Key Considerations for Evaluating a Sponsor's Track Record
As an LP investor, arguably the most crucial consideration when evaluating an investment opportunity is the Sponsorship. Think of it like a pilot flying an airplane. It doesn't matter if the pilot is landing the best airplane on the longest runway with the clearest weather—if the pilot is inexperienced, you're doomed.
When evaluating a Sponsor, the goal is to determine their ability to execute their proposed investment strategy and business plan. The best way to assess this ability is by reviewing a Sponsor's track record. Although past performance does not guarantee future results, a solid track record can demonstrate competence and a higher likelihood of success.
Ease of Accessing Track Record and Materials
It should not be difficult to find robust Sponsorship materials, whether included in an offering deck, website, or a separate "Sponsor deck." If you have to ask for materials or follow up with numerous questions, or if you find discrepancies in their materials, consider it a red flag.
Comprehensiveness of Track Record
Track records should include every single investment, currently owned and exited, in the firm's history. Excluding and cherry-picking investments is unethical and against securities law.
Detailed track records should include at minimum: asset type, location, size (number of units or SF), dates of acquisition and/or exit, and strategy type (e.g., value add, ground-up development).
Ideally, project-level returns should be displayed. It’s common to see some projects underperform, and that’s okay.
Ask if the Sponsor has any current or past capital calls, defaults, or foreclosures. Good Sponsors can face challenges and should be able to discuss them openly.
Clear Sponsorship Expertise and Advantage
There should be a specific market, asset type, or investment strategy where the Sponsor demonstrates expertise. In every market, there are operators specializing in specific asset types. If the Sponsor isn’t one of them, they are competing against those who are.
The Sponsor should articulate and demonstrate a competitive advantage, such as market expertise, strong relationships with leasing brokers, or a proven marketing strategy, just to name a few.
Sponsors with proven abilities in site selection should explain their strategy, whether it's through data analytics or other techniques to identify growing markets.
Track Record Validity
A Sponsor's track record should provide insights into their historic performance and support their ability to execute their specific business plan. For example, a Sponsor with 30 multifamily projects may not be the best fit for a retail value-add project or a new ground-up development. If they are proposing a simple multifamily value-add project, their track record should include a least a few successful executions of this strategy. If they have not exited any of their previous projects, understanding current performance metrics such as current yield or occupancy can provide that insight.
Investments under another firm or with a different team should not be commingled with the firm's track record. These should be outlined separately, comingling these can be deceiving.
A track record should only include investments where the Sponsor and its leaders were owners and Principals responsible for day-to-day management and key decisions. Including investment where they were an LP investor is not meaningful.
Similar to LP investing experience, Co-GP or JV involvement without sufficient control or skin in the game should be disclosed.
Previous Execution Success
Detailed case studies of past investments that demonstrate the ability to execute a similar strategy are a green flag. While past performance does not guarantee future success, successful execution of similar strategies in the same market and asset type is strong supporting evidence.
Not all track record exits are the same. Determine if the success was due to executing the business strategy or benefiting from favorable macro trends. For example, buying before 2020 and exiting in 2021/2022 likely means they benefited from cap rate compression. This is why detailed case studies can be more meaningful than just a track record.
Final Thoughts
This list is not exhaustive, and I encourage you to ask questions and become comfortable with an investment's Sponsor. To quote Harvey Specter from Suits, “Keep pressing until it hurts. Then you'll know where to look.”