26 questions to ask your GP
26 questions to ask your GP
GP due diligence list and why you shouldn't budge on asking questions
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26 questions to ask your GP
A few weeks ago, we talked about the 5 principles of an investor’s mindset. The 5th was “a willingness to ask questions and walk away.”
Today, I would like to dive deeper into this topic and provide you with a list of questions you should ask before investing in a syndication. Some of these questions might be answered for you through the investment deck and legal documents that you were provided. Having said that, a healthy dose of skepticism is important and you should make sure that the answers to these questions are true answers rather than your interpretation of what the answers should be.
If you’re forced to choose between a GP getting annoyed with your question and not being able to invest, you should choose the latter nearly every single time.
As a general rule, you should always shy away from asking questions that can be answered with a simple number or a yes/no. The questions should always require detail that allow you to verify that your original assumptions were correct. A good rule to keep in mind, especially when you’re just starting to get to know the other party: verify, then trust.
Verify, then trust.
Example:
Bad LP Question: “what is the entry cap rate on this transaction”
GPs Answer: “6%, and we think this is great”
Better Question: “it appears that you are buying this property based on $600,000 in year one NOI, translating to a 6% cap rate. Could you verify whether that's correct and provide comp support to help me understand how this 6% number compares to recent trades in the marketplace?”
Notice that this question is better, both because it is rooted in numbers inside of the deck while also asking for broader context
Best Question: “it appears that you are buying this property based on $600,000 in year one NOI, translating to a 6% cap rate. Could you verify whether that's correct and provide comp support to help me understand how this 6% number compares to recent trades in the marketplace? On a related point, how did you get comfortable with the exit cap rate assumption of 5%?”
This now pulls another related question into the same thread - the exit cap rate
Notice that if you ask the first question and stop there, you would have missed a lot of context and potentially would have made an investment decision without understanding the risks involved - all based on the GP’s comment around the 6% being fair.
I always say that I have no issue with LPs entering risky transactions - all investments carry risk. What I do have an issue with is when an LP gets into a transaction without understanding the risks involved.
Take all the risks you want with your own money, but just make sure that you understand them to the best of your ability before wiring that capital.
A quick preface:
It is impossible for me to write out a comprehensive list of questions for all deals, since every deal is different. Having said that I hope this list not only helps, but also encourages you to ask more than you would have otherwise.
There's a balance here, because the GP cannot reasonably take hundreds of questions from every single LP. However, it is typically the case that either (i) the GP has a team dedicated to investor relations or (ii) the GP is newer and doesn’t have an IR team.
In either case (in particular for your first deal as you’re getting to know the counterparty) my humble opinion is that you should err on the side of asking, as opposed to being worried about bothering them too much. If you’re talking to a larger company and speaking to an IR member, you should also not be afraid to ask to speak to an executive. Such an ask should come once you’re closer to a “yes” decision, rather than at the outset, though.
Err on the side of asking
If you haven’t read top 15 syndication mistakes in full, I’d recommend reading that first since these topics are related.
Lastly, I know this list is long, but keep in mind that some of these questions you will (hopefully) be able to answer confidently without having to ask them. There are also many other questions, but I tried to keep this as succinct as possible (highest impact questions, as opposed to listing anything you could ever ask).
As always, I will continue to update this list as I get new ideas, so check back anytime!