So I've recently begun to think in more detail about how to set up my own REPE shop - realistically starting 5 to 10 years from now. One thing I am struggling with is how to finance the early days of the operation. I'm realistically going to be able to contribute say $2-$3 million of equity, but based on my assumptions for operating costs with a 7 man deal team (including me), 2 finance people and 2 admin, plus office space, travel, placement agents, legal, etc.
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A 7 man deal team for a shop just getting its start seems to be a little over staffed IMO. If you have good connections to deals already all you would need is an associate or analyst to run the numbers and put together packages while you manage the capital raising side of the business to start. One admin and an accountant should be able to tackle the running of the office itself.
I'm not sure what your role is right now or who you have as industry connections, but a $200 million fund for your first raise without a track record would be a huge accomplishment. Syndicating a few one off deals might be an "easier" way to get your start and build a track record prior to raising a fund. I definitely agree that finding a wealthy individual or family to go in with you as a partner would be an ideal scenario. They can help fund the day-to-day operations until you start gaining traction with deal flow and capital raising.
Not that I have ever done any of this myself so YMMV.
Dingdong08
Hmm I had pretty much the same thoughts as Prospie. That's a huge staff and hard to cover the overhead for when you're just starting your first raise. For my first raise, I certainly wouldn't be looking to placement agencies because I know at that time I couldn't afford their fees (it will kill your returns). Get the money your own way--not through agencies IMHO.
Also, wouldn't that truly be a double sweat equity situation valuing your money over the LP's even further? The increased value between your money and the LP's is in the partnership agreement. You're the GP and get the promote, they're the LP and get the pref. Am I missing something here? A salary (not large) is a reasonable expectation as well.
Good post. Would love to hear more from people.
$200M for Fund I especially in REPE where in order to get a foothold in competing for investor dollars is all about market focus and specialization is gigantic.
How about focusing on a niche market like value-add office in the mountain west region with a target raise of $25-$50M.
That is a lot more realistic than a national platform expecting to raise $200M on Fund I.
As I have mentioned before the success of new shop is 50/50 in capital (for your bloodline) and having established JV equity Partners who are willing to invest with you from the outset so the buying power of your fund is magnified greatly and your diversification helps returns.
Raising a first fund is really, really tough no matter who you are (almost). I would never discourage anyone from being entrepreneurial but it is very difficult so if you decide to do it, truly know and accept it deep down. And I don't just mean on the surface and say that sure, other guys have problems but I'll be different because I'm, well, me and me is awesome. I have raised first funds, I think I'm pretty good, I did it with partners who also had incredible backgrounds and thought they were even more awesome than me, we had deep pockets, knew investors who loved us, and it is fucking hard. Check out these guys: http://www.jaguargrowth.com/team/ I know Gary and, although I haven't talked to him in at least a year so I don't really know what they're doing now, he was Zell's ex-right hand and partner in all of their international stuff and it took him over 2 years to raise something like $150-$200MM. He couldn't believe how difficult it was, how much time it took not just in the amount of calendar time from start to close but also the amount of hours he had to put into it and, again, he was SAM ZELL's former partner. I don't know if there's a bigger name in real estate. He made the mistake of thinking that he'd just be able to say that he was raising money and the LP's would rush in so that definitely added time but just realize that even with a pedigree like that it's an uphill battle. And realize there's no single best way to do it so what I'm going to say isn't gospel.
Let's just assume you know your product, your background is great, people love you, your strategy and product is good, unique enough to attract and make money, yada yada yada. Your goal from now until you decide to jump off the cliff is to get to know investors well. HNW's, institutions, possible strategic and JV partners-absolutely anyone who can write big checks or invest along side you as JV's (and some of those could be construction co's that'll kick in equity if you use them, for example). Get to know as many of them as well as you can both professionally and personally. PE and REPE doesn't require you to be a genius (sure, some average 100 IQ person's head would probably explode but I'm going to assume we're all moderately intelligent but not necessarily physicists at Princeton) so the difference between the guys with their name on the door, proverbially, and everyone else is their ability to raise equity. You know who does have to be a genius? A quant hedge fund guy and what industry has former employers seed them and entire pools of capital set up to seed them, house them and tuck them in at night? I can tell you it's not PE or REPE. Get to know equity investors well. One of the most important pieces of the puzzle when raising a fund is having that cornerstone investor who can fill out the base, and not a $2MM guy but someone who's writing a sizeable check. The more institutional and better known name, the better it is (decent sized pension, institution, insurance co, endowment, a former billionaire industry guy who's retired or sold out, etc) but beggars can't be choosers.
As others have said, it's usually easiest and best to go off on your own and do a few one off's as you're raising a fund and/or to get a few deals outside of your previous firm that are just you before you try to raise a fund, and of course for personal cash flow. Make them good deals and use your equity contacts you've been building up over the years to invest in these deals. That gets them used to doing deals just with you while they still have the ability to say yes or no to individual deals rather than in a blind pool. More LP's are setting up direct investment functions who invest with fundless sponsors so this isn't a horrible way of doing deals in today's world. Just set them up with the same basic terms that you would with a fund: 2/20 with some IRR hurdle or whatever is market at the time. Get as much as you can but expect some negotiation down from LP's, although I've heard that LP's are slightly more ok with fundless sponsors getting the full nut because the fees only kick in once the deal is done and nothing's drawn before their money is actually at work, but that's third hand knowledge on my part.
I've been in corporate PE for years now (but I've raised a few pools of capital for RE, especially in the depth of the recession to take advantage of opps at the time) and this doesn't come up on that side, but you're most likely going to need someone with a balance sheet to sign for the recourse if you can't get non-recourse. There was a good thread on this sometime in the last year so I won't get too into that but you'll need to think about this and come up with a solution.
On the GP front (and I'll just use GP interchangeably for management co, holding co or however you structure it if you're doing one off's or can get directly into a fund) it's not bad having partners. I agree that you don't want 3 guys each owning 33% because you really want to be the 51% guy who can pull the trigger. They can all put in money to cover expenses and for the co-investments you'll need to make at the one off level and when you raise a fund. Don't pay yourself a salary until you raise a fund and/or are really making money. 1040 income is the least tax efficient means of compensating yourself and avoid it as long as you can. Think about paying yourself a salary out of money that you've put into an LLC: you put in 100 and get 60-70 back and ship the rest off to Uncle Sam. If you're successful the IRS will eventually make you take an income that is suitable for the entity that you're running but wait until your CPA's tell you to do this.
It's also not a bad idea getting a strategic institutional investor to come in at the GP level for a few reasons. The obvious is to cover overhead and expenses before you do a few one off's and/or have fund fees coming in the door, but it's also a vote of confidence to the market. I think the Jaguar guys I linked to above got New York or Met Life to come in and invest at that level. If you can get a big enough name it signals to the market that you've passed the test. It's kind of like being married, and the single guys won't get this: after you get married and have that ring on your finger you will get hit on by more women than you ever have because one crazy chick married you and you now have womenkind's seal of approval. Unfortunately most wives won't let you bring back those extra chicks back to your bed, but your early investor will want you to bring as many other investors in as you want. This is going back 10 or 15 years, but I knew the guys who started Stag Capital in Boston and they got Steve Karp (he sold NE Development to Simon and walked away with a billion dollars 15 years ago) to invest at the GP level for a minority stake. The actual money helped cover overhead but it also was an instant seal of approval from a guy that basically invented the shopping mall. After that other investors looked at them and thought that if Karp invested, they must be good, he introduced them to other investors for one off's and eventually their fund, he invested in their deals and funds and I'm pretty sure he'd sign for recourse or convinced lenders that they didn't need those carveouts.
As others have said, run as lean as possible until you're cash flowing. Seven investment people is overkill unless you're wealthy enough to cover that nut and/or are buying billion dollar assets. Run with your partners (another advantage of having partners) and maybe an analyst. Remember you have no assets to manage, you're only trying to do deals and raise capital. Yes, you and your partners will be back in the weeds of Argus and Excel, you'll be doing all of the DD, and you'll be the CEO, the copy girl and the janitor as well, but that's startup land. It's not as nice and easy as being at an established shop but no one said it would be. Like @prospie noted, share office space for as long as possible with a broker, a lawyer (we did this at first), a friend or whomever. Office space in big cities is expensive and it's a bitch because it typically entails a lease term longer than you want (welcome to the other side of RE, being the tenant) and all of those costs like setting up IT and phones is expensive and an absolute waste of money. At worst go for a Regus type of office. When you're raising a fund you'll most likely need your own office space because LP's will want to kick the tires and make sure you're real but hold off as long as possible on that and when it comes time, go for as cheap as you can handle. It's always been my philosophy on the principal side that I'd rather be in a Class B building that's easy to get to and take home the delta between that B and a Class A shiny tower in the CBD.
You should also have good to great relationships with lawyers and accountants when you're ready to go out on your own. Negotiate with them to discount their hourly fees (or better yet, get them to give you a fixed cost for a deal or docs) and just promise them that you'll stick with them forever if they'll give you a break up front and allow you to pay their fees once you've closed deals or a fund. Legal fees can be really expensive. Everyone knows this because you see those legal bills come in or you plug them into a spreadsheet but when those are paid out of your pocket they are infinitely more expensive than before. For example a good set of fund docs from a decent law firm will cost you $200k or more, and sometimes considerably more if you're negotiating with multiple LP's who want to negotiate a lot. But you want them to be bullet proof and you want them them from a law firm with a decent name because when you market your fund you don't want your law firm to be some guy who just hung out his shingle, you want it to be a name that people should recognize. That doesn't mean you necessarily need to use Skadden Arps at $1000/hr but it should a name that people can recognize or at least if they look it up they'll see the firm has a few hundred lawyers in multiple locations. A decent lawyer who's done this before can also introduce you to LP's and their advisors that they've done deals with before.
You'll need to personally co-invest in the fund and most likely in the one off deals before you raise a fund, probably in the 1-2% range like you said. LP's want you to have skin in the game and there's no way around that. This can be where having partners really helps because you can split that up. It's also where having an institutional strategic partner at the GP level can help because they'll also share that co-invest, and if you do a few one off deals before you may be able to go to that partner and say "I have $XMM in equity tied up in those deals and I'm out $YMM in startup/overhead costs, can I pledge my interest in those deals and you lend me the co-invest?"
This isn't a full picture and I'll probably think of more but my plane's landing soon and need to put my computer away.
were you flying on singapore/cathay/emirates first-class as you typed that up? :) one SB for this amazing reply (not that you need the SB)
prospie Dingdong08 cre123 picklemonkey REPE8 and anyone I missed, thanks very much for the insightful comments.
The $200mm initial raise comes from prior experience working at a startup shop where that was about what we ended up with for the first fund. Our team was actually larger than seven (and we had 2 fancy offices), but the chairman and CEO were wealthy and could afford to go in for many millions prior to cash flow (I'm hoping these guys may back me in the future...). As background, I then jumped ship and was working with a multibillion dollar investor before I went to HSW for MBA and now back in the business at a different mega-type.
I understand the idea that if you select a niche strategy / product type to focus on you can start with a small amount of capital and develop a specialized track record, and that is indeed what we did at the smaller firm where I started out, but I actually don't love that business plan. What can happen, and I've seen this, is that you select say, class-A logistics development in Brazil, as your strategic focus and you have a successful first fund, but then the opportunity switches to a different asset class or geography, and so you try to change strategies on fund two, but the the LPs say "nah, you're an industrial shop, you know nothing about retail (or whatever your new plan is)". You become pigeon-holed as a firm. While I know that it's unrealistic to say "our strategy is going to be to mimic a typical megafund and invest in every asset class in every major market", I would nonetheless shoot for a flexible mandate to whatever degree possible on fund I, and then try to get more and more flexible over time (i.e. expanding geographies, etc.). I believe one reason why certain MFs, namely BX, have such an advantage now is precisely that they do have substantial flexibility and can adjust their investment strategies quickly to tackle new opportunities. If you have to spot the opportunity first and then raise the capital for it, it's probably going to be gone by the time you've got your act together.
@dingdong08 I definitely take to heart the fact that getting close with investors early is key. I'm fortunate to be in the right circle to have access to lots of HNI's (and that access expanded in biz school), but it's still something that requires focus. I guess I'm going to have to prioritize relationships with capital alongside just the usual struggle of trying to make it up to MD over the next few years!
Anyways. early days for me to be thinking about fund / empire formation but it's a fun topic...
May be you don't focus on a niche strategy in terms of geography or product type...but given small(ish) fund target size ($200M) you can differentiate yourself in terms of deal size, e.g. going after deals too big for wealthy individuals and too small for bigger institutions/funds that need to write bigger equity checks to put capital to work
Yeah, I really can't overstate how important building those investor/LP relationships is. Those skills and relationships are the difference between working for a fund, making really good money and having your own and making great money. If you're at a mega fund or equivalent sized firm this will be difficult but I'd try to start interacting with your investors now. You don't want to get yourself into a pure capital raising role because you want to keep developing your investing skills but if you're at a smaller firm (and I don't necessarily mean small like a 10 man shop) and you rise through the ranks try to get involved with them. Head to those meetings, volunteer to do some of that work to see how investors like to see things and how they view the world, etc. Also start networking with other LP's that don't invest in your fund on a regular basis. If you have the good network from bschool and previous jobs, go through those contacts and get introduced to them. You're obviously not in a huge rush like a college kid is, but it's never to early to start. And make sure you hit up the institutional LP's because high net worth's are great but they can be fickle unless they have a well organized family office setup and unless you're friends with Bill Gates they have a limit. Even boring sounding institutions like the Ohio State Teachers or a plumbers union have tens of billions to invest. Although I will admit that I started with a multi-billionaire and he opened more doors than I would have ever imagined possible.
This isn't meant as preachy, just to continue the conversation because I'd be interested to hear what people in real estate are experiencing. I completely understand the desire to not box yourself into a niche (or chase the hot product when you raise capital simply because it's the hot sector at the moment) but unfortunately that's what institutional LP's are looking for, at least on the PE side of the world. The reason BX can do what they want is because they're BX and everyone, or maybe it's just me, would like to be in BX's shoes. In my experience, especially more recently as opposed to 15-20 years ago when I first got into this game, institutional LP's are going to put their wide mandate money with the BX's and choose niche investment firms for their smaller allocations. I don't think you have to go as far as specializing in class-A logistics development in Brazil, but to say we want to buy anything domestically in any asset class that catches our fancy as a first or even earlier stage fund group is going to be tough. It's also easier to develop expertise in a somewhat focused strategy where you can make money. Back in 08 we put together a team and raised an RE fund (and I hadn't been involved day to day in RE for 5 or 7 years at that point but I knew enough to be dangerous and more importantly who we needed on the team and how to raise money and from whom, although I'm contradicting myself as to getting into a hot market) to acquire class B multi-family in geographically defined secondary and tertiary markets that were generally healthy properties but had fucked up financial structures, were underwater and couldn't refi their debt. Boring, ugly, non-sexy properties in places I never really wanted to go, but it was a relatively easy sell to investors and we made a shit ton of money doing it. And that win allowed us to raise more money with a slightly different focus, but somewhat along the same lines: I wouldn't have been able to raise money to do class-A logistics development in Brazil for example. On the non-RE side, and not to give too much away of who I am so some of this is made up, we raise money to buy family owned businesses in a generational transfer or corporate ophans after an M&A deal in industries x, y and z with EV's between $A and $B and gross margin requirements that we can use as a platform to roll up other companies. While that seems very specific there are thousands of opps out there in that range and that's what LP's like to hear when you're not a BX or KKR. I'll never end up on the front page of the WSJ and I'll never own a G5 but I'll make more money than most people can actually imagine, I'll occasionally end up on someone else's G5 and most importantly I will continue to be able to raise money as long as I don't royally fuck up my investments.
Wow, this might be the best thread of 2015 (so far). Thanks to all the commenters above.
I'm still only 30, but like many people here, I, too, dream of going big. There aren't really 40-year-old real estate analysts (for the most part), so in the next 5 years or so for people like me it's do-or-die. So here are my thoughts on the situation (more of a stream of consciousness, but I think my situation might apply to a lot of people on this forum).
I'm trying to take it slow and steady. I'm a well liked but not a particularly loved individual--for the most part, people think I'm "ok" but people don't really invite me to lunch or want to get stuck on the elevator with me. But everywhere I've worked, regardless of how much people like my personality, I've earned the professional respect of virtually everyone. I currently work for two super wealthy families, and I've earned their respect for my performance and the fat bonuses that come with it--they don't really like having lunch with me, but they've told me, unsolicited, that they want to do deals with me if/when I find them. So I recognize my weakness--I'm an atrocious salesman and I don't really like people, but I'm goddamned good at everything else. If I'm going to raise a fund, I can raise it right now through the network of people who respect me professionally, but if I want to truly go big I'll need a partner who has complementary skills. So I'd say it starts with understanding your own strengths and weaknesses. Do you have expert-level skills or are you smooth as butter with people?
My thoughts are that starting your own investment or PE firm requires the skills and knowledge as a basis. The other day, I started writing out my targeted strategy and then all the organizations that I would use for land use law, insurance, accounting, lending, title work, brokerage, architecture, feel development, and so on. I realized that I've got 80-90% of the parts in place. I have almost everything in place to do deals except the equity. However, as mentioned, I can raise the equity for some one-off deals right now if need be, but would need a partner to raise money for a fund.
So I think launching a real estate business successfully requires methodical thinking, realism about your own ability, the knowledge, skills and ability, the respect of people in your industry, and brass balls. I'd say build out your entire firm intellectually, and once you've put it all together on paper, find the equity--one way or the other. But don't look for the cash money until you have a plan methodically plotted.
Completely agree. This is incredible.
I also have the same kind of anecdote about a guy who kicked all sorts of ass at a REPE firm, founded his own, and really struggled to raise money even with a track record that was world-beating. It definitely made me adjust my expectations
Yeah, to your point, I've been trying to re-jigger my business model. I've got substantial track record in residential for-sale and have built kind of a nice unofficial team around me. Because raising a fund is so difficult, I'm thinking of operating as a very lean residential infill builder that raises money for specific deals. For a guy like me, I think that's realistic. The idea that I could raise, say, a $1 billion fund is, well, it's probably beyond my personal capacity.
@dingdong08 I do definitely see that institutions are generally placing larger amounts of capital with the likes of Lone Star and BX, and then choosing specialist investors for sector or geography specific strategies. This is particularly true with SWFs and the top tier of sophisticated LPs who are basically just going with the very biggest guys for market visibility, co-investment opportunities, and so forth, and then structuring lower-fee separate accounts to tackle specific sectors and geographies, often maintaining control over investment decisions. It makes sense for them but it can also be pretty good business for the managers because the cost or raising capital and investor relations and whatnot is low, and even if the fee is only 1+10. The problem with this from the manager's side is that you start to become highly dependent on only a few LPs with whom you have accounts. But anyways, this is off topic.
I like the single deal at a time strategy, it's just hard because lining up the capital in a hurry / at "deal-speed" is such a bitch (its hard enough to get it when you're not in a hurry!). I guess you need to get people onboard in theory beforehand and soften them up so they are anticipating your pitch when the deal comes and have already begun thinking about internal approvals and all that. It seems that LPs can sometimes approve co-invest in a hurry because their boards are waiting for it versus new fund commitments and the like that take more time... building on that, theoretically you could get the LPs "ready" but not committed when you were still searching for deals.
I was lucky enough to have exposure to LPs at my first firm given its smaller size and my language skills, and I have tried to keep in touch with them, but rarely get in front of capital partners these days. Maybe I'll start going to more RE industry conference and things, I have generally shunned those recently... I am, I supposed, heavily inclined towards drinking and bull-shitting about work, so I guess I can put those skills to work!
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+1SB Dingdong08 . This easily one of the best most informative threads I have come across on the site. Thank you to all.
Great thread. When I have time I can contribute more but here's a good example: Marc Perrin left Starwood to start Roxborough Group** in San Francisco. Top tier experience and network, and I believe he raised $100M. Regarding team size there are two experienced deal guys (aged 35-40) and they are hiring an analyst to handle underwriting.
http://www.theroxboroughgroup.com/
http://news.theregistrysf.com/san-franciscos-jma-ventures-roxborough-gr…
**
Amazing that a guy who co-headed US investments for Starwood was only able to amass 100mm. You would think with that amount of experience and connections you would be at 200mm-500mm. I suppose its possible that he set a cap however probably unlikely. Puts into perspective how difficult it is to raise a fund and so many including myself have that goal.
Agreed. As a twenty-something real estate neophyte, I can't add much to this thread other than "Damn".
Are you taking into account co-investment? That's a big obstacle for first time discretionary REPE funds.
Bravo, one SB.
is it possible to remain a senior MD / Partner at a REPE shop and accumulate a portfolio of properties on the side? Are there any compliance issues or is it hard to do either or given the hours, etc.?
It really just comes down to the individual company. If you work for a REPE shop that exclusively builds or buys A Office buildings in CBDs, it is unlikely that they will care if you and three of your rich friends build some townhouses on some land you buy in an emerging neighborhood. Still though, it really depends on the company.
One way around this of course is to be a partner at YOUR company. Real estate is rather entrepreneurial, after all. That way, you make the rules.
But if I were to become a partner at my own company.. that would mean i face the same fund raising issue that was discussed in this thread. Seems like it is very difficult to raise a fund. So maybe it would be better to just remain a partner at a REPE (assuming you get to that level) and invest in your own deals through a different company at a smaller level with your personal equity and contributions from family and friends (and whatever amount of equity you ARE able to raise)
I work for a sponsor fund who has less than $100M in capitalization for Fund I. Because we act as an asset manager for the properties we own we are the minority investor but we receive a carried interest on the back end. Because of our parnters our buying power is magnified up to 5x the amount of committed capital.
Large funds love investing with us since we are market leaders and have a specialized focus.
I think people going out to raise a fund have a misconception that you need 100+ million dollars in order to be taken seriously in the market place.
You can make a sizable living raising funds less than 50 million. For every BX or Starwood, there are countless little funds who do quite well.
The hardest fund to raise is # 1.
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