Investing in GP Fund vs deal by deal
June 19, 2024
Real-estate GPs, their success and responsiveness to investors can vary by a wide margin. This is why we decided to introduce rankings to make it more transparent for you to understand how a GP has performed in the past, communicates with investors and handles distributions.
In this article, we outline how we rank general partners from best to worst, giving you a comprehensive guide to who to work with and who to avoid. You can also watch this video to get an overview from our CEO:
When it comes to ranking general partners, there are five key attributes that you should consider.
Communication by a general partner is a critical attribute that should not be overlooked. A general partner’s ability to communicate effectively with investors and other stakeholders can make or break a deal.
Responsiveness, frequency and quality of communication are all critical components that should be considered when evaluating a general partner’s communication skills.
In addition, the way a general partner handles capital calls can also reveal a great deal about its communication skills. A clear and concise explanation of how much capital is needed and how it will be used can go a long way toward building trust with investors.
By keeping investors informed and involved in the decision-making process, a general partner can build strong relationships with its investors and earn their trust. In conclusion, effective communication is an essential attribute to consider when evaluating general partners.
Those who excel in this area will undoubtedly stand out from the crowd and earn the respect and trust of their investors.
It is important to look for general partners who are responsive and communicate regularly. They should provide regular updates and keep their limited partners informed of what is happening
One of the most important attributes of a great general partner is its ability to distribute returns to investors. A GP that excels at distribution is one that communicates regularly and transparently with investors, distributes returns in a timely manner, and delivers on promised returns. At the highest level of performance, a GP will never require a capital call and will deliver returns that exceed expectations.
Investors want to see their returns as soon as possible. A GP that can distribute returns early on in the project is a sign of competence. When a GP consistently delivers on its promises, investors are more likely to reinvest with them in the future.
In short, a great GP is one that understands that distribution is key and prioritizes the needs of its investors above all else. When a GP excels at distribution, it is a clear sign of their competence and commitment to their investors.
As an investor, it is important to look for a GP that has a proven track record of delivering consistent and timely distributions, as this is one of the most important indicators of future success.
Capital costs are an essential aspect of any investment, and it is critical for general partners to have a clear and concise understanding of it.
When evaluating a general partner, it is important to assess its approach to capital costs. A good general partner should be transparent about how much they are contributing and what the cost is for.
The best general partners don’t just rely on limited partners to cover costs; they also put down some of their own money. It’s also important to make sure that they don’t ask for more capital than necessary and that they can achieve the projected total return. If a general partner meets these criteria, he or she should receive a high ranking.
For investors, it is thus imperative to evaluate a general partner’s approach to the cost of capital.
When it comes to ranking General Partners, there are certain attributes that investors prioritize above others. One of these attributes is responsiveness. As an LP, you want to work with a GP who is reliable, proactive, and communicative.
A GP who responds to your inquiries promptly, communicates regularly, and is transparent about their investment strategy and performance is more likely to earn your trust and confidence.
Good responsiveness from a GP includes not only timely responses to LP inquiries but also regular communication. A GP who sends out regular updates on the status of the project, including any changes or challenges occurring, is more likely to keep LPs engaged and informed.
Also, a GP who explains any measures they are taking such as capital calls and other points is showing that they are willing to engage with their stakeholders.
In short, responsiveness is a key attribute to consider when ranking General Partners, and LPs should seek out GPs who prioritize this aspect of their relationship with investors.
When it comes to ranking general partners, total returns are undoubtedly one of the most crucial attributes to consider. After all, the primary objective of investing in real estate syndications is to generate a return on the capital invested. Therefore, a general partner’s ability to deliver on their projected returns is the ultimate litmus test of their success.
At the top end of the scale, a score of five out of five indicates that the general partner has exceeded their projected returns, demonstrating exceptional skill in identifying and executing investment opportunities. However, even a score of four out of five is nothing to sneeze at, as it still represents a solid, positive return on investment.
On the other hand, scores of three, two, and one out of five should be viewed with caution. A score of three indicates that investors have made some money, but the general partner may not have been transparent about the reasons for a capital call. Scores of two and one suggest that investors are at risk of losing money or have already suffered significant losses.
In conclusion, total returns are the ultimate measure of a general partner’s success, and investors should prioritize this attribute when evaluating potential partners. Remember, a general partner’s ability to deliver on their projected returns is what they are supposed to do and ultimately, promised.
If a GP were to earn a score of 5 out of 5, it would need to demonstrate excellence in communication, distributions, capital costs, responsiveness, and total returns.
Limited partner distributions are made at least every 6 months to show proof of profit. Capital costs are either paid out or an interest-free loan is offered to the property to avoid a capital call, which effectively reduces equity and saves funds. Responsiveness to the LP’s calls or messages is mandated, with an ideal response time of a few hours. Last but not least, a 5 out of 5 score requires that the GP meets the projected Internal Rate of Return, if not exceeds it.
A 4 out of 5 score for a real-estate general partner indicates consistent communication with monthly updates, even if there are some minor delays. They pass distributions to investors, though some may be delayed due to unforeseen circumstances. They put their own capital into the capital cost and hold webinars for investors to answer questions during each step and have patience. They respond to limited partners in under a week, and usually offer 1-5% IRR within production.
A score of 3 out of 5 for a real-estate general partner means that communication is timely, responding to limited partners within 7 days and providing monthly updates, although those updates may be delayed. Distributions are likely to be passed, and capital costs are likely to require a capital call, although not necessarily explaining what the call is for or how much the GPs are contributing. Responsiveness is strong, expected to be within a week. Returns are typically within production, without exceeding what was projected.
A score of two out of five, or a real estate general partner, is characterized by an almost total lack of communication and distributions, or if distributions do exist, they tend to decrease over time. Capital costs are often not managed properly and responses to phone calls and emails are often ignored. As a result, returns may be as low as negative one to five percent.
Having a score of 1 out of 5 or a real-estate general partner can be a nightmare. Their communication skills are lacking, they may even communicate but never share the important information. Distribution of money may have been done, but likely on a slower scale than normal, like the first quarter instead of the first month. Capital costs are absent, because they lack the ability to put the process together. Responsiveness may occasionally present itself, but only if you indicate interest in a new deal. The total return is negative, with losses exceeding 50% of equity.
June 19, 2024
May 27, 2024
