PERI Capital Group’s mission is to “Mitigate Risk Through Smart Co-Investments”. We achieve this by working to reduce one of the greatest risk components in any commercial real estate (CRE) project – Sponsor risk. In our experience, anyone can make an investment look good on a spreadsheet. The challenge is identifying Sponsors who will deliver real-world results. Finding and building relationships with those who can is the key to alleviating Sponsor risk across your CRE portfolio.
CRE 101 – Commercial Real Estate Sponsor Types
The right Sponsor understands what to pay for an asset, how to build value, and how to manage and operate the property. The right Sponsor makes smart, experience-driven decisions when potential issues arise. They also know when best to exit the investment to maximize ROI. In our experience, Sponsors who have mastered these core characteristics fall into one of three primary categories: Institutional, Direct Operators, or Family Office. Regardless of category, Sponsors with this ideal combination of characteristics can be challenging to find, but when they do come across our radar, it’s their demonstrable track records that shine.
Now, let’s look at each type of Commercial Real Estate Sponsor in turn.
Sponsors with our ideal combination of characteristics can be challenging to find, but when they do come across our radar, it’s their demonstrable track records that shine.
INSTITUTIONAL SPONSORS
In CRE, Institutional Sponsors are generally large corporations that are well-funded either by public equity or by other means such as pension funds, endowments, or other state-run or institutional capital. They have large investment teams that underwrite opportunities for investment, as well as large investment committees that further scrutinize the viability of each project. When opportunities to co-invest alongside a viable Institutional Sponsor materialize, Institutional Sponsors provide an extremely attractive opportunity for PERI’s Partners for several reasons:
Unparalleled Due Diligence – Because most institutions are heavily funded by other institutional capital, they have obligations to meet certain ROI hurdles. These return hurdles incentivize the Sponsor to be more conservative in their underwriting approach and more selective on which investments to pursue. This means performing extreme due diligence on every project to evaluate its merit.
Institutional Sponsor due diligence teams are commonly comprised of numerous analysts whose sole responsibility is to perform preliminary analysis on every project. This goes beyond simply understanding the “project” and its return assumptions. It means also digging into the direct sponsor, their team, their experience, education, track record, underwriting methodology, market opportunity, industry opportunity, as well as a dozen other aspects. Most opportunities evaluated by the analyst do not pass the first phase.
With this thorough approach to evaluation and project approval, it takes a multitude of “yesses” for a project to even be considered a possibility, and only one red flag to be considered a “no.”
If a project passes the first level of due diligence, the evaluation process intensifies. Teams of senior analysts will further question everything in the model. If it passes this level, it then moves to a final due diligence phase with “all hands on deck.” Every layer is pulled back. Every assumption is questioned. Every risk is considered. Only then does the Chief Investment Officer make the final decision to present the project to an investment committee for review, vote, and approval. This extensive approach is one of the primary reasons why Institutional Sponsor opportunities are attractive to PERI. Their level of sophistication and due diligence far exceeds anything an average investor/company can do on their own. They simply have the resources to perform and execute exceptionally.
Access to High Barrier-to-Entry Opportunities – High barrier-to-entry in this explanation refers to access to institutional-grade investments. Because large sums of capital are being put to work, institutional opportunities typically stipulate steep minimum investment requirements. In many cases, the minimum investment is north of $1 million. This creates a high barrier-to-entry where participation is well out of reach to most individual Accredited investors, or beyond the amount they can be or would be willing to invest.
By securing these institutional relationships PERI can participate alongside their capital, accessing opportunities not generally seen or available to other real estate investment firms. Through PERI’s participation as a whole, our Partners enjoy the advantage of investing in institutionally-backed and managed projects at a fraction of the minimum requirement.
Management Expertise – To further compliment the due diligence benefit of co-investing with an Institutional Sponsor, their management expertise is paired with some of the best and brightest minds in the industry. These professionals understand the management and operational complexities of commercial real estate and have the right balance of subject matter expertise, talent, and skill to oversee every aspect of an investment from beginning to end.
DIRECT OPERATORS – PRIVATE EQUITY REAL ESTATE SPONSORS
Think of Direct Operators as the type of Sponsor the Institutional Investors find, scrutinize, and ultimately invest in. These are individual private equity real estate firms that underwrite, acquire, operate, and divest their own assets. To attract institutional capital, these high-level Sponsors will have extensive track records of performance to justify co-investments. They are typically funded by a mix of institutional capital, as well as other capital sources for their transactions. Through our course of business at PERI, we will have opportunities to co-invest alongside Direct Operators. Most of PERI’s co-investments with Direct Sponsors will be with those we have a prior relationship with or through a referral from an institutional or family office partner that attest to the Direct Sponsor’s legitimacy and track record from their own investment experience or working relationship on previous projects.
FAMILY OFFICES
Family Offices are privately-held entities that oversee the investments and wealth management for ultra-high-net-worth families that have minimum investable assets often exceeding $100M. Given their substantial resources available for investments, a Family Office is often the lead investor (or one of the lead investors) in any given project making a single investment in the tens of millions of dollars.
Just like Institutional Sponsors, Family Offices have internal investment teams that are dedicated to the evaluation, underwriting, and due diligence of investment opportunities. In fact, you could insert the advantages listed in the Institutional Sponsor section here and they would apply. That said – decision-making goes much deeper than an understanding of underlying economics. And, it’s more personal. Why? The key difference between an Institutional Investor and a Family Office is that the money the Family Office is investing is their own. It is the responsibility of the Family Office’s analysts, Chief Investment Officer, and Investment Committee to protect the family’s capital at all cost. As such, Family Offices are extremely conservative in their assumptions and are well-known proponents of “patient capital.” They are under no obligation to put their money to work at any given time, whereas Institutional Investors must allocate capital to meet return obligations. This difference in approach allows the Family Office to watch an opportunity manager over an extended period to evaluate their performance on other projects before making an allocation into a new one.
The key difference between an Institutional Investor and a Family Office is that the money the Family Office is investing is their own.
Lastly, Family Offices are incredibly selective about where they choose to make an investment. Matter of fact, PERI knows of some Family Offices that underwrite 1,000+ investment opportunities over the course of a single year and only end up making a few allocations. This practice is the epitome of disciple and patience and the results of these efforts yield investment opportunities well matched for PERI and our Partners. When we learn that a Family Office in our circle is preparing to make an allocation to a project, we can go into our evaluation process with a high level of confidence knowing that the opportunity has already exceeded their high standards for a family investment.
In summary, there is an old saying that “investment” is spelled “R.I.S.K”. It’s what a commercial real estate Sponsor does to mitigate that risk that determines whether an investor feels the opportunity is acceptable, and worth pursuing. In CRE, understanding the different types of Sponsors and their evaluation and selection processes is extremely important. When evaluating opportunities with proven Institutions, Direct Operators or Family Offices, PERI’s in-depth knowledge of what it takes for project approval at their level provides a solid basis for us to gauge its merit from day one. We understand that their teams have already taken extreme precautionary measures to ensure their capital is protected and invested intelligently. This is a true advantage that we believe PERI and our Partners can take great comfort in while participating alongside the experienced and proven groups.
The views expressed herein are exclusively those of PERI Capital Group, are not meant as investment advice, and are subject to change. This information is prepared for general information only does not consider the specific investment objectives, financial situation, and the particular needs of any specific person or entity. We recommend that you seek financial, tax and legal advice regarding the appropriateness of investing in any investment strategy discussed or recommended in this article.
