Real Estate Observer This newsletter will provide frameworks & analysis you can use to confidently invest your capital in private market real estate. It is written from the perspective of someone who reviews many deals in search of one that fits my personal or my investor community’s preferences. To keep up with what I’m working on, click here. |
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Having started my career in institutional SFR real estate, private real estate syndications were new to me ~five years ago. As I began allocating capital and getting more involved in these deals, it was especially interesting to see how some people marketed their portfolios and experience.
At first, I admittedly took things at face value. I was amazed that people just a few years out of their corporate jobs had seemingly built massive real estate portfolios. But as so often in life, things were not always as they seemed.
I quickly saw that people were inflating their assets under management (AUM), which is perhaps the most overused metric of all. $1 billion AUM sounds more impressive than $50 million, but it reveals nothing about returns, leverage ratios, or whether those assets are actually performing.
Assets Under Management (AUM): The total market value of real estate assets that a firm or sponsor controls or manages on behalf of investors.
Why would a sponsor inflate their AUM?
Credibility and Trust: Larger numbers create an illusion of experience and success. Investors often (incorrectly) assume that someone managing $2 billion is more capable than someone managing $50 million in assets. Maybe that’s the case, maybe it’s not.
Investors feel safer investing with someone who appears to have already convinced many others to trust them with capital.
Have you seen a sponsor inflate AUM?
Questions to ask when someone pitches themselves as the lead operator of a deal:
What role did you play in the previous deals?
Are they really "assets under management" if the person pitching you only owns a small percentage of the general partnership and is not involved in the day to day. The investment firm I co-founded has invested in deals where we are not the operator, therefore we do not consider these in our “AUM”.
I have even seen LPs turned GPs attempt to claim their LP positions as part of their AUM. This is a problem.
If someone is pitching you a deal where they're the "main operator/sponsor," make sure their experience actually aligns with what they're telling you. Being an investor is different from being an operator and vice versa.
What was your role in these deals?
Were there other people involved who helped with operations? If so, are they involved in the deal you're pitching now?
Are you using the same property manager?
Let’s say the person pitching genuinely does operate a large fund/firm. Sometimes, large does not = good. There are quite a few multi billion dollar firms I wouldn’t trust anywhere near my capital!
There are many scenarios where lower AUM or less perceived experience are not an indicator on whether a deal is good or bad. Here are some examples:
The operator runs a niche strategy that doesn’t or can’t perform well with more capital because there are not enough deals. We run into this with our scattered site development in Charlotte. We consistently hit 70%+ IRRs (short duration holds) but we haven’t figured out how to do this at scale, therefore there has been little need to bring in outside capital.
The sponsor/operator has not done any deals of their own, but just left a firm where they gathered much of the necessary experience. This is not the same as being an operator but it’s worth consideration.
The sponsor is investing significant capital into the deal relative to their net worth.
Moral of the story here is to be careful when evaluating sponsors based solely on AUM or some of the other metrics like # of units under management. There’s too many great & trustworthy operators out there to consider investment with a sponsor who inflates their experience or is lacking in the transparency department.
It’s always best to dig into their track record, current performance, how they handled challenges, and many other items that we’ll continue to talk about in this publication - thanks for being here!
If you’re interested in North Carolina single-family development or existing multifamily opportunities, you can follow along by clicking here. I usually only come across 2–3 deals per year that are truly worth investing in.
Clay Stanley
704-608-8488
