Finding the right funding sources to scale up a business venture can be tricky. For real estate investors and entrepreneurs, one viable option is raising private equity capital through syndication. Syndication involves pooling funds from multiple investors to finance a large investment opportunity. In this article, we will outline five steps to successfully raising private equity through a real estate syndication.
Step One: Develop An Investment Thesis
The first step is defining your investment thesis or strategy. Do you want to focus on multifamily, industrial, or retail properties? What locations and markets do you want to target? Will you pursue a value-add or opportunistic strategy? A clearly articulated thesis will guide how you source deals and determine the risk profile for investors. It will also help you define what types of investors you want to attract.
Take time to analyze market data and trends to build a compelling case for why your particular investment thesis can achieve strong risk-adjusted returns. You need to be able to persuasively convey your thesis to generate interest from investors.
Step Two: Create A Business Plan
With an investment thesis in place, develop a business plan for your syndication. This includes determining the legal structure, usually either a limited partnership (LP) or a limited liability company (LLC). You will need to outline operational details like how long you expect the syndication to last and how you will eventually exit investments.
Your business plan must also incorporate a realistic capital raise timeline and budget. raising capital from investors can take 6-18 months or longer. Include the costs not just for acquiring assets but also for marketing, accounting, and legal services required to set up and operate the syndication.
The business plan synthesizes how capital will be raised and deployed based on your investment thesis. It is both for your own benefit as a roadmap, as well as to communicate your competency to potential investors.
Step Three: Build Your Marketing Materials
With a business plan set, you need to develop materials to raise capital from investors. The primary document is the private placement memorandum (PPM) which discloses the investment strategy, risks, conflicts of interest, biographies of key personnel, fees, fund life, and other terms to investors. You will also need a subscription agreement for investors to sign and operating agreements that specify the rights and responsibilities of the syndication manager and investors.
Your marketing materials are critical to attracting investors. They must instill confidence that you have the experience and skills to source good deals and manage the investments professionally. Investors also want to see transparency regarding all potential fees and risks. Developing marketing materials typically requires assistance from legal and accounting professionals to ensure regulatory compliance.
Step Four: Market To Accredited Investors
The difference between real estate syndication vs private equity is that private equity funds are typically closed-end investment vehicles with longer fund lives targeting potentially higher returns, whereas syndications distribute income to investors over shorter time periods. syndications also generally provide investors with more liquidity. However, private equity funds usually require substantially more capital to gain access to deals, as they aim to acquire larger properties for more complex value-add investment strategies.
For syndication managers, understanding these differences helps in determining whether a syndication structure suits their investment objectives and capabilities. While a private equity fund may be an eventual goal, building a track record and raising larger pools of capital often takes time. Launching a smaller syndication first can be an effective stepping stone as experience and credibility develop.
Step Five: Raise Capital and Get to Work
With strong marketing materials conveying your investment thesis and business plan, you can start promoting the investment opportunity to your network of accredited investors. Schedule meetings, get on calls, host presentations—it can take weeks and months of ongoing conversations and relationship-building to close on investment commitments.
Once you have raised your minimum required capital, you can set the final close for your fund and get to work executing your investment strategy. Start sourcing deals, perform due diligence, negotiate contracts, deploy funds, and actively manage your properties. Open communication with investors about progress and performance is as critical as it was in raising the initial capital.