Real Estate General Partner (Sponsor) vs. Real Estate PE Investor / Investor Manager (LP)

I’m sure there’s been multiple discussions on this topic before that have been piece mailed across various posts, but I figured I’d try to cover the specific topic here…

Real Estate General Partner (Sponsor) vs. Real Estate Private Equity Investor / Investor Manager (LP)

I currently work for a middle market REPE firm on the East Coast. Fund size is in the $500MM -$1B range and is focused on opportunistic returns. Majority of the deals are focused on JV equity or high yield structured debt. Average investment is ~$20MM and deal capitalization typically ranges from $50MM to $80MM.

After working on the LP side for over 4 years now, I have garnered some great experience in underwriting hundreds of deals a year across various asset classes, capital structures, markets, and Sponsors (local, regional, national groups). Outside of purely underwriting deals, weekly responsibilities include assembling investment memos, drafting term sheets, participating in JV document negotiations, and closing calls, presenting materials at deal meetings, etc. The level of involvement has helped build a solid foundation in real estate acquisitions and finance.

However, as I sit here today, I question myself daily on where is the true upside in this niche of real estate? Understanding that my end goal is to own and operate real estate on my own one day (as many acquisition professionals do), it is becoming more obvious to me that a career in REPE on the LP side is probably not the best route for achieving those goals. The two key reasons that I have identified are the following:

1. As an REPE LP, you’re not in the driver seat on operations and executing a business plan. You’re more so a generalist placing bets on Sponsors and the real estate, validating assumptions, managing investment risk, paying attention through the investment hold period, and exiting the investment at a logical time. The ability to become an expert in a certain aspect of real estate is somewhat limited on the LP side. Generally speaking, specialist in todays world (real estate and non-real estate), are the ones making real money not generalist.

2. The ability to obtain a carried interest of any profits that the fund generates (promote), appears to be a long road ahead. Additionally, MD’s are required to invest into the fund’s GP position (~1-2%), which usually requires some type of member loan. I don’t believe anyone that is not a MD has a carried interest or the ability to even invest in the fund. Additionally, I don’t believe the folks at the upper management level are clearing 7 figures, it’s only the principals/direct owners that are making millions. As a 4 year experienced associate, I should easily make $200K this year. I say this to provide as much color on the compensation end of this topic as possible. $200K in todays world and the city I live in does not go very far to say the least.  

On well executed value-add and opportunistic (development) deals, I am seeing Sponsors (GPs) make anywhere between a 6x-12x EM and 100%+ IRR after promote, and the LP is happy with a 1.8x and a 18 IRR. I understand that the LPs is promoting off its own investors (8% pref, 80/20 split of profits is typical), but you’re looking at an 7-8 year fund period and probably a limited carried interest % even at the MD level.

So without asking too many questions, I wanted to open this up to feedback from past and current experience that some of you have had on both sides of the business. I understand comp structure varies widely across REPE firms both on the GP and LP side.

Where do people see the most upside and opportunity to working on acquisitions both on the GP and LP side? In my personal opinion, I see the experience on the LP side as good experience and toolset to exit  >2 years < 5 years to working for an entrepreneurial GP and hopefully get a carried interest much earlier in the game. This seems like an route with a higher probability of success then convincing pension funds to trust you with their money. This is  personal opinion from my personal experience, I'm not here to convince anyone to not go the REPE (LP) route as I think it has been a great experience so far and there are plenty of ways to become successful in it. 

Lets hear it...