Opinion wanted. Should I Bring on an Equity Partner for My New Real Estate Venture?
I’m debating whether to bring a colleague in as an equity partner in my new real estate venture. For context, I’ve been successfully running a real estate syndicate for the past three years and now have the opportunity to diversify into rental residential properties.
I have the opportunity to diversify now into rental residential RE. It would include quite a lot of work in terms of the renovation, tenant management, actual buyouts of the properties and so on. I came up with the structure and the LP commitments for that.
Now I am debating if bringing on the colleague is worth it or not. He would be a great help as he is a more mature / senior / has a bit more executive presence (I am mid 20s, he is early 30s). So, he would help me a lot if the operations and admin. Though, we are both still working as FTE in the PE fund, so no full time commitment possible on either of our sides.
Also, I am generally against giving up equity early on in the project and would much rather bring on partners later on. However, I also realize it would be a challenge to build this alone / with only paid staff and 50% of something is a lot more than 100% of nothing. Any help, guidance, framework to think about this would be greatly appreciated!
Would love to hear thoughts, frameworks, or experiences on whether bringing on an equity partner at this stage makes sense. What key factors should I consider?
Bumping my own post, sorry, but insights / opinion greatly appreciated as it is a big decision.
Impossible to opine without knowing all the dynamics involved, but generally speaking: couldn't this be a major source of friction/conflict with a senior colleague at your PE fund day job if there's ever any friction at the side venture? And this could ultimately jeopardize your day job? A lot of folks like the optionality of the side gig ('oh I'll jump off on my own and quit day job') but doesn't that go away with arrangement you described?
TLDR: don't shit where you eat. just my two cents
I Agree with asmith_1
In addition, it's hard to really say what value this person is bringing. Is the "executive presence" going to help with fundraising, if not, what are they bringing to the table? You mention that he's going to be helping with operations/admin items, which isn't really something you need a partner level employee for.
Both comments appreciated. In general, I do not think it would cause much trouble in our day job as we are not focused on the same industries. Also, I will be quitting in a few months anyways as the side gig is already making more than the PE job.
However, and that is probably the best POV, is the value question. I think it comes down to me wanting to have someone by my side to help with anything and everything but also not really wanting to give up equity for, as you correctly mentioned, not a partner level employee. It would make sense in case of fundraising, but the LP commitments are already secured due to quite a good track record in the syndication.
No. If you are going to be leaving your full time job soon you will have more capacity to do more work to develop the skill sets in rental residential real estate.
I have been operating a rental residential real estate syndicate for a number of years it is better to scale by first doing the silo of work and then finding a small business owner in the silo to take it over. For example learning renovation basics by hiring the subs on a deal or two and then eventually get a small gc to act as a project manager. It is the same with tenant management just set up a few property management processes which is easy with with appfolio or buildium eventually when you have some scale and experience you can move the work to a smaller property management firm and with the experience it will be easier to asset manage them.
If you bring on a partner it is better to just do it as a co-gp partner on a deal by deal basis. If someone brings me a deal and they manage the full process and I just raise all the equity I am generally getting between 40% to 60% of the deal.
I understand. Makes sense to just hold on for those last few months and once I leave the PE job I will have a lot more time to focus on the operations of this as well.
Thank you for the the guidance and POV.
Even with the comments, there isn't enough detail here to justify a firm answer one way or another. How much equity does he bring? What are the terms? How much control are you giving up? But I have two specific thoughts, one for and one against.
First off, the negative. You have built a real business here, which is awesome. But people in PE are not known for their lack of ego, generally, and you need to take a long look at your partner and ask whether or not the guy several years your senior, with twice as much professional experience, is going to take kindly to playing a junior, supporting role given that this is YOUR business and not both of yours. Some people can do that, others are just constitutionally incapable of deferring to or giving the lion's share of credit to someone they see as younger or less accomplished (whether or not it's true be damned). It's all well and good to talk about partners, about a collaborative and syncretic approach, about all of that. And to a large extent it may be true. But at the end of the day he's bringing something relatively common (money) to something you've built. Maybe you both handle different aspects of the business, or he's happy being second fiddle. But two equal partners who do the same thing and feel entitled to make the decisions are bound to clash, at least a little, because eventually you'll disagree on something, and if you don't have a clear delineation of how decisions get made and who is in charge, you're gonna have a bad time. Most people are really good partners until something goes wrong, and the only time it matters that your partner will stand shoulder to shoulder with you is when the tide is going out, not when it is coming in.
On that note, the positive case. Shit goes wrong. Shit always goes wrong, at some point. Every real estate entrepreneur who ever lived had a moment when everything fell apart, all at the same time, and it became difficult to impossible to keep all the balls in the air. At it's core, both real estate and entrepreneurship are not about models or management, it's about risk mitigation. It's very obvious to say "I don't want to give up my upside" but any good operator knows that the important question is never "how much will I make," but "how much can I lose?" Staying alive to live another day is the fundamental requirement to be successful in this business as an owner/principal. Yes, having a partner who brings in a substantial amount of capital can supercharge growth. And that's amazing, and important, and worthwhile. But you'd have gotten there anyway, and you're really young to boot, so really all that does is get you bigger, faster. Far more important is that your partner is there to help stanch the bleeding and contribute capital with you when you have to plug a hole, when your guarantee gets called, when you have to take sick leave/parental leave/etc right when a major crisis occurs. The importance of that, of someone who can cover for you financially, physically, etc can't be overstated. 50% of something is better than 100% of nothing, as you wisely note... but it goes further, because losing 50% of something is also better than losing 100%.
Thank you for the insightful comment. To clear a few things, the partner would NOT bring in any equity at this point. He would have half of the business and become my number 2.
The setup is as follows. I am running decently successful syndication without any partners. It is quite a niche subset of market with limited capacity. Due to the limited capacity of that strategy, I want to diversify into residential RE (renovations in major cities). Both strategies are very different so hence the idea of bringing on the partner from my PE day job to help with it. He would bring no equity (I have secured LP commitments due to success in the syndication) and would help with the operations, renovation management and so on.
Although I do not think he is the type to have an issue with being "number 2", it could cause an issue down the line. Also, you make a great point about eventually having a disagreement and 50/50 is not ideal for that. I think it comes down to feeling a bit of comfort in this new venture with having someone by my side (who is not just a paid FTE) or the feeling of giving up too much for basically a ready to go business case.
I think I am leaning more towards setting up the GP solo with 100% ownership stake and brining potential partners further down the line. Also, as I will be quitting my PE gig in a few months, I will have the time to oversee projects myself, which was one of the things that worried me with the current setup.
Non beatae ducimus accusantium. Exercitationem nihil eos corrupti cumque.
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