fund vs syndication
We have regular conversations with investors about syndications vs starting a fund. Sometimes it seems easier to just go deal by deal and but here are a few reasons we like to have our clients set up funds:
Marketing - With the correct fund setup we are able to raise capital through various marketing strategies such as advertising without having to worry as much about compliance. Also because a fund structure allows for all the deals to be under one thesis it is a much easier offer to market.
Sponsor Risk - Trust Matters: When it comes to investing, who you partner with is a key factor. Not all investment managers are cut from the same cloth. By spreading your investments across various deals, you lower the risk of being stuck with an underperforming manager. Middlemen, who simply bring you deals, often lack the in-depth understanding that the fund sponsor possesses. They're motivated to close deals, not necessarily ensure your success. Be cautious of overly optimistic return projections; reality often veers off from Excel's rosy predictions. A deal that seems to promise a 25% return can end up delivering a 50% loss, while a seemingly modest 10% return deal can surprise you with a 15% gain. Knowing your fund managers, their motivations, track record, underwriting methods, and team is paramount.
Diversification - Spread Your Bets: Funds offer you instant diversification across a range of assets. In closed-end funds, the sponsor carefully constructs a diversified portfolio over time. In open-end funds, new investors immediately gain the benefits of diversification. Fund managers take a systematic approach to build a diversified portfolio across different geographies and asset classes.
Fees - Aligning Interests: There are unlimited ways to structure fees both on syndications and funds. With funds you may be able to save money on fees by investing at scale. The fund structure ensures interests are more aligned where on syndications different deals can be structured differently so one deal may have a completely different fee structure that you will have to understand compared to another individual deal.
Liquidity - Weathering Storms: When one asset in a fund encounters trouble, liquidity can be shared among all assets, coming to the rescue when needed. In contrast, individual deals offer fewer options when things go south, often forcing sponsors to scramble for additional funding or let projects go back to the bank. In times of economic turmoil, funds are more resilient and better equipped to navigate downturns.
Cash Drag and Taxes - Tax Efficiency: Open-ended funds allow you to defer taxes until you decide to sell, potentially enjoying tax benefits like depreciation. In contrast, individual deals trigger taxes with each sale, and managing idle capital becomes an added challenge. It's crucial to factor in these considerations for a comprehensive view of your investment returns.
Organization - Simplify Your Finances: Managing a portfolio of 25 individual deals can be overwhelming, resulting in a pile of K-1 forms and scattered record-keeping. Investing through a fund streamlines this process, providing one comprehensive report covering all your assets and a single K-1.
Sidecar Opportunities - Trusted Expansion: If you wish to diversify further with additional individual deals, many fund managers offer sidecar capital opportunities. These are deals that didn't quite fit the fund but have still undergone rigorous vetting by the sponsor.
In conclusion, funds generally offer a more attractive option than acquiring individual deals. You benefit from the expertise of the fund sponsor, who has meticulously evaluated numerous opportunities. Keep in mind that not all funds are created equal, and some managers use funds to take on more risk. They may leverage debt and financial instruments creatively. Therefore, it's essential to thoroughly assess each fund manager's motivations and strategies to make an informed investment decision.
This email is intended for informational and educational purposes only and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The information is provided as of the date indicated and is subject to change without notice. Raise Pro does not have any obligation to update the information contained herein. Certain information presented or relied upon in this article may come from third-party sources. We do not guarantee the accuracy or completeness of the information and may receive incorrect information from third-party providers.
