Private Equity Funds Vs. Syndications
Some investors may not know the difference between a fund and a syndication. The purpose of a fund or syndication is to allow investors to passively invest while reaping tax benefits and growing their personal wealth in a real estate investment space. Real estate syndications and funds are two excellent entry points into the world of investment real estate, and depending on your investment goals, there may be one that better suits you.
What makes up a real estate fund or syndication?
For a syndication, there are general partners or sponsors as well as limited partners or investors. Syndications are on a deal-by-deal basis, one asset at a time. There is a time period for raising capital, and fees can vary greatly from one syndication to the next. In addition to one time and ongoing annual fees, this usually includes profit sharing to the general partners or management ranging anywhere between 10-80%. General partners are also responsible for due diligence, acquisitions, deal and asset operations, financing, and communication with limited partners. Limited partners bring the capital and remain passive unless noted otherwise.
For a fund, the major difference from a syndication is that funds typically pool resources from all the assets held, giving the fund an advantage if one area or asset is hit with an unfortunate event. The pooled revenue of the fund may solve issues without capital calls to investors. Within a fund, investors bring capital and remain passive. Oftentimes, investors do not know what the assets are before being acquired, so having a reputable and capable fund management team is paramount. There are fees, of course, that can also have a wide range of variation. Funds can have distinct features that single syndications do not. Funds can have collections of assets that can ebb and flow with market cycles, and this diversification can offer investors a level of protection rather than being exposed to a single asset risk.
As in all investments, rewards are often valued by measuring risk. While a single syndication may offer a higher upside, the single asset risk is much greater than a multi-asset fund structure, and in turn, the returns should reflect that risk profile.
What are filings?
Filings refer to what types of documents need to be filled with the Securities and Exchange Commission (SEC) or other regulating governmental bodies. They also determine the type of investor who can invest in the fund or syndication, and involves marketing and solicitation. These filings are meant to protect non-accredited investors (any investor who does not meet the income or net worth requirements set out by the SEC is considered a non-accredited investor) or the general public who has little or zero investing experience.
A 501(b) is an exemption that allows companies to raise an unlimited amount of money and sell securities to an unlimited number of accredited investors. However, no solicitation or advertising is allowed and the sponsors can only accept investments from people who they have a pre-existing substantive relationship with. A 501(c) is an exemption that allows for the sponsors to market and advertise the offering; however, all investors must be accredited and sponsors must take reasonable steps to verify all investors are accredited.
Fees and Profit Sharing
In most cases, there is a profit share arrangement or equity split between general partner (GP)/ sponsor/manager and limited partner (LP)/investors. This is usually only the net profit and paid out after all expenses and investor capital is returned. Both funds and syndications have an unlimited possibility of structures, fees, and profit sharing. Typical fees may include acquisition, disposition, asset management, promotion, guarantor, and capital raising among others. Given the various fees and structures, providing guidelines on what is typical, reasonable, or normal is difficult. Beware of the language in the legal docs and look for not-so-obvious fees as with any investment; the more fees, the more dilution there will be to the profit.
Some firms offer a higher back-end profit share or equity split than larger upfront fees. Other firms take ongoing asset fees and smaller back-end percentages. Either way, a fund or syndication have their advantages and disadvantages that can be debated in either direction. Be cautious of the firms that are not upfront with how much they charge and hide fees inside their subscription agreement.
When determining whether you should invest in a fund or syndication, investor needs, risk profile, and the length of the investment should be considered. A fund and a syndication may have similar filings and similar fees. However, the main difference between the two is usually the single investment risk of a syndication versus the diversified holdings of a fund. As always, there are no guarantees in investing in real estate. Remember the old adage, “If a deal looks too good to be true, it probably is.”
This is not financial advice and is the opinion of Dual City Investments and associates.
Dual City Investments is a commercial real estate investment firm built on fidelity and integrity while focusing on providing private equity investment opportunities with investor security as our priority. Our firm’s mission has been to produce consistent investment returns through a systematic approach across investment real estate and specialty asset classes. We provide trustworthy and consistent real estate investment options and specialize in identifying opportunities that allow for long-term wealth building.