A Detailed look into general partner investing and navigating a deal through a pandemic
Throughout my years raising capital for our real estate investments, I have encountered a few investors who ask how they can be the General Partner instead of the Limited Partner in a deal. The first thing that would come to mind when I heard those questions is: Invest thousands of hours in learning a complex industry, and hundreds of thousands of dollars into people and technology, and you will be just getting started. Putting together a successful commercial real estate deal is not for the faint at heart or the inexperienced. It takes years of hard-work, talented people and you have to actually find the right deal in a very competitive market. That said, Ingenuity, Collaboration, and Stewardship are core values of our firm so we always tried to find a way to give our investors a taste of the General Partner “like” returns by targeting value add properties with higher return scenarios.
During the Pandemic, we were raising our second Fund and in March of this year (2020) we purchased an office property. Bad timing? Not really. We still love the deal and our basis, and in fact, feel very bullish about the long-term opportunity to generate a strong return for our investors. The structure in that deal, however, was a little different. We had a joint venture partner in that property, and our Fund was acting as the General Partner. All of the returns from the Joint Venture, including carried interests that we would be able to earn in excess of the property level returns, were set up to inure to the Fund. This structure effectively put all of the Fund investors in the role of General Partner. Normally, this scenario is structured a little differently with investors only earning a percentage of the carried interest. However, because we were using Fund equity as the General Partner capital, we felt that sending 100% of the carried interest to investors was the right thing to do. Considering the risk that the Pandemic has thrown into the market, we’re happy to have that structure in place and are optimistic that the returns will ultimately play out in a significantly positive way for our Fund.
As we approached the structure of our last deal, we started to consider the concept in a more meaningful way for future deals. Our research returned that the GP Co-Investment structure seemed very appealing for us as we continued to build our investment practice. We had just built out a new strategy for acquiring logistics based industrial in markets west of Denver and realized that we could lever our personal capital more effectively if we brought in GP-Co Investors in multiple deals. They would have the opportunity to earn a 10% piece of our carried interest effectively allowing the individual investor to earn greater returns than our institutional limited partners when measured against project-level returns.
Sometimes unexpected situations create opportunity. Not only did we develop a new and exciting investment strategy, but we were also able to create an investment structure that helped us address the requests of those who wanted to be General Partner in some of our deals. The thousands of hours, and hundreds of thousands of dollars invested in people and technology, along with a little entrepreneurship, helped us put our private investors one step ahead. We’ll still do all of the heavy lifting of course and continue to focus on enriching the lives of those we serve (whether they be GP’s or LP’s)!
Autumn Valencia is the Marketing Coordinator at Intersection, providing strategic marketing expertise to support business objectives across company divisions. For general and marketing inquiries, please contact Autumn at firstname.lastname@example.org