Fund Model vs Syndication: Pros and Cons for InvestorsJun 30, 2023
Pros and Cons of Fund Model vs Syndication
Today, we’re going to discuss Fund Model and Syndication. We’ll talk about what they are and, more importantly, the differences between them. Both are investor tools, but we’ll talk about which one works better and is preferred in today’s real estate industry.
To begin, we need to answer a few questions.
- What are the differences between a fund model and a syndication?
- Why are investors preferring one over the other?
To put it simply, a Syndication is a way of pooling money from multiple investors to purchase one or more properties. Investors typically own a percentage of the property based on their investment amount, and the sponsor manages the property and distributes profits to investors.
On the other hand, a Fund Model pools money from multiple investors into a single fund, and the fund then invests in multiple properties. Investors in the fund own shares of the fund, rather than direct ownership in the properties. The sponsor still manages the properties and distributes profits to investors, but the structure is more streamlined and allows for greater diversification.
One of the main benefits of the fund model is that it allows for greater diversification. With a syndication, investors are typically tied to a single property or portfolio, and their returns are dependent on the performance of that property or portfolio. With a fund model, investors can own a piece of multiple properties, which can help to mitigate risk and provide more stable returns.
Another benefit of the fund model is that it can be more attractive to larger investors. Institutional investors, such as pension funds and endowments, often prefer to invest in funds rather than syndications, as it allows them to invest in a more diversified portfolio and can provide greater transparency and reporting.
However, there are also drawbacks to the fund model. One of the main drawbacks is that investors typically have less control over the properties and investments. With a syndication, investors often have a more direct say in the management of the property, whereas with a fund model, decisions are made by the sponsor.
Additionally, the structure of a fund can be more complex than a syndication, and may require more legal and accounting fees to set up and maintain.
Importance of Communication with Investors
Regardless of which model is chosen, it is crucial to communicate effectively with investors. Not all investors are the same, and their concerns and priorities will differ. It is important to understand their needs and concerns, and present the investment opportunity in a way that addresses those concerns and provides a clear picture of the upside potential.
Transparency and open communication are also key to building trust with investors. Investors want to feel confident that their money is being invested wisely and that they have access to information about the performance of the investment. Regular reporting and updates can help to build this trust and ensure that investors are satisfied with their investment.
In the self-storage industry, the fund model and syndication are two common methods of raising capital. In this article, I will be discussing the pros and cons of the fund model versus syndication and why the fund model tends to be a better option for investors.
What is a Blind Pool?
Before we delve further into the pros and cons of the fund model versus syndication, let's define what a blind pool is. A blind pool is an investment fund where the assets are not yet identified. In a blind pool offering, investors are essentially betting on the operator or "jockey" to find suitable assets for the fund. The criteria for the assets are outlined, but the specific assets themselves are not yet identified.
The Fund Model
One of the biggest pros of the fund model is that it allows for the collection of capital prior to identifying assets. This means that the operator has the ability to move quickly and has the necessary cash to buy assets. With a high-functioning acquisition team, having capital on hand is crucial when negotiating the purchase of properties.
Additionally, the fund model is centered around the operator, which allows investors to trust the stewardship of their money. By investing in a fund, investors have the opportunity to diversify their portfolio with multiple assets, which can provide more stable returns over time.
The Syndication Model
Conversely, syndication is generally centered around the asset itself. Investors are presented with a specific property or portfolio of properties and the purpose of the syndication is to raise capital to purchase those assets. With a syndication, investors are able to see the specific asset they are investing in, which can provide more transparency and clarity.
However, the downside of a syndication is that it requires a more significant amount of time and effort to raise capital for each individual property or portfolio. Additionally, syndications are generally riskier for investors since they are typically invested in a single asset or portfolio, which can result in a less diversified portfolio.
Why the Fund Model Tends to Be Better
While syndications provide more transparency in terms of the specific assets being invested in, the fund model tends to be a better option for investors. By investing in a fund, investors have the opportunity to diversify their portfolio with multiple assets, which can provide more stable returns over time. Additionally, the fund model allows for the collection of capital prior to identifying assets, which allows for quicker moves and negotiations.
According to a report by the Self Storage Association, the self-storage industry has been experiencing significant growth over the past few years. The report states that the industry has been growing at an annual rate of 7.7% since 2012, and as of 2021, there are approximately 59,500 self-storage facilities in the United States alone.
Furthermore, a study by the National Association of Real Estate Investment Trusts (NAREIT) found that self-storage REITs have outperformed other REIT sectors over the past two decades. From 1994 to 2014, self-storage REITs had an average annual total return of 17.43%, compared to the 10.07% total return for all equity REITs.
The decision between a fund model and a syndication will depend on a variety of factors, including the size and nature of the investment, the goals of the investors, and the preferences of the sponsor. While the fund model can provide greater diversification and may be more attractive to institutional investors, it also requires more complex legal and accounting structures and may result in less control for investors.
Regardless of the model chosen, effective communication and transparency with investors is crucial to building trust and ensuring a successful investment. By understanding the needs and concerns of investors and presenting the investment opportunity in a clear and compelling way, sponsors can attract the right investors and build a successful investment portfolio.