How to go out on your own

This is obviously the endgame for most.  But how does one try to align their path/know when they are ready to go out on your own, and how to find a financial backer?

Ideally, with over 10-years experience in acquisition and or capital markets?  How much a of a track record do you need for LP's, and how much of your own capital do you need even assuming you can syndicate out a HNW for the co-gp?  Would it take a track record of $500mm with acquisitions and a track record of $1b for development?  What am I missing? 

Assuming you have an acquisition track record and capital markets relationships, how does one make this happen?

Comments (21)

 
Oct 13, 2020 - 8:12pm

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The main thing about money, Bud, is that it makes you do things you don't want to do.

 
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Oct 14, 2020 - 12:29am

Write up a business plan and socialize it with some of your really good clients. See if they will co-GP deals with you – as in: you source the deal, execute the business plan, and asset manage it either under their watch or in tandem with them for a piece of the promote.

Your business plan will have to be complementary to their overarching strategy but not directly competing with them. Delicate balance.

You're effective non-salaried acquisitions + asset management head for them but it will give you a track record of doing deals "on your own" and not under an employer.

This is what we're doing and it's working successfully. We're able to leverage all of our partners front/back office, asset management infrastructure, balance sheet for the debt and institutional LP capital relationships.

In the spirit of fairness, we'll give these guys a piece of our platform-level GP for putting us on once we're a real outfit that has scaled.

I had a flair for languages. But I soon discovered that what talks best is dollars, dinars, drachmas, rubles, rupees and pounds fucking sterling.
 
Oct 14, 2020 - 12:42pm

Thank you for the thoughtful reply.

Can you elaborate on clients, I work for a Gamily Office GP firm.  I know capital partners and banks, and what I aim to do is moonlight after 1-2 years of acquisitions(REPE level transaction volume), to spin off.  I'm not entirely sure of how to fit my current status to your above business model.  Do I quit my job or can I do this on the side?

Thank you again

 
Oct 14, 2020 - 1:07pm

This is obviously the endgame for most.  But how does one try to align their path/know when they are ready to go out on your own, and how to find a financial backer?

Ideally, with over 10-years experience in acquisition and or capital markets?  How much a of a track record do you need for LP's, and how much of your own capital do you need even assuming you can syndicate out a HNW for the co-gp?  Would it take a track record of $500mm with acquisitions and a track record of $1b for development?  What am I missing? 

I don't think putting milestone numbers are helpful.  

Build up an expertise.  Figure out what it is you're good at, or can gain a competitive advantage in, and focus on that.  Just going out and looking for deals is almost never going to work unless you're 20-30 years in and have rock-solid relationships.  Why is anyone coming to you with an off-market deal?  Why are local or submarket investors giving you their money over someone else?  Yes, Related can do office and retail and MF, but it took 50 years to get there.

Once you have that expertise, Merchant_of_Debt has the right idea.  Pick a few of those relationships and bruit the idea around, figure out what it is their looking for and where that aligns with your skill set, and look for that deal.  Assuming you have those relationships, people will want to help.  Everyone wants to see you get ahead (except perhaps your current employer, but maybe even then).  As Merchant said, avoid directly competitive assets.  Is someone buying four family homes in Brooklyn?  Do it, but learn a couple neighborhoods in Queens instead.

After that you just have to find an asset.  I would disagree with @Merchant on this one - if you're supplying the deal and running it, don't give away your promote.  It's your incentive for doing a good job.  Legitimate investors will understand that.  Maybe you ask for some of it up front to cover overhead, but don't give it away without getting something in return.  If you find a $100mm deal, sure, you bring in co-GP capital.  Or in return for someone covering guarantees.  But presumably we're talking smaller deals.  If you want to give away a piece of the operating company in return for the ability to scale really quickly, I guess that's a different story, but it's a question of where you want to go and how fast you want to get there.

Not everyone has to be Steve Roth overnight.  You can easily source, finance, and manage a couple smaller projects while working for a larger company.  Generally you won't be competitive with them so as long as you're getting your work done they won't even care much.  And once you have a little cash flow and an independent track record you're in a much better position to negotiate with larger, more systemic capital partners.  The riskiest dollars someone invests in your business will always be your overhead, and not the real assets, so you'll always pay a premium to people if you're asking them to kick in diligence costs and salaries and office space.

 
Oct 14, 2020 - 11:36pm

Yeah I hear ya. We don't split promote for the sake of doing it. There's got to be real contributions or trade-offs. Aside from what I rattled off - it's largely the loan guarantees.

I was speaking in the context of doing "larger" deals outside of your balance sheet capacity. If you're gonna do small ones - no need for a co-GP really. Larger is all relative though. We look at a lot of $15MM-$50MM stuff and debt in this space has still been inaccessible to us independent of our partner in our GP due to lack of net worth and liquidity (for now at least).

Secondly, we've been able to get JV term sheets and looks from institutional players because of our willingness to partner with a larger outfit. It feels like a decent way to get in front of them as an early-stage company and still have a real opportunity to JV. I think our platform is accruing some relationship capital with these types of groups that can be independently leveraged at a latter phase in our lifecycle but earlier than most startups.

I had a flair for languages. But I soon discovered that what talks best is dollars, dinars, drachmas, rubles, rupees and pounds fucking sterling.
 
Oct 15, 2020 - 1:39pm

C.R.E. Shervin

how risky is it to poach investors from your current job?

I think it's something you need to figure out informally before asking.  At the end of the day, it's unlikely a small shop is competing for the same funds that a bigger one is.  Small investors might only be able to write $5mm checks, and a bigger development shop isn't going to waste time and resources on deals that don't make sense.  Ditto but in reverse for larger investors/funds.

That being said, poaching anyone is a bad look so you should handle it carefully.  We've said to investors that we don't want to upset their existing relationships, but we have deals under control that make sense for their strategy and if they're not holding capital to do a deal with our parent company (or where we work, whatever you term it), maybe they're interested in investing.

I'm not advocating being a dick to your boss/es, but if they aren't willing to let you go do your own thing then they can go fuck themselves.  Those aren't the kind of people you want to work for or with.  You just want to make sure that they can't badmouth you too badly to partners you'll need, so get their buy in first

 
Oct 14, 2020 - 1:14pm

My first job post-MBA was with a "go out on own venture" of three senior execs leaving a big name regional firm. They wrote a plan and pitched some very wealthy backers and got funded by a niche PE frim willing to back their startup. I've seen similar type stories with others. A few themes I've seen. Usually a partnership of senior people, get the backing of one key funder/investor, go very niche and true to their experience. 

Bottom line, I think you can do it when you have the funding in place. Getting the funding in place is a matter of credibility and novel ideas/approach. I mean, you do need to justify why your new firm will be better/different than your old one, or why on earth should you get any money after all!

 
Oct 15, 2020 - 1:50am

I'm not in RE but I have booted up my own (very small) PE firm. I think an important question you should ask yourself is how much entrepreneurial shit eating you're willing to do. 

I think that part is the most important question. You really don't need to know much about an industry to get started as odd as it sounds. You just need to willing to eat a lot of shit. Get comfortable with being wrong, get comfortable with potentially not making money for a while, get comfortable with uncertainty.

I know this is a VC fund, but I thought some of the tidbits she mentions in this podcast are really good/accurate:
https://podcasts.apple.com/us/podcast/venture-unlocked-episode-1-elizab…

In a lot of ways, it will feel like a big step back and you have to be able to keep long-term goals in mind. 

 
Oct 15, 2020 - 1:43pm

m_1

I think that part is the most important question. You really don't need to know much about an industry to get started as odd as it sounds. You just need to willing to eat a lot of shit. Get comfortable with being wrong, get comfortable with potentially not making money for a while, get comfortable with uncertainty.

I agree with the gist of this, but you absolutely need to know what the fuck you're doing in real estate if you want to have any success.  No one wants to bankroll you figuring shit out and losing money on your first couple deals.  Find a niche in the market, and exploit it.  

100% agree that the biggest hurdle is dealing with all the back office, with all the fundraising that was taken for granted, motivating yourself every day.  No one thinks about that (as the many HR-hate threads on these boards attest to), because it's always there in the background.  But if you want to start hiring, you're gonna spend hours and hours dealing with healthcare, ordering supplies, etc.  No one ever thinks about this, because at big shops someone is taking care of it, but it's a major time suck.

 
Oct 17, 2020 - 9:14am

I've done it - not with 50 years experience either (am in my early thirties). I took my balls and went for it for one whole year. It failed. I am back in employment. However I raised $20m twice so let me walk you through my process:

I was in one of the largest city in the world and just started trolling website and contacts to find deals. I underwrote in a year about 30 deals. Went to large and small PE funds where I knew someone to get cash - this narrowed down to roughly 10 funds. I used to work in one of the largest REPE shop for a couple years before and before that I was in a totally different industry (trading). I ended up having a PE fund who backed me on two deals - they liked my ambition (I was alone mind you). Most PE shops will back you if you bring some $50m+ deals, however, it's extremely hard to source one where you have an angle unless you have a mate at CBRE, JLL etc... in one of the mega teams, and even so...

So I focused on value add properties, two mixed office/resi deal with planning (one was to add an extra floor) the other deal had no planning but I wanted to add 3 floors and put a change of use in it. So very intense projects. I underwrote the shit out of them. The guy who backed me was roughly my age, and I had worked with him when I was in REPE so we had mutual respect for each other. A lot of the PE funds I went to had very specific criteria for deals - and it's very hard to source. Some PE funds will see you, but you know they are binning your presentation when you get out of that room and just laugh about it afterwards. I had ex-colleagues at other funds who would talk to me. So essentially I had a strong network in PE funds that I could leverage on. Sourcing was the toughest bit.

I got 2nd and 3rd on both bids I ended up doing with a PE backer - so never got to actually acquire the fuckers (in hindsight with Covid that's a good thing). I had a side business that I grew managing properties and that kept my family alive (my wife doesn't work), I spent zero of my capital but we lived in a very tight budget with kids and airbnbing our house to go on holidays (took two nice month long holidays where we made money net). What I am trying to say, is that it was hard. I was constantly stressed trying to get deals done.

When covid started it was the end of me, I was selling a property, sale fell through. I was adding a floor to my house - cash was getting low. It was all a bit shit and stressful - I went online on Linkedin one evening, read about a job that basically fitted like a glove (not in Real Estate) - applied, 22 online interviews later they hired me. Now I am breathing again, I have a salary coming in every month. Plenty of cash flow to finish adding a floor to my old house (about to sell it ASAP). I rent a big house with not a care in the world (no more ownership except for rentals that I own), my side business is still working and bringing in $5K a month with no vacancies (in Covid I had 3 vacancies at once), side business includes mainly properties that I own and a few I manage. While $5k might seem like a decent amount of cash if you are out of undergrad, but if you live in NY or London with kids, a car, and a mortgage it's tough to make it work.

None of the backers I had cared if I put my own cash in the deals. I'd be happy to talk more about it - but only on here, no PM please as want it to benefit everyone if I'll spend time. I am taking a breather now, I am looking again at deal in the new city I moved in - except I'll be doing them with my own cash when the house sells or I'll fund but I am definitely not leaving my job again with nothing ready. HOWEVER, I could never have underwritten and sourced all those deals had I been in employment - so interesting to see what will happen. I will likely do smaller deals for the time being, buy REITs - lever them with interactive brokers and call it a day for the next year ahead.

 
Oct 17, 2020 - 9:39am

You have any plans to go out on your own again in the future? Perhaps with more of a track record and partners this time? People say you "have to have skin in the game" why did your backers not care about you putting in your own cash?

The main thing about money, Bud, is that it makes you do things you don't want to do.

 
Oct 17, 2020 - 4:07pm

It's a bit of a different one with PE funds or smaller funds. It's not your money but LPs money at the end of the day so you are not AS concerned if the deal goes slightly south, it's also real estate and there are clauses for them to kick me out of the deal if I underperform - that's how they protect themselves, worst comes to worse they replace me with someone else to operate the deal, but the real asset behind hasn't changed much. You'd need to structure the deal as well differently if I go alongside their equity in the deal - it's just not worth the time for them. 

I'll go on my own again I hope, I'll see if I can make it work alongside a full time job. That's the plan at least. I teamed up twice with people - both time didn't work out. It was actually a big waste of time both times. First time we just were not alligned with our ideas and I really wasted 3 months with him, second time the guy was an architect who added zero value and I should have just paid him $500 for a couple of plans and call it quits, no point in cutting him on the equity, he was beyond useless with shit work ethic. It's extremely hard to find someone. I found someone at the end and we are finishing a small project at the moment entirely financed by me - I will hopefully do some more deals with him going forward.
Good question, thanks for asking the partner one.

 
Oct 18, 2020 - 1:46pm

Thank you for writing  the response you did.  You were very gracious with your time to go over all the details, especially the difficult personal ones.

 

The questions I have regarding your experience are with the structuring.

 

As someone with anywhere from 0 to invest to 200k to invest how should I go about raising the GP capital.  Is this purely friends and family?  How much do you need percentage wise?  What sort of covenants do LP's write in for non HNW GPs?

My current job I get the first looks for ANY deals in the area(major metro) because the family I work for has owner for 50-years.  It would seem my competitive advantage would be to take down smaller(less institutional deals), or just deals they pass on for whatever reasons.  I am also working my way through new markets to find off market deals, and some of these won't fit into our bucket, so I may be able to go after them.  These are deals that have an 8% C-O-C/6-7 caps without any heavy lifting.

How upfront do I need to be, if at all, with my current employer that I am taking these deals down on the side. What type of return structure within the GP would be good to give up?  When you say backers ok not putting up your own cash, does that mean at the GP or LP level.

I should have plenty of time to do some deals on my own and do my current job, or just work really hard at both, doesn't matter.  Besides outsourcing legal, which I have boilerplate documents, accounting which I can do, 

 

 
Oct 19, 2020 - 4:12pm

No problem - essentially for big PE shops it goes like this:

LP gives $100m in the fund-> GP takes promote and management fee at fund level

PE GP gives $20m to me and is my LP -> I am the operating partner and take a management fee on deal level and promote on deal level. I might or might not be a GP on the deal. For them easier to structure as just a simple management contract with promote, to kick me out of the deal it's cleaner as well if they think I underperform. 

You going after your own deal that the fund might have passed detracts from your day to day job. It depends what type of company you work at. I know that for example if I was to buy a block of 9 flats in my old fund, no one would have given a fuck (with my own money). If I was looking at outside investors for that block of 9 flats and worked as an operating partners that would have been a breach of my employment contract, again large mega PE fund. Personally I wouldn't tell my employer if I was in your situation if there was no potential of getting "caught". If there is a risk, don't do it. Why would they let you look after your own deals when you supposed to look for deals for them? Again those are questions you need to ask yourself. Do you finish at 5 every day and have spare time? Are the founders generally older and started in a similar way to what you are trying to do? Are they seeing themselves in you and can take exception to what you are trying to do on the side? I work in an unrelated industry and have hinted to my employer that I am looking at RE deals, but I tell them it's with my cash only.

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