Investing as a Limited Partner: The Main Parties to a Deal

And How 2 Investment Groups Collectively Lost Over $1,000,000,000.

Author

Clay Stanley
November 10, 2024

Before we dive in, I want to give a quick shoutout to the Carolina Panthers for their win in Germany against a similarly awful team, the Giants. With two wins in a row, I am hoping we can finish the second half of the season stronger than the first. There’s really only one way to go from here, right?

Despite Bryce Young not being able to hit water if he fell out of a boat his entire NFL career, I do hope he is currently enjoying a well-deserved frothy glass of German beer.

Alright, let’s jump in. If you've had a chance to read the Meet the Author section, you already know that I prefer investing in private market real estate as a limited partner rather than purchasing smaller properties on my own. 

This is my preferred way of investing in real estate, though there are many avenues to explore, including but not limited to:

  • Single Family Flips/Buy-and-Hold

  • Small Multifamily Flips/Buy-and-Hold

  • The "BRRRR" Strategy

  • Large Multifamily

  • Commercial Real Estate (Retail, Office, Industrial, Land, Hospitality)

  • Active Real Estate Investing

  • Passive Real Estate Investing (Limited Partner Investing)

  • Being a Subpar Investor but Selling an Online Guru Course (my favorite)!!

You get the picture—there are countless ways to make money.

There’s also always the potential to lose money, no matter which strategy or asset class you pursue, including when investing as a limited partner (LP).

Let’s start by defining the key players in a deal. First, we have the Sponsor or General Partner (GP), who handles nearly every aspect of acquiring and managing real estate.

This includes:

  • Finding Deals and Building Relationships with Brokers and Sellers

  • Networking with Lenders

  • Analyzing Hundreds of Deals to Find the Right One

  • Handling Negotiations

  • Arranging Financing

  • Conducting Due Diligence

  • Managing Properties and Assets

And of course, they are also responsible for sourcing the capital needed to make these deals a reality.

Sometimes, sponsors reach out to large institutions or private equity firms capable of writing large checks in the tens of millions or more. Other times, they raise the necessary funds from their network, consisting of individuals who can typically invest $25k-$500k. That's where we come in as passive investors or limited partners.

As limited partners, our role is to:

  • Choose a deal and sponsor that align with our return and risk preferences

  • Invest capital in the selected deal

  • Receive regular updates and any cash distributions

In return for providing capital, sponsors aim to deliver returns to limited partners. Profits will be split based on a predetermined structure. Sounds straightforward, right? Well, it’s not that simple—keep reading.

Here's a deal that, thankfully, neither you nor I would have had access to back in 2006.

Tishman Speyer Properties and BlackRock teamed up to purchase 11,232 residential units in New York City for a jaw-dropping $5.4 billion.

These are institutional, highly sophisticated real estate sponsors or general partners. Even the largest investment firms, like these, often rely heavily on outside capital. In this case, while they invested some of their own money into the deal, the majority of the funding came from:

  • The California Public Employees Retirement System, one of the largest pension funds in the U.S.

  • The Government of Singapore Investment Corporation, a major sovereign wealth fund

  • The Florida State Pension Fund

These outside investors weren’t directly involved in managing the deal. Remember, that is the general partners job. They depended on BlackRock and Tishman's expertise to execute the business plan and generate returns. 

Unfortunately, that’s not how it played out.

They failed to recognize they were buying at the market's peak and relied on risky debt products, assuming they could raise rents quickly enough to cover their debt service.

However, rent control regulations were tougher than expected and their debt obligations caused them to burn through capital at a rapid rate. It was a downward spiral from the start.

In the end, the California pension fund lost $500 million, the Florida fund lost $250 million, and the Government of Singapore fund lost $600 million.

Yikes.

This story highlights two hard-and-fast rules, and possibly a third:

  • You can lose money in real estate investing

  • The type of debt product and leverage used can be significant risk factors

  • Don’t invest in NYC (a personal rule of mine)

Prudently investing as an LP is not quite as simple as cutting a check and watching the cash flow come in. There are lots of deals available for investment out there, and only a handful that I would consider putting my money into.

As I mentioned, this is my preferred investment strategy, and you can see substantial returns investing as an LP. That said, many in this industry only highlight the positives. I want to give you a full picture so you can make well-informed decisions.

This isn’t rocket science—but it is your capital—your kids’ college fund, and your retirement savings.

As always, my inbox is open for any questions or feedback. Have a good week!

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