Raising Capital for a RE Multi-family strategy: Feedback wanted
Hello all, I've been introduced to an owner of multifamily properties in Arizona, Nevada, and Florida. Over the course of 35 years in business, the owner has bootstrapped herself having developed a portfolio of 1200 doors in 9 multifamily properties, all of which she not just owns but also manages. She estimates that her portfolio is worth around $200 million, and net of leverage and co-investor interests, her stake is around $60 million.
I have reviewed her investment record under NDA, and reviewed new deals with her. What I've observed is that she has demonstrated the ability to acquire assets at attractive going in cap rates, and through a series of value added strategies, grown the cap rate over time. Coming from the asset management sector as I do, I look at her performance and would characterize it as demonstrating a good record of strong risk-adjusted returns.
Thus far, her modus operandi has been to self-fund her growth. Her interest is to raise capital and significantly increase her net worth and the size of her company. Her objective is to raise $100 million of discretionary capital to invest, with the intent of this being the first of her raises.
Here are some questions I have.
1) Does anyone have feedback on what the optimal way to raise capital might be? Open-ended fund, sale of shares in a private company, etc? I welcome any and all feedback.
2) Her primary concern on raising capital is what she is told will be an $8-9 million tax bill due to sale of the properties. My take on this to her is that we would make a transfer of assets conditional upon raising the money, and so the liability is only incurred if capital is successfully raised, and she is not being asked to transfer the assets and hope we can raise money.
3) Should we not be able to use her existing portfolio to seed the company/fund, anyone with feedback on the probability of success in raising capital for a investor of this type? can you raise money off of a prior track record like hers?
Feedback welcome, many thanks!
I'd welcome feedback.
1) Hire a placement agent, Park Hill, JLL, HFF, etc. specialize in this kind of thing. She'll have to pay for the privilege, but that's your best bet.
2) This isn't a capital raising question, is she considering selling her portfolio or seeding the new fund with it? This isn't clear in the question. The tax question isn't something you can ask on here and get a good answer (we're finance professionals). She needs to get/pay for a good tax lawyer/accountant that can walk her through different structures and what tax effects they will have. It's probably worth an initial conversation with them on options, but don't engage them until you're under contract on the recap.
3) Without reviewing her track record it's tough to say. A few questions I'd have if I were looking at her track record:
How recent are the deals that she's done? If she bought a bunch of stuff in 2010 and then just held on to it that's probably not a great story. If she has a great pipeline/deals under development currently that's better.
What realized returns has she achieved, if any, and what would her returns be if she sold today? Value-Add/Development returns over the past decade have been ~20%-25% depending on how you show them (at least from the data I get from consultants that work for Pensions). Which is crazy high. If she's in the 18%-20% range she's probably ok, but again, there are a bunch of value-add shops out there with crazy returns and more institutional infrastructure.
What amount of leverage is she using to get those returns?
Here are my $0.02 on what will happen - She has pretty much no shot of raising discretionary money from institutional investors without a placement agent. Every pension fund has a consultant that's going to vet the firm, and it doesn't sound like she has the institutional processes in place to make a good impression/get her foot in the door. So she'll hire a placement agent, they likely won't be able to get her institutional capital either, but they will probably bring a lot of potential non-discretionary capital to the table.
If you go HNW you need a placement agent even more, but you may have a shot there, but no guarantees, and investor reporting requirements might make the whole thing not worth it.
This is good advice. I'll add this, Park Hill is not even going to call this lady back (they should, but they won't as it isn't worth their time at this level). JLL (formerly the Henschel folks) probably aren't calling her back either. CBRE Capital Advisors may taker her business and there are some more boutique placement agents who trade in this space. At this level, you need to start with a good attorney and tax advisor to protect yourself from yourself, your future placement agent, and future LPs. There is an element of net worth preservation at play here.
I hate to say it, but her being a woman may be the only reason she would be able to raise a sleeve of institutional capital at this level. I'm guessing that some state pension funds and some endowments would consider investing with her to round out some of their ESG mandates. None of this is guaranteed obviously as there is a lady who just left Blackstone to start her own firm and she's slogging it out to raise money. If I were her, this is the path I'd try to pursue initially, with the help of a good placement agent.
Just my two cents, and none of this should detract from what she has accomplished or will accomplish, as she has done 1,000x what I likely will ever do. She's a badass. I've just seen this process up close, and I know how hard it is.
Fair points, agree on all of them.
Thanks for this reply. I've tried to reply to you a few times but am getting a strange error message so trying again. Of the boutique placement agents in the market, are there any that you would recommend? I have a tax advisor that a FL-based real estate lawyer recommended to me, but welcome any names on that front as well.
She really is a badass. I have a lot of respect for her track record, her humility, and confidence. And she has the house on the water and boat to show she knows how to enjoy life as well. It's a pleasure to connect and work with her thus far.
Of course, happy to help. Keep us updated on where this goes.
A lot of people bought properties at a high enough cap rate to generate attractive returns. Not to say she hasn't done well for herself, but there needs to be a differentiated strategy that's beyond just value-add.
What you would consider a differentiated strategy that is compelling in today's market?
I guess over 35 years cash flow and capital events add up, but if she's that under-levered she isn't maximizing the potential of her properties. On the other hand, if she's really worth $60mm then I guess it's worked out for her!
Can you give more insight? What has she done that has helped generate those returns. I hate to be the downer (just kidding, I love to be a downer), but Mayor McCheese could have invested in those three markets over the last four decades and made a killing. You don't have to tell us, but you should know yourself what her strategy is. As someone says down thread, "value add" is a nonsense term used to hoodwink credulous LPs.
Wait, she's going to sell assets? I don't understand why she'd get hit with a tax bill. Aren't you/she raising outside capital? Is the idea that she raises money in a fund, sells her existing assets into the fund, and cashes out her personal stake? That seems like a big no-no for potential investors.
By her own admission, she is ridiculously, ludicrously under-leveraged across her portfolio. If you take a typical structure where a GP is 10-20% of the equity and an LP 80-90%, and throw 60% debt on there, her $200mm portfolio should have $140mm of debt and (to make the numbers nice and easy) $50mm of LP capital. Which means she can take $50mm out and start her fund that way, if she prefers. Recapping out her investors and getting a loan wouldn't be too difficult.
All that being said, a couple questions for you in particular as you think through this.
1 - What kind of deals is she doing? Over 35 years she's acquired 1,200 units, which is amazing and impressive, but when you get right down to it that's one small deal (~35 units) every year. Obviously it makes sense she would have started smaller and gotten bigger over time, but one thing I hear a lot when people raise a fund is that they don't anticipate the enormous pressure to deploy capital. At the very least, she has to be ready to buy much, much larger properties - she's going to have to compress that 35 years of buying into about 5. Does that kind of opportunity exist in those markets? Has competition increased to the point where yields are down from where they were 5 or 15 years ago? Which brings me to..
2 - You say her returns have been strong, but who cares about a deal she bought in 1999. Accretion in those markets has been enormous and somewhat beyond her control. How has she done in the last 5-10 years since she's gotten to some scale and had to deal with institutional competition? As per the above, she is no longer going to be able to buy the 50 unit complexes for $4-5mm and slowly raise rents. Instead of flying below the radar of national operators, she's going to have to compete directly with some of them. And she's going to have to do it on a timer. If she's been buying 100-250 unit properties for the last decade and has shown strong returns, no worries. If it's been business as usual, maybe that is a red flag about the ability to expand rapidly. Generating strong returns in a 3-5 year hold period is a vastly different animal than doing so in a 35 year hold period.
3 - this is more of a personal issue for her, but have you explored why she wants to do this? Bringing in outside capital is a giant pain in the ass; she's going to go from being her own boss to reporting to someone else, effectively. It will likely require additional staffing and management in terms of reporting, and just more of a headache. This woman has made an amount of money that any sane person could live on comfortably for several lifetimes. Given how long she's been doing it, she's got to be at least in her mid-50's. It's just a weird time to decide "I'd like to die with $200mm in my bank account instead of $100mm". Why is now the time to expand like this, instead of 5 or 10 or 15 years ago?
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