I get this question often especially as I start to sponsor some of my own syndication deals. When I started in the business, I primarily worked with a sponsor / operator who fulfilled both roles. I’ll set out here to explain the differences and help you understand what advantages or opportunities a sponsor provides to deals.
Syndication is simply the pooling of investor funds to buy something that may be too expensive for an individual or small group of investors to acquire. You can syndicate almost anything. The main stream syndications I’m involved in are multi family apartments of 200-300 units in size that may range from $20M to $50M in value; self-storage deals in the $10M to $30M range and mobile home park funds in the $10M and up range. You can quickly see that to acquire these assets assuming 30% down and budgeting for renovations, closing costs that typical capital required is 35% of the properties cost. We regularly are raising capital in the $10M and up range to take down these deals so accessing 100+ investors (at minimums of $50K to $100K per investment) is needed.
Syndicates (sponsors) are responsible for working with legal to put together the deal offering, educate investors and raise capital. Thy also manage the investor relations aspects including keeping the investor updated on the investment project through monthly or quarterly reports, managing the back-office operations (accounting, distributions and K-1 tax partnership statements) and interfacing with the operator frequently to ensure the project is on track.
The operator is the team of folks (usually a company) that are experts at analyzing markets and deals. They select the property, do the underwriting on a deal to determine if the asset should be acquired and can make themselves and the investors a good return for the given risk. Operators develop a business plan to add value (optimize the asset) managing all aspects of the plan. They have an Asset Management role to oversee the project for the hold period to ensure the property gets optimized and increases in income and value by their efforts.
The operator and the sponsor are often one and the same. This becomes a big job for some operators who are either too small and have difficulty raising capital or too big, more institutional and hence, really don’t want to deal with hundreds of investors at the $50K investment level. In this case, operators can then find sponsors (partners) to enable the operator to just focus on what they do best and allow them, the sponsor to do just their roles.
Currently I work with operator/sponsors where I’m part of the sponsorship team in helping them in a wide variety of roles including due diligence to investor relations activities. However, I do have strictly operator relationships where they would like my company to just write them a check for $5M for instance and we become the sponsor, handling all legal offerings, investor liaison efforts like marketing and funding, back office accounting and reporting aspects of the arrangement once the project is running. As a sponsor in this capacity, we do incur some costs and can also change the operator assumptions if they are too aggressive and enable the sponsor to create a different return for the investor. This may be an added cost and dampen returns slightly but I find if done fairly that all can win.
As a sponsor, I can spend more time with the investor making sure this is an investment suitable for them. Since I can work across several operators, I am able to provide investors a lot more opportunities and experiences in geographies, niches and operator styles. I’m developing a portal for instance to allow my investors to see all their investments with me no matter who they are investing with as opposed to investors working directly with several operators that get confused with things like “when is my distribution?”, or “I didn’t get the latest report, can you help?”. Having a robust and secure portal allows investors to see all their investments, gain access to latest reports, distributions, etc. We can be more of a one stop shop providing this broader improved customer experience through educating investors on a variety of niches and operators, access to some operators they could never work with directly (i.e. institutional operators who don’t want to manage $50K investor) and providing good deal flow for investors.
As a sponsor, investors can get access to some of the top operators in the business who are more institutional in nature and don’t allow direct investments of less than $500K for instance. The more capital we bring consistently to these operators does allow us first look at new deals to determine if they would be good for our investor base. That is a huge advantage to our investors as there is only so much capital needed and these deals from some of the best operators are in strong demand.
So, yes, we invest in both operator/sponsor deals where we become part of the sponsor team and we are the sponsor selecting operators in other deals especially with more institutional based operators. We can win both ways and our investors can as well.