What’s wrong with these sponsors?

What’s Wrong With These Sponsors?

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Sponsors go by many names: General Partner (GP), owner/operator, principal, and maybe some others I haven’t heard of.

The sponsor is the person who is running the show in a real estate investment. They source the deal, structure the deal, raise both debt and equity for the deal, run or oversee the day-to-day operations of the deal, oversee the contractors and vendors that will work on the property to decide when and how much to release in dividends, when to sell or refinance the property and for how much.

There is a lot of responsibility on these individuals. So? What’s wrong with these sponsors?

Role Of A Sponsor

Sponsors raise equity and/or debt from Limited Partners (LP). As an LP, it is your job to fully understand what the GP is doing, how they are going to do it when they will do it, and most importantly when and how much of your investment will come back to you.

A minor challenge is that many LPs blindly invest with a sponsor without understanding the business or how the sponsor will accomplish their stated goals. The real issue is that often the GP also doesn’t understand how they will accomplish their stated objectives or how they will effectively exit the property.

Even if they do understand, they need to have a track record of completing successful projects.

” A saying in the business is that a good sponsor will make a marginal deal good, and a marginal sponsor will make a good deal bad.”

How do you as an LP and (let’s say) me as a capital allocator avoid the bad apples, the bad deals, and the marginal or outright bad sponsors and only work with the best of the best? Here is a sampling of the high points that I look for before allocating any capital to a sponsor.