Experienced syndicators understand that being unprepared for a capital raise can cause friction with investors, lawyers, accountants, and other stakeholders.
In this article, we’ll dive into the difference between a stressed, overwhelmed sponsor and a sponsor that enjoys what they do. We’ll also note what mistakes to avoid, how to best manage the syndication process, and some tools that help keep you efficient along the way.
Keep reading to learn best practices, what not to do, and how to stay ahead of any potential setbacks to save yourself time and gray hairs!
Over-Complicating The Distribution Waterfall
The distribution waterfall is how you allocate capital gains among the members of a pooled investment.
Waterfall calculations are infamously complex, gaining further complication as tiers are added, and catch-ups are calculated. Before adopting investment management tools, most sponsors used Microsoft Excel to model waterfalls, dealing with the risks and drawbacks of reoccurring miscalculations.
This process is prone to human error; as most know, manual data input leaves space for critical errors, which is particularly impactful when creating sensitive documents to process distribution calculations.
Sponsors can avoid over-complicating their distribution waterfall by using an investment management service or automation software – removing the margin of error in manual calculations and the admin time needed to manage the process.
Not Paying Yourselves Enough As a General Partner
As far as terminology, you can think of the general partner (GP), the private equity fund, and the limited partners (LP) as the participating investors.
Usually, the GP receives a disproportionate share of the profits relative to their contribution. For example, a GP might receive 20%, while the other 80% is distributed among the LPs.
It’s important for the GP to receive a high enough percentage of the profits to ensure a strong ROI. This isn’t being greedy; it’s the incentive for you to maximize the profitability of the business for both you and your investors.
Understanding Legal Documents
One of the best things you can do to be prepared for meeting with potential investors is to hire an attorney early in the process to help organize the required legal documents.
When you syndicate a property, you form a limited liability corporation (LLC). As a new syndicator, you must familiarize yourself with the U.S. Securities and Exchange Commission (SEC) regulations before getting started.
Other documents that you should seek legal advice on include:
- A private placement memorandum (PPM) is one of the most important documents you will provide to prospective investors, which discloses everything they need to know to make an informed decision. The PPM typically has four main sections: the introductions (a brief summary of the offering and how to subscribe to it), basic disclosures (general partner information, asset description, and risk factors), the legal agreement, and the subscription agreement.
- An operating agreement is a document laying out an LLC’s rules, regulations, and provisions. The document outlines the responsibilities and ownership percentages for the general and limited partners.
- A sub-advisory agreement pertains to a fund managed by an external management team. These agreements define the terms and circumstances of the partnership between the fund and the adviser, as well as the obligations and rights of each.
Click here for more commercial real estate terms.
Too Many Investors
To obtain Investors for your syndication, you will need to understand their return expectations and develop relationships. This involves spending a lot of time discussing their history as an investor, what’s important to them, and why they want to work with you. Developing trust with your prospective investors will keep them engaged and interested in future opportunities.
If you cast too wide of a net, coordinating meetings and communicating effectively will be difficult. Ultimately, your performance and success rates will suffer. Instead, focus on quality relationships with Investors you connect to over the number of people contacted.
Your goal should be to keep things manageable!
Waiting Too Long To Gather Soft Commitments
Because it can be challenging to win over investors, raising capital in a hurry can often yield poor results.
Don’t wait until you have a deal to start fundraising. Start building relationships beforehand and give your Investors time to learn about your business. This will give you time to network and communicate so that when you’re ready, you can gather soft commitments and make the process less stressful.
Ready To Get Started?
As a syndicator, your day-to-day flow of meetings, account management, and payment distributions can take an overwhelming toll if you lack the proper tools to manage important documents. By investing in a solid investment management platform gives you the tools to communicate project updates with investors and oversee deal performance, payments, and legal documents in an investor portal.
InvestNext helps industry-leading syndicators achieve their goals.; our team can help you manage everything from capital-raising to waterfall calculations to distribution payouts. InvestNext gives you high-quality, compatibility, and efficiency while giving your investors an institution-grade experience.
Learn more about how InvestNext can meet your syndication needs by clicking the link below: https://investnext.com/demo
Additional Resources
Choosing the Right Deal Structure for Real Estate Syndication
