Need some help from the RE pros on this board. I'm on the younger side and in the hedge fund space which means I need to figure out a long term allocation strategy to diversify my personal cash flows.
I like equities, hate fixed income (as anyone on a longer horizon probably should), and have always been extremely jealous of the tax advantages of real estate investing. I want to back a few good (ideally somewhat young/hungry) GPs in the value add space as an LP and build long term relationships. Would like to incorporate some geographic diversity as well ideally by picking operators in a few different regions.
I'd like to work with a smaller operator outside of Tier 1 cities because my suspicion is that the returns are better in value add if you are dealing with less efficient markets. I also would like to go deal by deal rather than a fund structure since I'll learn more (a long term aspiration of mine is to do some of this myself).
My questions are as follows:
Is there something egregiously stupid about what I'm thinking?
How would you pros go about finding such a GP? And ideally what diligence would you do? Happy to hear of suggestions via PM as well.
Thanks in advance and hopefully this thread will be useful for others.
Here's my take as someone with experience as lender, LP and GP. You really want to understand who they (the guy to whom you're giving your money) learned the business from. The best GP's are guys that learned the business working at GPs. The best GP shops are usually super lean and the BSD founder is still in the weeds (Steve Roth is notorious within the industry for still ripping apart proformas at Vornado lmao). If you learn from these guys you will learn to be a great investor - assuming they didn't just get lucky. When the protegee ultimately breaks off, look to see who backed them.
There CAN be one-man shops but the best GPs have 2-3 guys/gals where one dude has the finance background, the other one gets construction/project management, and the other really understands operations (asset/property management).
It's honestly the same way you'd evaluate management in a corporate (public or private) equity investment. Track record? History working together? Etc., etc.
That's a roundabout way of answering your direct question regarding how to find good operators, but hopefully that gets you looking in the right nooks and crannies. Real estate private equity is just as much of an ecosystem as any other investment business.
Here's one thing: If you start telling people you're interested in backing GPs those guys will find you, haha.
On the finding people front, I'm working on a startup in this space. It's called Tower Hunt. Think of it like LinkedIn for commercial real estate. We're initially focused in Boston and NY/NJ and are growing there. If you're interested in these regions (need not be downtown to your point), feel free to create a profile (the more specific the better) and reach out to some of the suggested folks on the principal side. If nothing else, you'll get a decent and personalized view of what's going on in these markets from a mid- to institutional-market level.
I agree with the anonymous commenter's view. The market has an extremely long tail and is highly fragmented.
@Malta" - I told you there was a market for the real estate sugar daddy app.
nutella - you're going to have to network a bit, but there will always be people who want to do deals and need money. The trick of course will be finding GPs who can deliver on time and on budget, but you will certainly find no shortage of people in their late 30s/early 40s tired of the rat race and wanting to do deals.
As a GP I would advise a first timer against trying to back a small GP on individual deals. If you are accredited, find a reputable sponsor whonis raising a fund in a space that you think makes sense, toss your money in, listen and learn from quarterly updates etc. before trying what you are suggesting.
My firm literally does this. We target vertically integrated GPs in Tier 2 cities. We have 1-2 GPs in each market we target. We don't give them a blank check, we invest on a deal-by-deal basis. Some of them are good at scouting and bringing us deals after getting them under contract, others need a little hand holding on pursuing deals through a full bidding process. We like to target younger GPs that have modest scale (2,500+ units in a market), and contribute a substantial amount of their own equity in each deal.
In terms of finding GPs, it's really hearing about groups through our network or equity brokers coming to us. In many cases it's two guys with access to HNW capital looking for an LP to enable them to do big boy deals. We tell them to come back to us once they have built a platform. Sometimes our GPs outgrow us to a point where they check the box for a larger institutional type shop like JPMorgan and can get the equity they need faster and cheaper.
There are plus/minuses to both smaller/bigger GPs. The larger GPs have a track record but I am noticing they are not able to pull off the level of returns that smaller shops can. A lot of this is because smaller shops that do a deal by deal basis have less capital to work with so they need to get a bigger bang for their buck. They have to do value add, they have to create a plan of action. Whereas larger shops with a ton of capital are simply trying to place it and get stable cash flow. Its all a matter of preference.
A more seasoned GP will have:
Access to better deal flow Lower cost of capital Stronger management
OP wants to go invest with some cowboys, and seems to think that equates to better returns. Honestly, it doesn't, and on a risk adjusted basis the seasoned GP will win every time.
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