search fund VS real estate syndication
Hi
Curious to hear peoples opinion on the advantages and disadvantages starting a search fund vs a real estate syndication which is better and hopefully more lucrative for the operator?
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by a searcher
in Lawrence, NY, USA
in Lawrence, NY, USA
1yr ago
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by a searcher
1yr ago
from Baylor University in Chicago, IL, USA
from Baylor University in Chicago, IL, USA
Search fund:
- Higher growth prospects, no cap on sales growth
- takes longer to close
- typically longer cycle to find the business, more emotional sales process
- less money down typically than CRE, this part depends on your size deal and network, so many variations on financing
- 2-3X MOIC (bigger returns), 30% IRR for investors is avg
- more active participation post close, usually as GP you will be the full time CEO
- much riskier as it can loose its value quickly if not done right, many ways to fail
- typical exit cycle is 5-7 years
RE Syndication:
- There is a ceiling on rents, a ceiling on NOI boosting, can only improve building so much
- quicker to close
- can find quicker, less emotional process
- typically need to gather 20-25% down for CRE
- Lower returns (2X MOIC is superstar status), 8-10% IRR
- active participation for GP in the first 1-2yrs post-acquisition, then its pretty passive/hands-off
- RE keeps its value and is more stable, very low risk of completely losing value
- exit cycle is usually 3-5years
Overall: Search fund is higher risk, higher reward (also more difficult especially post-acquisition), RE syndication is much more stable and less risky.
- Higher growth prospects, no cap on sales growth
- takes longer to close
- typically longer cycle to find the business, more emotional sales process
- less money down typically than CRE, this part depends on your size deal and network, so many variations on financing
- 2-3X MOIC (bigger returns), 30% IRR for investors is avg
- more active participation post close, usually as GP you will be the full time CEO
- much riskier as it can loose its value quickly if not done right, many ways to fail
- typical exit cycle is 5-7 years
RE Syndication:
- There is a ceiling on rents, a ceiling on NOI boosting, can only improve building so much
- quicker to close
- can find quicker, less emotional process
- typically need to gather 20-25% down for CRE
- Lower returns (2X MOIC is superstar status), 8-10% IRR
- active participation for GP in the first 1-2yrs post-acquisition, then its pretty passive/hands-off
- RE keeps its value and is more stable, very low risk of completely losing value
- exit cycle is usually 3-5years
Overall: Search fund is higher risk, higher reward (also more difficult especially post-acquisition), RE syndication is much more stable and less risky.
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by a searcher
1yr ago
from University of Kentucky in Houston, TX, USA
from University of Kentucky in Houston, TX, USA
Luke: Thank you for the tag.
Steven: If you are looking for "lucrative for the operator", the traditional search fund model is not your best bet. You will be way (way) better off with an independent searcher model that can raise capital for the deal from smaller PEs (almost like an independent sponsor model).
If you are looking solely at RE, I am afraid there are not very many search fund investors who like asset-heavy plays (everyone is very fond of talking "asset-light"). You might want to consider syndicating with family offices, with whom you can possibly ink series deals. If you don't have FO contacts (or don't feel like cold calling!), try reaching out to large RE brokerages with a capital markets team (e.g. JLL). They could help you find investors if the RE deal is good.
Finally, heed Willie's advice above. If you don't have prior experience in RE, you will need someone to guide you in all aspects of it. Otherwise, you will get burnt. And, Cost Segregation is your friend! Model it into your analysis.
All the best!
Regards,
Madan.
Steven: If you are looking for "lucrative for the operator", the traditional search fund model is not your best bet. You will be way (way) better off with an independent searcher model that can raise capital for the deal from smaller PEs (almost like an independent sponsor model).
If you are looking solely at RE, I am afraid there are not very many search fund investors who like asset-heavy plays (everyone is very fond of talking "asset-light"). You might want to consider syndicating with family offices, with whom you can possibly ink series deals. If you don't have FO contacts (or don't feel like cold calling!), try reaching out to large RE brokerages with a capital markets team (e.g. JLL). They could help you find investors if the RE deal is good.
Finally, heed Willie's advice above. If you don't have prior experience in RE, you will need someone to guide you in all aspects of it. Otherwise, you will get burnt. And, Cost Segregation is your friend! Model it into your analysis.
All the best!
Regards,
Madan.
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