Bidding Strategies
How do you go about bidding on a deal? Let's say the deal meets your desired return metrics but you need to get competitive on it. I can see that you will probably bid until the purchase price hits the metric threshold (ex. at a $100M pp, your irr hits 13% (the min. you need for investors) compared to 15% at $95M), so the max you might be willing to pay is that much.
But how about for a first round offer? If you offer too low, the broker/ seller will just ignore you. But then you don't want to give up a great deal by bidding high right away either. I know you might have a whisper price or even an asking price, so how do you work around it? Thanks!
You make sure you have a good relationship with the broker so if you’re original offer is too low, they call you anyway to tell you to raise your offer. Also, you shouldn’t offer the bottom line, ie., your fund needs a 14%, and you underwrote it right to a 14.00%. That’s a recipe for an issue. Nothing ever goes as planned and this leaves no room to increase costs etc. generally, DD finds some more capex you need to spend, not less. That means you’ll be buying a property that doesn’t meet your criteria unless you retrace them. Which means you won’t get that last look call again next time.
Going to dive in a little more because I'd really like to learn more. Let's say I'm running a startup fund with ~$100M that's targeting a 13% irr. I'm a one man shop that somehow got money from a sovereign wealth fund to acquire offices in the US. I'm buying an office, underwrote conservatively and get a 16% irr (ran multiple scenarios and it still seems fine). Now I'm a one man shop with limited years of experience in this market, so I don't have the biggest name in the industry or know the specific broker perfectly well. However, I want to be in this market and this asset seems like a good investment. So now how would you compete on the deal? I want to know how people think about bidding.
If we go another step further as well (in another question), let's say our bid gets approved and we're now in the final bids. We know it's down to 3 funds with the most competitive price being at $25M. At $25M, my base case IRR is 15%, so still good. Now what? Thanks!
What is the asset price vs cash available? If you have $100M to spend and are looking at $50M assets you can always offer all cash. Close with cash, do your quick improvements, refinance, then finish the improvements.
This obviously isn't the highest return way to do it but what it does is gets you in the door. Obviously this is if you can even do all cash on the purchase.
Well..you know what they say…the man/woman paying the highest price wins the deal.
Here’s the actual deal though. It comes down to more than just price. I’ve won deals before because we could do 21 days of DD and close all cash 5 days later. If the highest bidder comes in $2MM above me, but needs to get financing, which adds another 30 days to closing, I’m the more attractive bid. It comes down to more than just price. If you’re just getting into a price war, my strategy is pay the highest price. As you can prove you can close deals, you won’t need to do that anymore because you become a known factor and brokers will advice their sellers you can close.
This brilliant, I don't think many people who don't know this, so thank you. Hate to go back to the topic again, but if you enter into a price war and your strategy is to pay the highest price, you must surely have some thought as to the highest price you're willing to pay? Wondering how that thought process would be. Maybe it is the price at which IRR hits the threshold right to the neck, and pray to god that your assumptions come to life if you REALLY want the asset...
It all comes down to different factors. How bad do you want it - sure. But also you have execution risk. You need to understand your basis (price per SF or Unit) and you may say, I don’t like this basis based on comps. Or the cap rate is too low. And than it may depend on asset class. You may be okay stretching on multi but office, you may say no because if TI costs increase, that’s going to effect your basis by a big margin whereas multi family doesn’t have TI costs. So you can be fairly confident in your basis calculation.
There are many factors at play here and there have never been more lies written than in excel. Our model says one thing but it never happens like that. The point of a model is to tell us if we are directionally correct. I don’t know if my NOI will stabilize at $200,000 but if I can get to approximately $185,000-$215,000 I know I should hit my targets. We create these crazy excel models pretty much only because LPs demand them. I can do my deals on the back of a napkin and tell you they work. If I can’t do it on a napkin in a simple manner, i won’t touch it. No amount of excel gymnastics will make it a good deal.
There is a differnce between a strategy of paying the highest price and paying too much.
1. Price
2. Speed / certainty of close
3. Having the sellers think they would prefer to work with us going forward as compared to other potential buyers (if sellers are rolling meaningful equity / plan to continue to run the business)
99/100 times it comes down to these three factors. While I've ordered them in accordance with what I've seen as the typical order of importance, the relative weight of these factors varies from seller to seller. Winning an auction requires having an understanding of what's most important to your unique seller (which should be what the banker prioritizes, in theory at least) and ultimately putting forth a package that best appeals to them and yourself (though you may not want to do this in the first round). I've used handfuls of different "strategies" – there is no one size fits all answer here though.
Another poster raised a good point regarding having a good relationship with the banker so you get that last call to move up in price and advance to the next round. While this is true, it also raises a very interesting dynamic. While the point made is generally true, a great banker might every once in a while use your perception of a great relationship to his or her advantage - perhaps the banker gives you a "last call" because you need to move up 1.0x turn of EBITDA on purchase price to advance to the next round, which you then believe because you've had a good relationship with the banker. Turns out the banker was lying and pushing you up on price to extract more value for their client (and themselves). This is just one example of the tons of little nuances that senior investors / bankers must consider in the deal process.
Edit: I saw you were a prospect in PE and assumed this was in the PE forum. For clarity, my thoughts were based on my experiences in buyout PE, though I imagine the concepts still generally apply to the RE world.
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