Sponsor Equity is an idea from the real estate world, and is a new way in which investors are gaining more direct access to real estate deals. Generally speaking, investors end up investing in real estate through multiple parties and intermediaries, and pay the commenurate fees. Following the crash, many large real estate project sponsors, already involved in development projects, realized they were short on cash, and turned directly to investors for funds, offering them the opportunity to invest directly alongside the deal sponsors.
Q. So this describes a new type of deal in the real estate world?
A. Yes. It’s an opportunity to participate directly with a real estate operator and therefore get a piece of the sponsor’s stake in the deal, so that’s why it’s called a “sponsor equity” transaction. When you can find these transactions, they’re a lot more attractive than the standard ways of investing in big RE projects.
Q. Well, let’s back up. How do most people invest today?
A. Aside from the public options like REITs and REOCs, most high net worth people have gone in through private placements. But it’s almost always a very indirect investment: the person might invest through his financial institution in a “feeder” fund, which would then invest in an “allocator” fund, and maybe a “fund of funds” down into the project. That is, there are typically lots of layers of partnerships between the investor and the dirt.
Q. And I bet that means there are lots of layers of fees, too.
A. Exactly so. Many folks wind up paying a “double promote” this way. It’s painful enough to invest in a partnership where the manager is taking 20% of the profits; but when you add one of those on top of another, it can really kill the returns. Many real estate investors wind up with, say, 12% profit after investing in a project where the gross returns are twice that.
Q. So what’s with these “sponsor equity” deals, then?
A. Several of the really big project sponsors are already in development deals where they’re the General Partner, taking the 2 and 20, and they have the limited partners — the investors– in the project lined up. But because of the crash, the sponsors balance sheet is impared, and they need help in putting up the funds they themselves are supposed to contribute to the project. So in a “sponsor equity” deal, you help the sponsor do that, and as a result get a piece of his carry. You share in the promote, rather than being promoted.