Private Equity Funds Vs. Syndications
Lets now hover over the difference between Private Equity funds and Syndications. Some investors may not know the difference between funds and syndications. The purpose of the fund or syndicate is to allow investors to take advantage of tax incentives and passively invest while growing their wealth in the real estate investment field. Real estate syndications and funds are two great entry points into the world of investment real estate, and depending on your investment goals, one might be a better fit.
What makes up a real estate fund or syndication?
Syndication has a general partner or sponsor and a limited partner or investor. Syndication is done on one asset at a time per deal. Funding has time frames and fees can vary widely from syndication to syndication. In addition to one-time and ongoing annual membership fees, this typically includes a personally responsible partner or management team member's 20-80% profit share. The general partner is also responsible for due diligence, acquisitions, transaction and asset management, financing, and communications with limited partners. Limited Partners contribute capital and remain passive unless otherwise stated.
In the case of funds, the main difference from syndication is that funds typically pool resources from all the assets they hold, giving the fund an advantage if an area or asset suffers an unfortunate event. The fund's pooled income can solve the problem without demanding funds from investors. Within the fund, investors contribute capital and remain passive. Investors often don't know what assets are involved before they buy, so having a reputable and competent money management team is of utmost importance. Of course, prices also vary greatly. Funds may have various characteristics that individual syndications do not. A fund can have a collection of assets that can fluctuate according to market cycles, and this diversification can provide investors with some degree of protection rather than exposing them to risk in a single asset.
As with all investments, rewards are often measured by measuring risk. Single syndications may offer greater upside potential, but the risks of single assets are much greater than multi-asset fund structures, and as a result, returns should reflect their risk profile.
What are Filings?
A Filing is a type of document that must be filed with the Securities and Exchange Commission (SEC) or other regulatory authority. It also determines the types of investors that can invest in a fund or syndication and includes marketing and advertising. These filings are intended to protect non-accredited investors (those who do not meet the income or wealth requirements set by the SEC are considered non-accredited investors) or the general public with little or no investment experience.
501(b) is an exception that allows a company to raise an unlimited amount of money and sell securities to an unlimited number of accredited investors. However, we do not accept any solicitation or advertising, and the Sponsor only accepts investments from those who have already established meaningful relationships. A 501(c) is an exemption that allows sponsors to market and advertise their offerings. However, all investors must be accredited and Sponsor must take reasonable steps to ensure that all investors are accredited.
Fees and Profit Sharing
In most cases, there will be a profit sharing or stock split between the general partner (GP)/sponsor/manager and the limited partner (LP)/investor. This is usually net income, paid after deducting all costs and returning the investor's capital. Both funds and syndicates have endless possibilities for structures, fees, and profit sharing. Typical fees include, but are not limited to acquisition, disposal, asset management, promotion, surety, and financing. Given the variety of fees and structures, it is difficult to provide typical, reasonable, or normal guidelines. Pay attention to the wording of legal documents and look for fees that are not as obvious as other investments. The higher the fee, the more diluted the profit.
Some companies set post-profit sharing or stock splits higher than high upfront fees. Other companies charge an ongoing asset fee and a smaller back-end percentage. Either way, funds or syndications have pros and cons and can be argued either way. Beware of companies that don't tell you how much they charge up front and hide their fees in subscription agreements.
Investor needs, risk profile, and investment horizon should be considered when deciding whether to invest in a fund or a syndicate. Funds and syndications may have similar applications and similar fees. However, the main difference between the two is usually the single investment exposure of syndication and the diversified fund holdings. As always, there are no guarantees in real estate investing. Always remember the old saying, that if an offer sounds too good to be true, it could happen to be.
Pros & Cons of Real Estate Syndication
Have you ever wondered whether syndication is right for you or not? Real property syndication may be an effective funding structure. Therefore, it is often used in apartments. But there are advantages and disadvantages everywhere. To help you decide, here are the advantages and disadvantages of multifamily complexes:
