Marc Halpern, Part Time Investors LLC
April 7, 2024
1. What are your criteria for defining best-in-class sponsors?
Criteria for Best-in-Class Sponsors & Operators
Experienced with excellent track record in THAT sector
Communications
Transparency
Risks
Negatives
Comprehensive
Frequent updates
Personal integrity
Access to key performers
top managers
operations level
LP investor referrals
3rd party auditor & administrator
Sponsor invests their own money in the deal
Fees at risk
Top Criterion = the way the sponsor thinks: Interview
Decision making
Understands macroeconomic factors
Response to adversity, e.g., interest rates 3/2022-7/2023
What if’s
Answers to highly detailed questions
2. Are any of these criteria “nice to have” as opposed to “uncompromising musts?”
Greatly prefer sponsor who puts their cash or fees in the deal, but not necessary if everything else outstanding
3rd party administrator is not a must but helpful for oversight, especially for multi-project funds
3. Do you have different vetting criteria for sponsors of single-project offerings than for multi-project funds?
Wait until fund is at least halfway toward funding max in order to be able to assess decision making when filling the pipeline
Prefer fund that owns and manages the assets rather than fund that relies on other syndicators. This enables better and direct DEEP due diligence on sponsors and decision making
4. How do you vet sponsors differently in 2024 versus before the Fed started raising rates in 2022?
Looking for fixed rate financing term to exceed expected exit; no planned refi to return capital
Request detailed performance from 2022 Qtr 4 and later; some distressed syndications didn’t show distress to LP’s until Qtr 4 2023
When, if at all, did sponsor slow down purchases? Why didn’t a sponsor tap the brakes by Jan 2023 when it was already clear that Fed rates increased by 4% in 10 months?
Remember that some very high-performers pre-2022 became poor performers by the end of 2023
Everyone with a brain knew that interest rates would rise at some point, however, few expected the unprecedented pace of rate hikes. Some sponsors had their head in the sand pre-2022 about any interest rate increase whatsoever.
5. What lessons have you learned over the years from sponsors who underperformed despite passing initial due diligence?
Even the best jockeys can have a bad horse, so diversification in three dimensions is crucial to maintain high portfolio performance: multiple projects in multiple sectors with multiple sponsors
Even the most knowledgeable sponsors with the most expertise in macroeconomics and global geopolitics did not anticipate the rate of Fed rate increase or the fall of the Soviet Union, both of which directly caused apartment syndications and other private placement projects to fail, some of which even went bankrupt. Again, diversification with multiple projects in multiple sectors with multiple sponsors is crucial.
Achieve massive deal flow so that you can reject 98% of private placement offerings. This is done by networking in the DDD Mindset Club (Marc Halpern is pitched about 300 offerings per year), Family Office Club Events, BEC, LFI Annual meeting in Columbus, etc.
6. What changes do you see in the LPs that go through your DEEP Due Diligence course? How does the analysis of deals and sponsors change?
The level of DEEP due diligence is absolutely amazing when a dozen or so critical thinkers get together after trained in the course to challenge every upside assumption, every cell in every spreadsheet, every risk, every aspect of scrutiny of sponsors and operators, every word of the Operating Agreement, etc.
DDD Mindset Club members invest with much more confidence after passing joint DDD. DDD Mindset Club members also kill deals quicker.
7. There have been capital calls and losses from operators that were properly vetted to begin with. How do we learn from these situations to avoid them in the future?
Joint DDD of members with high patience and broad mental bandwidth for DDD gives great results when many intelligent people ask about all kinds of scenarios. We can’t eliminate risk but we sure can minimize risk and manage risk.
