6 Key Factors for a Successful GP Vetting

Before we even did the first deal that we raised from other investors, we invested in a syndication ourselves. We feel that vetting a deal is essential, but even a good deal can end up disastrous in the wrong hands. So, betting on the sponsor is number one. Usually, good sponsors will bring good sound deals. That said, what should you pay attention to when vetting a new sponsor?

6 things to pay attention to when vetting the GP

Moral Compass

 The number one thing to determine is if the general partner (GP) be trusted. One of our favorite questions that we feel limited partners (LPs) don’t ask enough is about deals that haven’t gone well. How the sponsor answers the question will be very telling. You are not looking for perfection. Rather, you want to determine how the GP dealt with that adversity. Were their investors involved and ensuring clear communication?

Another thing you can do is an online search, though know that this tactic can be very hit or miss. Lastly, talk to any references you might have to find out the GP’s reputation. There is just a gut check aspect to all this. Ultimately, will this team treat your money like it’s their own or even better?

Team Effort

 This is a team sport and the team that comprises the sponsorship group is extremely important. There are solo syndicators but we would tend to avoid them since everything will rest on their shoulders at the end of the day. For example, if there are two in the partnership, find out how responsibilities are split. At the beginning of new partnerships, much time is spent determining who is best suited for the various roles on the investment team. You want to make sure these responsibilities are thoughtfully being considered. Consider the following responsibilities.

·         Acquisitions

·         Due diligence

·         Construction

·         Asset management

·         Investor relations

·         Accounting

·         Legal

In small partnerships, everyone may have a hand in everything. But, you would like to see that each partner leans more toward certain parts.

The next most important question is to understand how long the partnership has been together. This can be a very important risk factor since if the GP team has not been together for long that could create more uncertainty.

·         Do they have a corporate structure to clearly define ownership?

·         Do they have clearly defined relationships with 3rd party vendors?

·         What happens if something happens to one of the partners?

You will need to establish relationships in advance. For example, attorneys for transaction contracts, syndication docs, and any other partnership agreements. The three other major vendors would be property managers, insurance brokers, and CPA/accountants to make sure the books are in order.

Well-established relationships with these vendors make a huge difference in the smooth operation of the business as a whole. Many of these partners take time to find and create relationships from which you end up benefiting from. The right combination of team members can easily make or break a deal.

Track Record 

Essentially, this digs into what the GP’s experience looks like.

·         Have they bought in specific geographic areas?

·         Are they buying certain property types, sizes, and purchase price ranges?

·         Has the GP worked with a handful of vendors in specific pockets or geographies?

You don’t want to see that they are buying in too many cities or a bunch of different asset types. We believe that focus especially in this competitive market is the only way to have a strategic advantage.

For example, The JB2 Investments team only buys multi-family in OKC, 70-200 units, 3-10 million range, mostly stabilized assets with some kind of value add. Then, once you understand the GP’s current holdings you would like to see that they are meeting or beating projections. Obviously that their current holdings reflect what they are trying to buy now. The overall success of their portfolio is important to assess.

Financial Strength

These are keys areas to consider when assessing the sponsorship group’s combined financial strength.

·         Has the partnership group had enough previous success that they are financially sound?

·         Do they have the net worth and liquidity to be able to sign on the loan?

·         Are they putting skin in the game?

 A lot of operators don’t have this financial strength so they outsource the balance sheet. They will give someone an ownership stake that has the balance sheet to sign on the loan. This is a riskier endeavor because if things go sideways, they have less incentive to stay in it. Another big one is are they putting skin in the game. We try to put a minimum 10% of equity stake into every deal. We have always done significantly more. You want them to be in a position that they have something significant to lose if things don’t go to plan.

Communication, Even When There is Bad News

Clear and transparent communication is key. This business is not just rainbows and unicorns. Stuff just happens including weather events and acts of God to higher vacancies one month. It’s so crucial to be transparent and open about issues while at the same time bringing the solutions to resolve them. Having good regular updates is important.

How is the property doing against original projections? You need to be able to measure in a simple concise way how the investment is doing. Seeing an example of the quarterly report will show how the GP communicates. Also, responsiveness can really pay off so be sure to answer questions relatively quickly whenever possible. If it’s challenging to get ahold of someone before an actual investment, you can trust that it's not going to get any better later. Honestly, we feel that after the moral compass, communication might be the most important.

Final Judgement

You want someone to perform better than you can. This means that they have better connections, time, and expertise from years of being in the business. You’re paying for the sponsor to have sound judgment even when things get tough. At the end of the day, you want to work with someone honest that rest assured will be a great steward of your hard-earned cash.

“Judgement is knowing the long-term consequences of your actions and then making the right decision to capitalize on that” – Alamack of Naval Ravikant

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