Why Fundraisers Should Choose Real Estate Syndications

Specialist fundraisers play a pivotal role in guiding institutional investors towards profitable investment opportunities. Given the myriad of options available, choosing the right investment vehicle is crucial—not only to ensure impressive returns for investors but also to optimize the compensation and manage the workload of the fundraisers themselves. Why should investors have all the fun, though? In this article, we turn the spotlight to the often-overlooked perspective of the fundraiser.

Let’s explore investment scenarios where not only do the investors reap fantastic returns, but the fundraisers also make out quite well for themselves. Real estate syndications, in particular, stand out as an optimal choice for those seeking high returns with minimal day-to-day management, providing a unique opportunity for fundraisers to enhance their success while facilitating substantial investment growth.

Comparing Investment Vehicles

1. Stocks and Bonds: Stocks and bonds are traditional staples in investment portfolios, known for their liquidity and diversity. However, they can be volatile and often require active management to maximize returns, especially in fluctuating markets.
2. Private Equity and Hedge Funds: These vehicles offer potential for substantial returns but come with higher complexity and risk. They typically involve significant entry barriers and demand extensive oversight, which can be a deterrent for those looking for more hands-off investments.
3. Real Estate Syndications: Real estate syndications provide a unique blend of stability, predictable returns, and passive income opportunities. Unlike stocks and private equity, real estate investments are tangible and can offer steady cash flow and tax advantages, making them highly attractive to both fundraisers and their networks.

What is the Barrier to Entry for These Investment Vehicles?

The barrier to entry for investment vehicles can significantly influence a fundraiser’s ability to participate and succeed. Each vehicle comes with its own set of requirements and challenges, impacting the ease with which fundraisers can engage and benefit from these opportunities.

1. Stocks and Bonds:
   • Knowledge and Setup: Engaging with stocks and bonds often requires a solid understanding of the stock market, investment strategies, and continuous monitoring. Fundraisers need to either set up a fund or select individual stocks and bonds that align with their investment goals.
   • Market Volatility: The stock market’s inherent volatility requires active management and a keen eye for market trends to safeguard investments and maximize returns.
2. Private Equity and Hedge Funds:
   • High Financial and Knowledge Barriers: Private equity and hedge funds typically require a substantial initial capital investment, which can be prohibitive. Moreover, these vehicles involve complex strategies that demand a deep understanding of financial markets and the specific sectors they invest in.
   • Intensive Oversight: These funds often require active involvement in managing investments or a strong reliance on fund managers to navigate the complexities of the markets and regulatory environments.
3. Real Estate Syndications:
   • Lower Entry Barriers: Real estate syndications present a more accessible entry point for many fundraisers. The GP team handles the majority of operational responsibilities, including deal sourcing, property management, and day-to-day administrative tasks. This allows fundraisers to focus primarily on capital raising without needing to manage the properties directly.
   • Passive Involvement: Unlike the direct and often intensive involvement required in other vehicles, real estate syndications offer fundraisers the benefit of passive income. Once the initial capital is raised, the ongoing management is taken care of by other GPs, allowing fundraisers to benefit from the investment without ongoing heavy lifting.

By comparing these barriers, it becomes clear that real estate syndications offer distinct advantages, especially for those who prefer a hands-off approach once the investment is initiated. This accessibility makes real estate syndications an attractive option for fundraisers who wish to leverage their networks without the need for continuous active management or deep expertise in fluctuating markets.

Benefits of Real Estate Syndications for Fundraisers

• High Compensation with Less Effort: Real estate syndications allow fundraisers to earn a share of the GP equity, typically without the need for continuous management after the capital is raised. This setup lets fundraisers focus on building and maintaining investor relationships instead of managing investments.
• Hassle-Free Management: Once the deal is funded, the operational responsibilities are handled by other members of the GP team, freeing up fundraisers to seek new opportunities without being bogged down by the day-to-day management of the property.
• Stability and Predictability: The tangible nature of real estate coupled with long-term leases provides a stable revenue stream, making it an attractive option for institutional investors seeking reliable investments.

Comparative Analysis of Fundraiser Returns

The following table provides a comparative analysis of the potential returns a fundraiser could expect from deploying $5 million across different investment vehicles:

Investment Vehicle	Compensation Mechanism	Fundraiser Compensation for $5M Investment
Stocks and Bonds	Percentage of assets under management (AUM)	$250,000
Private Equity	Carried interest on profits	$500,000 + carried interest
Real Estate Syndications	Share of GP equity	$500,000 + profit sharing

To simplify the comparison of potential earnings for a fundraiser who has raised $5 million to be invested in stocks, private equity, or real estate syndication over a period of 5 years, we need to consider typical compensation structures and potential returns for each investment vehicle. Here’s a simplified breakdown:

1. Stocks (via Mutual Funds or Hedge Funds)

• Management Fee: Typically around 1% of assets under management (AUM) annually.
• Performance Fee: Often not applicable for mutual funds but can be around 20% for hedge funds, assuming the fund exceeds a certain benchmark.
• Earnings Potential: Assuming a management fee of 1% on $5 million, that’s $50,000 annually, totaling $250,000 over 5 years, not accounting for any performance-based compensation that might significantly increase earnings in the case of hedge funds.

2. Private Equity

• Management Fee: Generally between 1.5% to 2% of committed capital annually.
• Carried Interest: Typically around 20% of the profits, after returning the initial capital plus a hurdle rate (usually around 8%).
• Earnings Potential: Assuming a 2% management fee, that’s $100,000 annually, totaling $500,000 over 5 years. Plus, carried interest could substantially increase earnings if the investments perform well, potentially adding millions depending on the success of the investments.

3. Real Estate Syndication

• Management Fee: Usually between 1% to 2% of equity or AUM annually.
• Profit Sharing: Common structures might include around 20% to 30% of the profits to the manager after investors receive their initial capital plus a preferred return (typically 5% to 8%).
• Earnings Potential: Assuming a 2% fee on $5 million, that’s $100,000 annually, totaling $500,000 over 5 years. Profit sharing could significantly add to earnings based on the success of the real estate investments. Other established syndicators in say capital raisers should make $100k for every $1m raised each year of the property hold.

Returns Conclusion:

• Highest Base Earnings: Both private equity and real estate syndication have higher potential base earnings from management fees compared to stocks, especially if the stock investment is managed through a mutual fund with no performance fee.
• Highest Total Earnings: Private equity and real estate syndication also have the potential for the highest total earnings due to the carried interest or profit-sharing models, which can be lucrative if the investments perform exceptionally well. These vehicles provide the fundraiser with a share of the investment profits, which can significantly exceed the earnings from mere management fees.

Therefore, if the fundraiser is looking at the potential for the highest total earnings from a $5 million fund over 5 years, private equity or real estate syndication could be more lucrative, particularly if the investments are successful and generate substantial profits above the preferred returns.

Conclusion

Real estate syndications represent a highly beneficial investment vehicle for fundraisers and their networks. They combine the potential for high returns with a lower workload compared to other investment options, making them an ideal choice for those looking to maximize efficiency and profitability. By directing institutional investors towards real estate syndications, fundraisers can leverage these advantages to achieve significant financial success with comparatively minimal effort.