There was a question in the forums a few weeks ago about what life is like working at operating partners for Private Equity firms. My current firm specializes in land development and we often do JV’s with real estate private equity firms. In these deals they provide the majority of the capital while we serve as an operator and manage the asset and develop and sell the land. I have worked here for almost a year and I thought I could shed some life on what life is like at a real estate operating partner by listing four things I’ve learned this year about being an operator.
1) You spend a lot of your time attempting to convince capital partners to do deals with you. A lot of my time is spent modeling potential acquisitions but once those deals are modeled and we have a firm grasp on it, the majority of the time is spent talking with capital providers and attempting to convince them that the deal is a winner. We spend a considerable amount of time walking our potential partners through the model and explaining and defending our assumptions. Throughout this process they generally have things they want to change so we have to go back and revise our assumptions. Even if they're interested they'll often ask for more data so we then do a deeper dive in the market and tweak the model to reflect new data.
2) You deal with a lot of rejection. Once we he our heads around the deal we take it to capital providers. We try to take each deal to partners whose risk profiles and areas of expertise match the deal. For example if there’s space for multifamily units we might start by taking the deal to firms that can do some vertical construction. However it’s very difficult to get a partner for the deal, especially if the deal is a little hairy. We often hear “it’s interesting but…” or that it doesn’t quite fit the firm’s mandate. If the deal isn't in a prime market and has some issues with it (for example the sale of an entity vs. an asset sale), it can be hard to capitalize. Even for more straightforward deals I’ve found that it takes several no’s to get a yes.
3) Sometimes the operating partner doesn’t get to operate the deal. Once we’ve got the deal capitalized and we've closed on the property, you’d think that the hard work is over and now we get to do what we do best which is develop and sell the land. This is not always the case. Despite having the expertise, the capital provider brings the money and they often have their own ideas about how to execute the deal. They may want to bulk sale land raw while we want to develop it out. The best deals come out of constant communication between the capital provider and the operator so that everyone is on the same page. If you don't have the same vision for the property as your capital provider, that can lead to deals not performing.
4) You don’t get paid until the end, but your return on equity can be huge. Land deals normally work like a J-curve. You have the initial outflow of capital, then in a few years you (hopefully) achieve break even and then it’s all profit after that. As an operator we get paid a promote out of the profits the increases after certain hurdle rates. We may not see significant profits (outside of management fees) for several years. However our profits may be huge multiples of our relatively small co-investment if the deal ends up performing.
