Welcome back and happy Friday!

I get this question a lot: “can you mentor/teach me how to be a GP, and if not can you recommend someone who does this?”

I’ve avoided commenting on this in public for well over a year now, but feel like it’s time. My response might be controversial to some, but I genuinely don’t think it should be - and it’s certainly not meant to be. As always, I’m open to all feedback.

Today we’ll cover:

• What is a GP - the basics

• What does it take to become a GP?

• Can mentorship really help you?

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What is a GP - the basics

First, let’s ground ourselves in a few things that might (or might not) be obvious.

A GP is a startup that is heavily dependent on two things to succeed:

• Fees (at acquisition and during the investment holding period)

• Promote (at sale, typically upon reaching some sort of preferred return to LP and returning capital)

There are a lot of misconceptions around this topic because people think GPs are wealthy, when in fact they’re only wealthy IF AND ONLY IF they’re able to return enough money to their investors and/or scale to the point where the management fees are substantial.

The GP entity, and by extension its Principals, are - especially in the beginning - running a very thin operating company with the hope of covering expenses of employees with income .. and guess what? The ~only income source for the GP is fees, which are limited and defined.

Translation: the GP business is risky and it requires scale and expertise to succeed without taking outrageous amounts of personal capital and reputation risk. Doing mediocre deals is not only not worth it but it’ll lead you to using years of your time to get ~no reward (and perhaps even upsetting investors if the performance is subpar).

What does it take to become a GP?

Now that we understand what the GP business is fundamentally, what are the requirements for success?

Let’s speak through 5 factors:

• Time - making any real money takes time

• Regardless of anything else herein, if you’re an honest GP trying to build a long term business it’ll take 5+ years to make any real money.

• This is because your performance (as GP) is tied to the sale of the property and you’re not getting a dollar (other than fees which are meant to cover expenses) until the pref and return of capital provisions are met…

• Access to capital – investors willing to fund your deals, or your personal capital

• Have your own capital? That’s super helpful!

• If you don’t, let’s discuss:

• Firstly, raising capital is difficult - finding investors is difficult, pitching yourself is difficult, getting people to trust you is difficult… and half the people who say they’ll invest with you actually won’t wire that cash (probably more than half)

• Second, raising the actual capital is just the beginning - you have to perform, and if there are hiccups you best believe (sorry I had to use that phrase) people will be reaching out

• Sometimes those texts and emails will come at midnight or on a Sunday, so you can understand how this can be stressful. If you think being a GP is being your own boss, you’re (I’m sorry) fooling yourself.

• I should note here that some personal capital is absolutely required :

• You’ll likely need to live on savings for some time as you find (hint: finding is notably not the same thing as closing on) your first deal

• deal fees might not cover your living and employee expenses

• you might need to personally guarantee the investment (which, while we’re on the topic, is particularly scary and certainly not recommended if you don’t really know what you’re doing)

• Pursuit costs (earnest money deposit) will cost money as well

• Access to deals – a strong pipeline of real estate opportunities.

• Found capital and have time? That’s amazing… but I still have some bad news

• Finding good deals is not easy.

• Guess what the job of a Managing Director at Blackstone is? Find deals! You might think that when you have all the capital in the world the deals come to you, but that’s simply (in vast majority of cases) not true

• “Ok but I can just look on LoopNet and stuff”

• Sure, you can.. but so can everyone else, so what’s your edge?

• Isn’t it possible to find a diamond in the rough though?

• Yes.. which is a nice segue into point 4

• Experience underwriting – the ability to analyze a deal correctly.

• For every diamond in the rough, there are hundreds - maybe thousands - of terrible deals.

• Of course this depends on how you define your sample set (i.e. how unique and filtered the deals that land in your inbox are), but if you’re getting public blasts from places where everybody else is looking, chances are that many people with more experience than you have passed on the opportunity

• Because of this, you need to make sure you have enough experience on what to look out for.. there are basics steps here that can be taught, but don’t be fooled by a model that looks fancy and pretends to have all the answers - sometimes the most important aspects of due diligence can’t be boiled down to a number

• Experience operating – the skills to execute the business plan and drive returns.

• Alright, so you have time, found the capital, found the deal, and underwrote it well.. you must be all set, right? Wrong..

• Now we’re onto operations, and trust me when I say this - it’s everything but passive

• “Ok but that’s why I’ll just hire a third party manager”

• If you think you can just hire a third party manager and move on with your life you’ve either (1) never worked with a third party manager, or (2) not ready to be a GP … or both - sorry but it’s true

• Managing an (even good) third party manager takes time and skill.. sure they can do a mediocre job without you, but will mediocre suffice for all the folks you raised capital from?

All this to say, there are 5 factors.. and you’ll notice that each one is **independently **important. I’m not trying to dissuade you from doing it, I’m simply stating the facts that you’ll either learn after you start or (ideally) right now.

Can mentorship really help you?

Alright, we’ve finally arrived.. so do you still want a mentor? Do they exist? Let’s discuss.

They do exist, in vast numbers by the way - coaches, mastermind groups, and courses galore. There are plenty of people who want to take your money - no shortage of them. The promises will be strong, and the results (on average) will be subpar.

“How can you say that Aleksey? You can’t just tarnish the reputation of everyone based on some bad actors!”

Yes, I can.. I feel very comfortable saying that the majority of service providers in this space will not deliver on all 5 of the factors I listed above. You’ll typically learn about this midway through the relationship, though - here are some things to consider in particular:

• You’ll go through an entire underwriting course only to realize that the next step is finding deals.. and boy is it hard to find a good one.

• “I did learn how to underwrite, which is great, but did I get my actual goal (becoming a GP) out of the course?” You can be the judge.

• There are many iterations of this that you can think of where you learned 1 or 2 of the 5 necessary components, but you’re nowhere near where you expected to get .. but now you’re so deep in that you can’t stop, right?! That leads us to the next item…

• The incentives between a mentor/teacher and a student are lobsided day 1 - they will - certainly on average - gain more than you and the gain isn’t tied to your actual performance

• In other words, if the goal is “learn underwriting” then that’s probably a somewhat achievable goal… but then what’s the value of it, if you’re still missing 4 other components?

• Listen to this experience on this topic

• Said another way, the student takes on all the risk, while the teacher gets paid either way

• Many GP “mentors” never actually put their own money on the line. Instead, they tell students:

• Go out and find a deal.

• Raise money from your network.

• Sign on a loan.

• This shifts all the risk to the student, while the mentor collects fees risk-free. A real GP should be comfortable co-investing in deals, not just teaching others to do it.

• While we’re on this topic, keep in mind that ~every one of these programs will tell you that they will coinvest with you but (1) you have no idea whether they have the cash today, (2) you have no idea whether they’ll have the cash when you’ll need it, (3) perhaps the cash will come at a price that you won’t want to take, but by then it’ll be too late because they put you in that situation

• Deal didn’t work out? You’ll want to blame the mentor, but that blame will fall flat since at the end of the day (legally speaking) your name is on the loan and they’re your own personal capital relationships

• Don’t be surprised by a Personally Guarantee (PG) request, or giving up economics

• Even when a mentor “helps” a student get into a deal, the reality is often far from fair. In many cases, the student is forced to:

• Personally guarantee the loan, meaning they take on all the financial downside if things go wrong.

• Give up a significant portion of the economics, often through:

• A large cut of the acquisition fee going to the mentor.

• A major share of the promote being given away on the backend of the deal.

• Effectively, the mentor gets a piece of the deal without taking ~any real risk, while the student shoulders ~all of the liability.

As always, I hope this was helpful and look forward to your feedback and questions.

PS - although this wasn’t the intent of this article, I hope it also (indirectly) illustrates how difficult it can be to be a good GP.

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