I digress.
But investors: here is what IS annoying. There is a clear trend developing where investors are sending obviously AI generated questions, where it’s clear that they uploaded the offering docs to a chatbot and prompted it to generate a list of questions for the sponsor. In nearly every case, they are the dumbest questions or just simply looking for “gotchas”. I answer them anyway, even though I doubt the prospective investor really cares about the answer because no human would ever ask it. Please ask your own questions, or just tell us that you are fine with us uploading your AI questions to our AI to answer your AI. Senseless.
A lot of sponsors are struggling to raise capital, and yet I’ve raised nearly $100 million in the last year or so…so the recipe works. And if sponsors want to reject investors for asking questions, fine by me. They are welcome here.
- 1moDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesI wish I could vote for this answer 5 times instead of just once!
Quote from @Brian Burke:
What is a syndicate sponsor’s role if it is not to answer questions from current and prospective investors?
People often confuse managing syndicates as a real estate business. It is not. It is a financial services business. Your competitors are not real estate investors, your competition is other financial service firms such as banks, investment firms, and conventional/retail investments. Because, no capital = no real estate to invest in. Don’t bite the hand that feeds you.
I have a full time employee whose only job is to answer investor questions. When questions are not simple/routine he sends the questions to me and I personally answer them. I spend a significant amount of time doing exactly that. Sometimes I abandon my objectives for the day (at the last minute) and spend the entire day answering questions that were sent to me that morning. Not just one-word answers but well thought-out complete and detailed answers. Why? Because that’s why we are here.
I can see a case for rejecting an investor if the nature of their questions makes it apparent that the investment is unsuitable for them. But I wouldn’t consider the quantity of questions alone as disqualifying. I had one prospective investor recently that emailed about 15 questions, which I answered. Then a month later, 15 more. I thought that would be it, but no…another month later, 10 more, then another 5 a couple weeks after that. Continued answering them all. Then, he subscribed. Some may say he will be the biggest pain in the neck—but I disagree…I’ve seen this both ways and found no concrete correlation between their DD and how they act once in the deal. Perhaps other sponsors have a different experience. Or perhaps their own inadequate reporting forces investors to become a pain in the neck, but I digress.
But investors: here is what IS annoying. There is a clear trend developing where investors are sending obviously AI generated questions, where it’s clear that they uploaded the offering docs to a chatbot and prompted it to generate a list of questions for the sponsor. In nearly every case, they are the dumbest questions or just simply looking for “gotchas”. I answer them anyway, even though I doubt the prospective investor really cares about the answer because no human would ever ask it. Please ask your own questions, or just tell us that you are fine with us uploading your AI questions to our AI to answer your AI. Senseless.
A lot of sponsors are struggling to raise capital, and yet I’ve raised nearly $100 million in the last year or so…so the recipe works. And if sponsors want to reject investors for asking questions, fine by me. They are welcome here.
- 1moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Alexis Henricks This could be PPM/Offering materials with major holes or LP's who are not qualified based on the questions that are being asked. Difficult for anyone to weigh in without reviewing the specific GP's materials and evaluating the questions and qualification of the prospective LP's that were interacting with the GP.
- 1moDan HandfordPro MemberInvestor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
I would separate reasonable due diligence from requests that effectively redesign the sponsor's reporting or operations. LPs should be able to get clear answers about the business plan, assumptions, fees, conflicts, financing, downside scenarios, controls, and reporting. A sponsor can reasonably say no to custom reports or involvement in day-to-day decisions. The cleanest solution is expectation setting: a thorough data room, a defined reporting schedule, an FAQ that grows with repeated questions, and a clear process for material follow-ups. Returning capital may be appropriate if the sponsor concludes the investment is not suitable for that person, but the quantity of thoughtful questions alone would not concern me. An inability or unwillingness to answer material questions would.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1mo
I will bet that sponsor has never had to go through a third-party due diligence report from factright, Mick Law or Buttonwood. When we did our factright report on both the company and the fund the excel tab was about 10 tabs each with 10-50 questions on each tab.
7e investments53 Reviews - 1moDan HandfordPro MemberInvestor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
Exactly. A structured third-party review can be far more demanding than individual LP questions, which is why I view the response process as an operating capability, not a distraction. The sponsor may not answer every request in the investor's preferred format, but the firm should have organized source documents, named owners for each diligence category, a response log, and a process for escalating material questions. If ordinary investor questions overwhelm the team, that may reveal a capacity or systems issue worth understanding before capital is accepted.
- 1moG. Brian DavisPro MemberInvestor · Hatboro, PA · Member since 2016 · 3k+ posts · 867 votes
Hi Alexis, that story doesn't sit right with me either. When our club vets a sponsor, the questions we ask before we ever wire money are the whole point of vetting, not an inconvenience to it. A sponsor who can't handle detailed questions before you've committed capital is telling you something about how they'll communicate once a deal hits a rough patch.
- Columbia Falls, MT · Member since 2021 · 5 posts · 3 votes1mo
Thanks, everyone.
Just to clarify, all direct communication between the members and the sponsor happen off-platform, so I don’t have visibility into the exact number, tone, or frequency of every question.
From the conversations I saw in our forum and heard about from members, the questions didn’t seem out of line or outside the normal scope of due diligence. Some members did dig pretty deeply into the operators’ backgrounds and surfaced findings in a pointed way. When that happens, we always give the sponsor an opportunity to respond or provide context. They responded the first time questions were raised, but declined to respond after that.
That doesn’t automatically validate the concern, but I do think a sponsor’s willingness to address material questions becomes another data point for investors.
For the offerings we feature, our panel conducts an LP Deal Review with the sponsor, and we create a deal page with the key investment details, overview, and offering documents.
@Chris Seveney your comment about FactRight caught my attention because I hadn’t come across these third-party due diligence reports like this before. It sounds like these provide a much broader review of both the sponsor and the offering. Are these reports typically shared with investors? And could this model work for investor communities serving individual accredited investors, or is it primarily used in the broker-dealer and RIA channel?
I’m also wondering if we should require sponsors to provide a clear reporting schedule and an FAQ based on the questions they repeatedly receive, AI-generated or not. Are there other key materials you would suggest investor communities like PassivePockets provide to help reduce repetitive questions and the burden on operators?
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1mo
@Alexis Henricks - They are for the BD / RIA space and the sponsor doesn't own the report either.
The reality is a sponsor can say or answer a question in a fashion that may not be accurate or not be in full context.the simplest thing to do is require sponsors to get track record verification reports, they cost around $5k per fund and if a sponsor is making the returns they say they are then dropping $5k is nothing for them. There are plenty of companies that do this (we had them done) and they basically review the investors and distributions to investors (and sponsor) to see if these investor are getting x% returns
i would guess if passive pockets required this the number of funds on the site would drop substantially pretty quickly though...
7e investments53 Reviews
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes1mo
This is clearly a nuanced issue. Yes, sponsors should answer questions. And yes, sponsors can choose what they want to answer or not.
I can see a few scenarios that may have prompted this, and my guess is the likely one that I see several groups struggle with is: they have a group of institutional investors that can fund their deals. They know they get better economics as the GP by going to retail accredited investors, only to find out it is a totally different business. And is an investment of both time and money to get up and running.
- Columbia Falls, MT · Member since 2021 · 5 posts · 3 votes1mo
I agree that sponsors can decide which investors they want to work with and which questions they’re willing to answer. But that isn’t really the point I’m trying to get at.
Of course sponsors should answer reasonable questions if they want access to investor capital. In this case, the sponsor didn’t just decide that one investor wasn’t a good fit. They stopped accepting capital from an entire investor community and returned an existing member’s investment because answering questions was taking too much time.
When a sponsor chooses to enter an investor club/community specifically to access individual accredited investors, the time and cost of investor education and due diligence should be expected. The better economics of raising from individual LPs come with more work, and sponsors need to be prepared for that before entering the channel.
- 1moMark RobertsonPro MemberInvestor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
I think there are two separate issues here.
An LP can certainly become unreasonable by asking questions already answered in the offering documents, repeatedly requesting the same information, expecting custom reporting, or trying to participate in operating decisions. A sponsor is also entitled to decide that an investor's expectations are not a good fit and decline or return the capital. In some cases, that may be the best decision for both parties.
From the sponsor's perspective, time allocation matters. Spending 15 minutes with a sophisticated investor considering a $1 million commitment and spending an hour explaining the basics to a new investor considering $25,000 represent very different returns on the sponsor's time. That does not make the smaller investor less entitled to honest answers, but it does affect how a sponsor structures its investor-relations process. If a sponsor chooses a $25,000 minimum, however, educating and supporting investors at that level is part of the business model it selected.
Material due diligence questions do not become unreasonable simply because answering them takes time. Before investing, I want to understand the sponsor's realized track record, including troubled deals; the complete fee structure and conflicts; debt maturities and extension provisions; capital-call and dilution terms; downside assumptions; and how investors were treated when prior investments fell behind plan. Raising outside capital comes with an obligation to make that information reasonably accessible.
Investor groups can help by consolidating and deduplicating questions, requiring members to read the data room first, and maintaining a shared Q&A so the sponsor does not answer the same question twenty times. The sponsor should have organized documents and a process for escalating questions that uncover something material.
Returning the investment by itself would not concern me nearly as much as the reason for doing it. Were members requesting endless custom analysis, or had they uncovered material background or performance issues that the sponsor did not want to address? I would want to see the actual questions, responses, and timeline before reaching a conclusion.
LPs should not expect operating control or unlimited access. They should be able to understand what they are buying, how the sponsor gets paid, what can go wrong, and how that sponsor has behaved when things went wrong before. If organized, relevant questions overwhelm the team, that is useful information about the firm's investor-relations capacity before the next difficult period arrives.
- 1moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Alexis, I don’t think the issue is whether an LP can ask “too many” questions. The better question is whether the questions are material to understanding the investment, risk, and sponsor’s execution.
If an investor is asking about debt terms, reserves, assumptions behind the business plan, distributions, exit strategy, sponsor compensation, capital-call risk, or what happens when the deal underperforms, I’d consider those fair due-diligence questions. A sponsor does not necessarily need to answer the same question one-off every time, though. A strong data room, FAQ, investor webinar, and clear offering documents can handle a lot of repetitive diligence without pulling the operating team away from the asset.
At the same time, sponsors are also choosing their investors. If an operator believes the communication expectations are going to create a poor long-term fit, they may decide not to accept the capital. That doesn’t automatically mean either side is wrong.
One area LPs should absolutely ask about is the tax side. If the sponsor is advertising depreciation or cost-segregation benefits, investors should understand how those items are expected to flow through the partnership and whether the losses may actually be usable in their individual situation. Cost segregation can accelerate depreciation, but passive investors often face passive-loss limitations, so I would never promise blanket tax savings to every LP.
To me, good due diligence should make both sides more comfortable with the relationship before the money is committed.
Happy to connect!
INVESTOR FRIENDLY CPA®5240 Reviews - 1moBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
If it is a one off, I would just think it just wasn't a good match between biggerpockets and the syndicator.
If it is happening often, I would question it moreso.
I think there is should be a level of understanding between the platform and the syndicator.
Does the syndicator expect to be talking with a bunch of people who already invested in syndications in the past(Therefore, they have experience with the process) and someone who plans to invest $250,000+ or are they talking with people who are doing their first deal and only investing $50,000?
I think it is about expectations and what the syndicator paid for and what they received.
As an accountant who helps BP members in the hopes of getting clients.
I have found it that I did have some issues with some BP members(maybe the way they were trained to expect a professional relationship to be or incorrect expectations were formed).
Basit Siddiqi CPA4.979 Reviews - Investor · Hendersonville, NC · Member since 2016 · 498 posts · 285 votes1mo
Quote from @Alexis Henricks:
A PassivePockets sponsor recently stopped accepting capital from our members because answering their due diligence questions was taking too much time away from operating the business. The sponsor also returned one member’s investment.
It’s not something I’ve encountered before, and I’m curious how others view it.
I understand that an operator’s primary job is to operate. Investors can ask repetitive, highly detailed, and time-consuming questions. But when you choose to raise outside capital, isn’t answering those questions part of the job?
PassivePockets is designed to give LPs a place to compare notes, ask difficult questions, and conduct deeper due diligence together. Naturally, that means operators on our platform may receive more sophisticated and detailed questions from our members.
So where is the line between reasonable due diligence and too much? Has anyone seen an operator stop accepting capital or even return it because of investor questions?
I’d love to hear perspectives from both LPs and sponsors.
I think a lot of this comes down to expectations being set before money is wired. LPs don’t get operating control or unlimited access, but they should be able to understand the sponsor’s track record, debt structure, reserves, fees, capital-call language, reporting, and what happened on prior deals that missed the plan. Those are normal diligence questions.
From my own owner/operator background in mobile home parks, self-storage, and smaller commercial, I’d rather have a capital partner ask hard questions upfront than find out later that we viewed risk differently. The cleanest relationships usually have organized materials, clear reporting, and a very clear line between major investor-level decisions and day-to-day operating decisions.
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