Is it time to double down?

Welcome back and happy Friday!

I was planning on dropping this article around Thanksgiving, but some things just can’t wait.

I keep coming across LPs who reinvest with GPs, and I think it’s time to dissect the topic in detail:

• What signals are **bad **reasons to reinvest with the same GP?

• What signals are **good **reasons to reinvest with the same GP?

Hopefully you’ll understand why this is relevant - avoid that surprise at all costs!

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First, let me address why I’m writing this.

I encounter countless counterexamples on this day to day: investors who shouldn’t be reinvesting are doing so, while investors who should consider investing again aren’t.

Let me start with a quick story

The above is a true story, and it always struck me as interesting - the common finance man might ask “that’s crazy, shouldn’t you be diversified!?”

And the answer is that they are! But mostly across typical public diversified investments AND real estate - they found a niche and they’re sticking to it.

So does this mean that if you found a great GP, you should stick with them? The answer is sort of.

The first and most important thing that governs whether you should invest at all (or reinvest again with a GP) is your overall portfolio allocation. As a baseline, you generally should never risk money in an alternative investment that you cannot lose. Assuming that’s taken care of, there’s still a question of “how much is too much” which is very personal, but I wrote on that topic in Minimum LP Investment Size.

Now, let’s assume you can personally take the risk and one of your existing GPs showed you another deal.

What should you be thinking about to determine whether you should double down?

What signals are **bad **reasons to reinvest with the same GP?

• Distributions are on time - there are many reasons for this that don’t point to deal health whatsoever, including over raising equity at closing

• Distributions are consistent - while the consistency is helpful, the NOI at the property is always fluctuating so distributions being the same isn’t necessarily a positive signal

• The reports are on time / look nice - not much more to say here :)

• K1s are on time - while K1s NOT being on time can be a signal in the other direction, I wouldn’t say that them being on time says anything about your next investment

• **"They were nice" / "I like them" / “They’re similar to me” **- I’m not sure what to say here, other than I hope that it’s obvious that one’s persona / marketing skills aren’t the same as them being good investors or fiduciaries of capital

• Also see #2 in Top 15 Syndication Mistakes

• **"They returned my capital" - **refinancing your capital out is a great, but it’s not the end - see here for more.

• **"They've done a lot of deals" / "Everyone else is reinvesting" - **good for them! The only person who can help you make the best decision is yourself and you need to keep your own guardrails up in terms of how much you’re willing to allocate at any given time.

• **"It felt safe because they used a pref" - **goes without saying that pref isn’t guaranteed (just because you’re accruing pref does NOT mean it’ll eventually get paid - this is a function of available cash), but I’ve heard this before. While we’re on this topic, please don’t forget to check return of capital clause.

What signals are **good **reasons to reinvest with the same GP?

• You fully exited from an investment - this is by far the strongest signal, and nothing else comes close … they told you they’d do x, did it, and you made money.

• Be mindful of carrying over too many gains at the same time - sometimes it makes sense to pay taxes and de-risk a little - here’s a story about overconcentrating

• As much as track record is important, you have to remember that every GP has (or will) have challenging deals and there’s a chance that this next deal will not perform as well as the last

• Content of the reports - quality over quantity (more here on what I consider to be good)

• Transparency about the bad news - how long does it take you to hear the bad news, how direct (vs sugar coated) was it, and how well planned/thought-out is the reaction/plan - partnership should go both ways

• **Disciplined underwriting and selectivity - **while I’m a big fan of verifying and (only then) trusting, you have to remember that people can change. It’s normal to trust more, but don’t just wire checks without diligence even if you had a great experience.

• **Demonstrated ability to navigate challenges with grace - **GPs who exited well in a downturn or managed (& communicated) through volatility prove real skill, not just luck (see cap rate compression for the most common luck component)

As always, I hope this is helpful and I look forward to your feedback!

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