Six Questions a Real Estate Sponsor Should Ask Before Raising Money
Aligning sponsor and investor profiles and previewing Thesis Driven's next course
On September 9-10 we’re hosting Thesis Driven’s next Fundamentals of Capital Raising course at 3 WTC in NYC. It’s a two-day bootcamp providing an insider’s guide to raising capital for real estate projects from individuals, family offices and institutional investors. More info here.
The course helps new and emerging sponsors learn how to unlock capital from the right investor types, specifically high-net-worth individuals, family offices, private equity real estate funds, hedge funds, and large institutions (e.g., pension funds).
Not sure about it? We’re hosting an online info session on Thursday, August 15th. Come meet Brad and Paul and learn more about the program! Sign up for the info session here.
Thesis Driven’s course covers the major types of investors, how they make decisions, and how best to build a relationship with each. But deciding the right type of investor to pitch can be a challenge, and pursuing the wrong type of investor can set an aspiring real estate entrepreneur up for frustration—or potentially much bigger problems down the road.
Today’s letter covers six questions real estate sponsors should ask themselves to identify the best type of investor for their business:
(1) “What’s my track record as a GP?”
Track record is everything in real estate.
Generally speaking, if a sponsor has fewer than five years experience and hasn’t deployed more than $50 million of equity, it is unlikely that they will be able to form a joint venture with a private equity real estate (PERE) fund or raise their own fund from institutional investors. These groups only invest with sponsors who have proven they can deploy significant amounts of capital at scale—usually $50 million or more per year.
So most earlier stage sponsors must focus on HNWIs and family offices, raising on a deal-by-deal basis via a single-asset syndicate or raising a small retail fund—and relying heavily on personal relationships.
But track record can be strategically enhanced by bringing on partners and/or advisors that have the requisite experience and relationships to help the sponsor position themselves as institutional quality.
Course note: we’ll take a dive deep into track record enhancement strategies, plus discuss the profiles of certain institutional investors who will consider partnering with sponsors that have more limited GP track records.
(2) “How large are my capital needs for my current project(s)? And (3) how much personal capital can I co-invest?”
Even if a sponsor has a long and successful track record, their strategy may not fit the ticket sizes of institutional investors.
These fund managers oversee many hundreds of millions, if not billions, of dollars. From their perspective, it is inefficient to back a sponsor who cannot deploy large sums of money quickly.
As a rule of thumb, a sponsor must be able to deploy $50 million or more of equity capital per year into assets to be a candidate for institutional capital. Demonstrating this capability requires proving they have the deal pipeline as well as the operating platform to acquire and manage a significant portfolio.
Further, a sponsor will typically be expected to put up 5-10% of the total equity required for a project or programmatic strategy, so sponsors must be sure the GP equity needs match their own liquidity profile (although there are several ways to help a sponsor supplement this co-investment requirement).
Course note: we’ll dig into specific pipeline requirements for different investors; what acquisition information sponsors need to track to legitimize their pipeline; and how sponsors can access co-GP investors and funds to supplement their co-invest requirement if they don’t have liquidity.
(4) “How robust is my investor network? And (5) have I made them money before?”
So what should a sponsor do if institutional investors are out of reach due to limited track record and investment size? We’ll need to focus on high-net-worth individuals and family offices.
How one approaches these groups will depend on the quality of his or her network and how effective he or she has been at making people money in the past.
If a sponsor has a strong “country club” network and reputation, then syndicating equity can come entirely from working those contacts. But most new sponsors are still building their personal networks and track records, which means they’ll have to get creative with building their investor network.
If digital marketing is a strength, then leveraging crowdfunding platforms and other online marketing tools can help build a sizable audience for deals. Or if in-person networking is a strength, hitting the family office conference circuits—or other strategic industry conferences where HNWIs like doctors and dentists attend—can be a core strategy.
Course note: we’ll break down best practices for crowdfunding and digital marketing, building a family office network, and how to position yourself for investors as an institutional-quality sponsor before having an institutional-quality track record.
(6) Lastly, “How important is an ongoing relationship with the investor?”
Family offices can work with sponsors for decades. Institutional investors tend to churn faster, and retail investors even faster.
So if the sponsor and/or their strategy is early-stage—and the project they're looking to capitalize is a one-off opportunity to build their track record—then finding friends & family (i.e., “retail”) investors is probably the best path.
If the sponsor is more advanced and looking to take advantage of a pressing market opportunity to acquire a large portfolio of assets over a 3-5 year period, then an institutional joint venture will be the logical investor target and structure.
But if the sponsor is seeking a long-term partner—either because the strategy requires a long-term hold period or the sponsor wants a flexible, patient capital source—then a family office will be the ideal partner. Although these relationships often take years to cultivate and will likely require the family office to invest in a one-off project before structuring a more formal partnership.
Course note: we’ll walk through a step-by-step process for building sponsor profiles that align with investor strategies at every stage, including how to sequence your phases of and targets for capital raising to meet your long-term sponsor vision.
About the Course
The Thesis Driven course will cover a detailed “insider’s view” of the real estate capital raising experience from a wide variety of potential investors, including:
Understanding and identifying each investor profile,
Comparing investment structures and legal frameworks for the different investor types,
Preparing marketing and underwriting materials,
Running the outreach process, and
Negotiating term sheets and closing documents.
At the end of the course there will be an applied learning exercise, where students will put what they’ve learned over the two days into practice—presenting their own capital raising pitch to the group.
Course attendees will come away with a fundamental understanding of the capital raising process for each investor type as well as best practices for marketing, outreach and negotiating LP/GP equity terms. As importantly, they will be connected to a community of peers with whom they can share their real life capital raising journeys going forward! Learn more about the course here or sign up for Thursday’s info session here.
—Paul Stanton and Brad Hargreaves
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