OpCo-PropCo Models and the Firms That Fund Them
A growing number of LPs are making investments in real estate operating companies as well as the underlying assets. Who are they?
At Thesis Driven, we focus on identifying and analyzing emerging themes in real estate. Often, those themes are championed by asset-light operating companies (OpCos) investing dollars to build the technology or channel that makes the real estate thesis work. In some cases, those OpCos choose to participate in the real estate itself, often by creating a real estate investment vehicle (a PropCo). Over the past few years, these OpCo-PropCo strategies have gained popularity, but their backers are much less well-known than traditional VCs. In this letter, I’ll outline the types of investment firms doing OpCo-PropCo deals and some of the quirks of each.
(As an aside, I’ve assembled a master list of firms making OpCo-PropCo investments. You can find it here.)
The ADU market, which we profiled several weeks ago, is a great example of a sector well-suited to an OpCo-PropCo approach. Companies like Villa have raised money from venture investors to develop and bring new kinds of ADUs to market. Today, they make money selling their ADUs to real estate developers and investors. But given Villa’s unique products and scale in the ADU market, they’re considering raising real estate capital into a PropCo vehicle to do real estate deals themselves. On the surface, this strategy makes sense as it allows them to capture a larger share of the value they are creating.
This letter is not a primer on OpCo-PropCo structures. Kunal Lunawat at Agya wrote an excellent overview of the model here, which I’d encourage you to read. His post outlines typical OpCo-PropCo structures, economics, and governance, as well as when it may or may not be appropriate.
I do take issue with one point in Lunawat’s otherwise superb post: he writes that OpCo-PropCo structures are a “relatively new phenomenon”, which would be news to anyone who has been in the hospitality industry over the past 25 years. Starting in the 1990s, vertically-integrated hotel companies such as Hyatt and IHG divested their real estate holdings, often spinning them into adjacent PropCo structures with separate capitalization and ownership. This is not irrelevant history, as a number of hospitality industry veterans (e.g., Starwood) are very active investors in the real estate tech world today and have substantial experience with OpCo-PropCo concepts.
That said, these structures are new to the venture world, and their adoption has been accelerated by macro shifts in the venture capital industry over the past five years. Specifically, venture capital has become less siloed as an asset class, with a wider range of investors doing VC-style deals. This has gone both ways: as more investors dip their toes into venture investing, traditional venture investors are diversifying into areas traditionally occupied by other firms. For example, Sequoia made waves last year when it expanded its model to hold public equities. But less well-known is Sequoia Heritage, the firm’s affiliated wealth management arm with a willingness and appetite to make real estate investments.
Bringing a firm that can invest across asset classes onto a cap table can be a huge advantage for an operating company; the investor can act as a friendly and aligned partner on a real estate strategy while capitalizing the operating business. This of course brings risks as well; the more entangled a company is with their investors, the more damage those investors can do if things go wrong. While it’s not the focus of this post, the governance challenges of OpCo-PropCo structures shouldn’t be overlooked. Having one investor on both sides of a transaction raises fundamental questions of economics and control.
Unfortunately, unlike many pure-play VCs, PropCo investors do not aggressively advertise their presence and buy box. While many of the firms themselves stay below the radar, it’s possible to sort them into four broad—and occasionally overlapping—categories: