First LP Investment Pillar: Execution
Track record and counterparty risk
Happy Sunday!
On Friday, I finished the first of four sessions for my LP Course Cohort. Each participant took a deck, analyzed it throughout the week, and then we got together to discuss our findings.
Naturally, many questions surrounded evaluating a deal from an LP perspective and I’d like to break such an evaluation down into 3 critical pillars today.
The 3 real estate deal pillars as an LP:
It’s important to note that no investment is perfect and all deals will involve a substantial amount of risk. If you think you’re getting a safe return with a property that’s offering you an annual 15% return, there’s a good chance that you’re missing something…keep looking!
While each of the three pillars above (Execution, Alignment, and Property) are critical to an investment, they can (and should) be analyzed independently at the outset. This is because missing any one of them could be detrimental.
How so? Here are three examples:
Strong Execution: A sponsor could have great execution skills, but the sponsor missed a major risk on a property and thereby lost LPs money.
Strong Alignment: A GP has a favorable fee and waterfall structure, and perhaps even bought a great property with a realistic business plan. However, the investment failed due to lack of experience.
Strong Property: The GP is buying a phenomenal property, at a great price, and the business plan is realistic. However, the business plan didn’t go according to plan and as a result of a weak alignment of incentives (or lack of experience) the project failed.
I provided these examples to illustrate a critical point:
Investments are inherently risky and complex. No investment will rank 10/10 on each of the three pillars (if it does, do more homework). The best investments will have risks that you get comfortable with due to their respective mitigants.
With that introduction behind us, let’s dig into our first of three pillars: