I don't get this. Can someone explain to me what/why an LP shop would do this and the role they generally take in this capacity? From my understanding, you generally have a developer who will coordinate most of the show with LPs taking a back seat (generally) as silent partners with decision/voting power on certain decisions, however, they take on the majority of the equity risk by filling up most if not all of the equity piece.
Please correct an ignorant monkey. Thanks.
Why would an LP do it? Way more of the upside without having to do any of the work.
The better question is why would a GP do this, unless they were really desperate to shove a deal across the finish line.
Very valid points.
So in most situations, would an LP come into a situation like this very early on in the deal to tie up the deal/site, diligenece, etc. and roll that as GP equity?
I know a number of developers who sell part of their GP portion to reduce risk/decrease the amount of capital tied up.
double promote and increased bandwidth. If I tie up an incredible deal and only have $100K in the bank, my 3.0x promote turns into like a 12.0x, they waterfall the GP stack.
If I have a mil in the bank, I can now do 10 of those deals instead of 1
I know a group in LA that does it,. very successful
Makes total sense about being able to have a capital base that can be spread out more, but can you explain the mechanics of how that promote gets magnified conceptually and promotes off the GP stack?
I.E GP piece requires $1mm and you put down 800k in the GP as an LP
What's the group in LA, if I may ask? Would be interested to read up on their portfolio,
This sounds great on paper but in reality.... not so much. How many groups are actually running ten active development projects at the same time, more or less all the time? That's an absurd amount of construction and risk to have going on. We're talking giant teams - to have the staff to break ground on (conservatively) 4-5 new projects every year, while managing stabilized assets, while hunting for new deals for the pipeline, while entitling projects for next year and the year after, while dealing with the inevitable delays from last year's deals... you're talking 10-15 project managers alone. At the base of the pyramid. Plus support staff (legal, HR, etc). Those firms are in a position to raise capital on their own, they don't need someone to take out their GP positions. And if the firm was only planning on doing 1 or 2 deals anyway, they don't have the staff to suddenly take on 8 or 9 additional projects.
The real answer is guarantee risk. Bringing an LP in for 10% of your upside, if it means laying off 50% of the guarantees, is absolutely worth it. All of a sudden you can guarantee twice as many loans (far more realistic than doing "10 deals" instead of 1). Your risk adjusted return shoots up, which is what principals at smaller development shops care about most.
Most small or mid tier developers would already be doing more if they could. Freeing up 90% of their initial capital contributed doesn't mean they magically put that money to work somewhere else. That kind of opportunity just doesn't exist. It's the same reason raising a bigger fund isn't always better - there are only so many opportunities in any given market, to assume that if you had 3x the capital you'd be deploying it all in equally lucrative opportunities is just plain stupid.
Because they're a shitty fee developer whose incentivized to build baby build, take their fees, leverage to the tits and hopefully earn a back-end promote in the process while not having to put much of their own capital or their principles' capital at risk.
To make $$$$. LP investors see tons of projects and get to pick the ones they like or look the most profitable. Without all their capital then no projects will get done. That fancy apartment building will not happen without them. Yeah your money is tied up for a bit but when you get it back you get Hella dough with it that you can keep on using to churn out returns on other deals
As an LP having a Co-GP is the dream. You can even do the full equity stack for a few deals to help them with a track record, then tell them to go out and raise money from bigger LPs than you and maintain a piece of the GP for each deal they do going forward. Takes the right team but this turns a semi big LP into a huge owner give the GP access to deals with big LPs who want 80/20 splits on big equity checks that a not HNW or UHNW wouldn't have in the bank and then you can also start looking for multiple big LPs.
As a GP this is the way to actually get to being your own fund rather than a syndicator.
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