The most crucial step investors ever take is vetting the sponsor and/or asset they are investing with and/or in. This is doing your due diligence. Like any relationship, trust is a key tenet of investing with a real estate firm, and it is the most important box to check.
It is up to the sponsor to pinpoint quality deals, underwrite the financials, close on the property, add value, and produce returns. All of the above calls for expertise and efficiency. But building genuine trust is never really about what someone knows or how well their processes work.
Nine times out of ten, the results of any investment are a product of the sponsor’s character and how well they treat their investors.
When the tide is in, all boats look good. But when the tide goes out, how do you know what sponsors will still be floating and which ones will abandon ship?
Put the Team First, Deal Second
As both active sponsors and passive investors, our rule of thumb is to focus 80% of our energy on vetting the team and 20% on the deal. That includes understanding the team’s background and experience, in addition to its commitment to training and succession planning.
Our process starts with the company’s or individual’s track record, which leads to several questions regarding their investment thesis and acquisition process. Many of our questions are derived from a close review of the sponsor’s track record. For example:
- What are their target markets, and how do they identify assets for acquisition?
- Has the sponsor changed their emphasis on a specific sector (e.g., switching from retail to industrial)? What was their rationale for doing so?
Ask the Hard Questions
We have all heard some version of this cautionary phrase: those who do not learn from the past are doomed to repeat it.
We have personally invested with sponsors who made erroneous investments and lost money—that does not always mean they were or are bad sponsors. The difference is that good sponsors do not cherry-pick their track record, usually going so far as to point out major mishaps. If no mistakes have been made, they have either not done this before … or they are lying. Therefore, it is imperative to ask the hard questions like:
- What happened during a sponsor’s worst deal(s)?
- Was the poor performance due to a failing market, natural disaster, or poor management?
- As a result, did they make up the loss out of their management fees or sponsor promote, or did they assign the losses to investors while still collecting fees?
- How did their investors fare overall?
- How transparent and timely was their reporting package?
- What level of information did they offer when things went sideways?
What we want to know is what happened and how the sponsor treated their investors. Sponsors should always put their investors first when poor management execution is the cause of failure. This is a sign of alignment and a commitment to serve investors.
At Cira Capital Group, our criteria for investing with other sponsors is parallel to our commitments to our investors:
- We will treat your investment as if it were our own.
- We will remain significant investors in our funds.
- We will invest for the long term, prioritizing capital preservation over capital multiplication.
- We will seek to maximize returns and minimize risk to achieve a diverse portfolio along the efficient frontier.
- We will strive to minimize management and operating fees to enhance returns for investors.
- We will communicate with our investment partners clearly, candidly, and in a timely manner.