The syndication market in the US is starting to heat up with some large financing rounds raising close to $100 million, and more syndications being announced. In this article we will answer commonly asked questions syndicators prior to investing in a deal.
This is one of the most important questions you need to ask syndicators before investing in syndication. Syndicated investments have a long lockup period which can be over 5 years, so it's important your investment not only provides a return on your capital, but also offers liquidity when needed. Although syndicated deals are getting easier to exit through public markets (e.g.: IPO or secondary), most investors prefer cash-out options given the long lockup period syndicated deals come with.
How do you plan on exiting our capital after it has been returned? Please provide detail on the current pipeline of potential liquidity events for syndicated investments in general and let me know if any transactions have closed so I know how this process generally works.
The answer to this question will determine how much equity is left with the syndicator after your investment is returned. Profit distributions can be paid out either partially or completely as a management fee or carried interest. As an investor, it's important that the syndication provides you with good returns on capital and has a healthy carry so you know management has incentives to generate value for investors given the risk they shoulder as entrepreneur owners of the syndication.
This question is designed to ensure that syndicators and investors contribute proportionally to their economic contribution. We like syndications where the profits are shared 70/30 between both groups, as it neatly aligns the interests of both parties and promotes healthy syndication. In this example of 70/30 split the limited partner will receive 70% and the general partner will receive 30% equity split once the preferred return is reached.
Complete a due diligence on the entire team you should always ask the following questions:
The minimum investment amount will depend on the Syndicator’s policy but will also be affected by the size of the project. Syndication projects come in all shapes and sizes, so look around for a project that fits your investment objective
This information may already be in the PPM, but you may still want to ask questions. During the holding period, which might be several years, there may be market changes. A Syndicator should be able to tell you how they intend for the project to turn out, but also what they will do if conditions change during the project. During the holding period, passive investors won't be able to access their capital or liquidating positions during this time period.
While the role of the Limited Partner is essentially passive, it is still important to receive regular information about how things are going. If the syndication team plans to carry out a major renovation of the building or has a strategy to turn around an underperforming property, how these plans unfold will impact the returns investors receive.
Property syndications are regulated by the Securities and Exchange Commission(SEC). Depending on the category of the property syndication, you may have to qualify as an “accredited investor.” Alternatively, it may be enough to qualify yourself as a “sophisticated investor.” Qualifying as an accredited investor will open up the most opportunities to invest in property syndications, so this is something you may want to look into.
The minimum investment amount will depend on the Syndicator’s policy but will also be affected by the size of the project. Syndication projects come in all shapes and sizes, so look around for a project that fits your investment objective and pocket.