How to Evaluate a Potential Sponsor/Syndicator

by Prolet Miteva | Apr 7, 2023 | Syndication Basics

Introduction

If this is the first article you are reading on Wealth Syndy and if you are not familiar with Syndications, we recommend you head out to these few links first:

Now that we got the basics out of the way, let’s focus on the most important part of Real Estate Syndication evaluation – The Sponsor. This is the most important part of an evaluation because, at the end of the day, the Sponsor is the one executing the project. A good Sponsor can make a bad deal good, and a bad sponsor can make a good deal bad. The people that will be responsible for the asset for the foreseeable 2,3 or 5 years do need to be reliable, experienced, and trustworthy.

We are not beyond saying, “Trust your gut,” but first, let’s talk about how also to evaluate the Sponsor logically before we also add the “gut” feeling.

It’s a 2-way street

Before we dive into the Sponsor, we want to remind you that this is not a one-way street. The interview with a sponsor is a way to determine if your interests align. So while you are coming from the perspective of interviewing a sponsor, do not forget that the Sponsor will also be interviewing you. If anything, ideally, the Sponsor should be the first to ask a few questions to understand better:

What is your experience with Syndications?
What is your risk profile?
What are you looking for?

Having this information, they can also answer your questions better. With that said, there are several areas in that we want to evaluate a sponsor. Let’s start with the most important one:

The GP (General Partner)/Sponsor/Syndicator Team

This is the team that will be running the show. This is one of the most important things – ensure that the team has the experience, has been through tough and good times, and has gone through multiple complete cycles. You will run into a lot of new Sponsors as you start evaluating opportunities, which is OK; however, be wary if they are all new. Usually, new Sponsors team up with more experienced members for the first few projects. If the team does not have an experienced member, be very wary. This can be a recipe for disaster. At the very least, if you are willing to risk it, go with the absolute minimum commitment you are willing to lose.

As part of the team, there should be at least someone in Acquisition, Underwriting, Investor Relations and Asset Manager.

A word of caution – there are more and more situations where people “join” the GP team, whose role is purely to raise money. You might sometimes find that these “GP”s do not even know the details of a deal. Be wary and ensure that you go through all of the evaluation steps.

Investment Strategy and Due Diligence Process

The investment strategy of a team is important, and this is where you can ensure that their strategy aligns to yours. Are they focusing on a specific asset type (Multu-family, Storage, Industrial, etc)? Are they focusing on specific Metros or states? There are pros and cons to both focus and wider variety. If a sponsor is focusing on either an asset type or an area, this can give you confidence that they know how to execute. It is easier to learn a lesson on the first asset and not do it again vs. learning different lessons on multiple different asset types. On the other hand, if a Sponsor has a larger team, it is possible that part of the team is focused on a specific asset type and the company as a whole is diversified.

Finally, there is a possibility that market conditions are pushing a Sponsor into a new asset class. If that is the case, ensure that at least someone on the team has experience with that particular asset type.

You also need to understand what is the team’s due diligence process, how they underwrite, how closely previous investments have performed to underwriting, and what steps they take to ensure the viability of a project, including sensitivity analysis.

As part of the questions, do not forget to cover questions around “what if” scenarios. Things like recession, interest rates, occupancy rates, etc. can all be an “Oh s**t!” moment, and you need to know how a Sponsor would deal with that kind of situation.

Track Record and Typical Deal

As mentioned above, you do want to ensure that the sponsor has done this a few times and has gone full cycle on deals. This is where the track record comes into play. The track record should include a list of deals and their performance, including deals that did not perform. You should also inquire about what a typical return has been (not an average return, averages make it too easy to hide bad performers). Has the Sponsor ever issued a Capital Call? If they have, why and what happened to the deal?

Since we do not want to only talk about the past, we must also inquire about the “now.” You need to inquire about a typical offering from the perspective of Preferred return, IRR, Investment length, and waterfall split. You can request existing deal marketing materials and offer docs to understand what their PPM (Private Placement Memorandum) looks like.

Extended Team

While in some cases, the Sponsor themselves might be doing the day-to-day work, most often, there is an extended team that supports the GP team. The extended team is equally important and usually consists of a property management company, CPAs/ accounting partners, attorneys, etc. The two most relevant to a passive investor are the property management company, as they will manage the day-to-day tenants, and the CPAs because, based on them, you will either be getting your K1s on time or you will be filing for tax extensions every year. Make sure to inquire about the track record of the property management company as well.

Web/Social Presence and References

In this day and age, everyone has a website, and you should expect that your sponsor does as well. They should also have some kind of portal that provides you easy access to your documents and prior communication. A few years ago, this was more of a “nice to have”; however, with many services that have come online and simplified this for the Sponsors, there is no excuse not to have a modern approach to offerings.

You will also notice many sponsors with podcasts, social media presence, and educational webinars. It is great that now there is much more access to information; however, ensure you do your homework. Just because someone has money to spend on advertising and marketing does not mean they have a good track record and good team members.

Need help getting started on questions to ask a potential sponsor? Get a copy of our “27 Sponsor Evaluation Questions” below.

The “Gut” feeling

We wanted to get back to the “Gut feeling.” Most of us have them, and we encourage you not to disregard the gut feeling unless you have a very bad track record of it being wrong. There are always people we do not feel comfortable with that seem too sleazy or shady. Remember you will be investing with this Sponsor and will be on the same “team” for many years. Do you want to stress and always wonder if you should have trusted your gut?

Conclusion

Remember that while you are interviewing the sponsor, the sponsor is interviewing you. With that in mind, ensure that you ask enough questions to learn about the team, their experience, business strategy, track record, deal structure, and extended team. Be vigilant and never be afraid to ask questions. Get the “27 Sponsor Evaluation Questions” below!