Private Investing has become more popular for investors as opportunities are more accessible. When choosing to allocate to alternatives like real estate, venture, or private equity, investors are left with the decision to invest in private funds or syndications.
In this article, we will be discussing some of the main differences between investing in private funds and investing in syndications.
Syndications are deal by deal. If you have ever been involved in real estate, a syndication is the pooling together of resources and capital to acquire a single asset. We are not focused on residential, but most single-family rehab deals are structured similarly to a syndication. You have your operator (the one structuring the deal), and you have your investor or lenders that are financing the deal.
Private equity funds are more geared towards the operator, and the strategy. A fund is the pooling together of resources and capital to allocate to multiple investments that fit the fund strategy. Instead of a single asset that has been underwritten and a partnership has been formed to allocate to that specific asset, a fund is structured as a plan to go out and invest in specific types of assets for a specified period of time.
There are two types of funds; closed-end funds, and open-end funds. These are structured in a way similar to how they sound. Closed-in funds have a period in which the capital is raised, the investments are located, the capital is deployed, and the fund has a predetermined amount of time to perform and return the capital to investors.
An open-end fund is structured to be able to raise capital and deploy throughout the lifetime of the fund. With an unlimited number of shares, investors can have the ability to withdraw their investment during specific periods, typically at a discount (deal by deal).
In both syndications and funds, there are several similarities to the structure; the partners, the entity, and the equity waterfall.
Starting with the partnership; in general, private deals are structured with two parties; the limited partners (investors), and the general partners (operators). These two partners are formed into a partnership called a limited partnership. This limited partnership will be the owner of the entity where the investment is held. And lastly, the equity waterfall. This is how the cash flow and profits are split between the limited and general partners.
The Bottom Line
The main differences between funds and syndications are the pooling of a single investment or multiple investments.
In a fund, investors gain the ability to invest across multiple assets within certain criteria to help achieve diversification. The potential downside to this is that all of the investments are pooled together like an index; if one investment underperforms, that will bring down the others. The other potential downside of investing in funds, is, because of their structures, the capital is raised prior to an opportunity being located, which depending on the operator, could add pressure to deploying the capital raised.
In syndications, investors have full control over which specific investments they want to invest in. The real benefit of this is that people have biases towards specific markets and assets.
Whether you invest in pooled funds or syndications should depend on your investment goals, risk tolerance, and the operator and fund strategy specifics.
The majority of our offerings at Dovetail are structured as individual investments and are direct to the operator, giving full discretion to our investor consortium.