Co-GP Real Estate: How To Launch And Scale Your Own Private Equity Business

Things To Consider As A Co-GP

As with anything, being a co-GP in the world of private equity real estate is not for everyone, and there are certainly a lot of things you should take into consideration before agreeing to be a co-GP for someone’s deal.

Pros Of Being A Co-GP

Pro #1: Limited Risk

As a co-GP, you limit your risk, both financially and reputation-wise. You do not need to be the one making sure the underwriting assumptions are pinpoint accurate, walking all the units and conducting all the due diligence, securing the loan, or raising all the capital.

You have the opportunity to participate in some or all of these aspects of the deal, but you are not the be all and end all on any of these items. You are leaning on the proven experience of the lead sponsor in each of these critical areas.

Pro #2: No EMD Or Other Upfront Costs Required

As a co-GP, you likely will not need to put in the EMD (earnest money deposit), which can be a huge way to mitigate risk, particularly on a large commercial deal. All other costs – including legal fees, due diligence reports, and more – will also likely be covered by the lead sponsor.

Thus, you’re putting in very little capital of your own for a potentially huge payoff, both when the deal closes and when it eventually sells.

Pro #3: Opportunity To Learn The Ropes

For LPs (limited partners), you may get very little, if any, access to the backend of the deal and how it operates. This is the beauty of being a co-GP.

As a co-GP, you get a front row seat to the acquisitions and operations of the asset, yet you don’t need to be the lead on everything. You are a sous chef, not the head chef, but you have the opportunity to see everything that goes on in the kitchen.

If you plan to eventually sponsor your own deals, this could be a hugely valuable experience that could catapult you into doing your own deals.

Pro #4: Opportunity To Launch Your Brand And Build Your Business

Being a co-GP gives you a great opportunity to build your own brand and launch your own real estate business, through giving your investors opportunities to participate in great opportunities.

Because the lead sponsor will not be communicating directly with your passive investors, you have the opportunity to build your reputation through leaning on the track record of the lead sponsor.

This is exactly what we did when we started out. At the beginning, we leaned heavily on the experience of our partners, the lead sponsors. Over time, as we built up our own track record, we were able to strengthen our own brand and reputation.

Cons Of Being A Co-GP

Con #1: Limited Control

One of the biggest downsides of being a co-GP is that you will likely have limited control over the deal. This means that the lead sponsor could decide to do a refinance, pause distributions, slow down renovations, increase concessions, or sell early, all without needing your approval.

This is why it’s so important to find a lead sponsor partner whom you trust and who respects you and keeps you in the loop every step of the way. The last thing you want is to get your investors into a deal that goes sideways, with you not being able to do anything about it.

Con #2: No Say In Deal Structure 

Most likely, as a co-GP, you’ll join the partnership when there’s already a deal under contract. At that point, the lead sponsor will likely have already done the bulk of the initial underwriting and chosen how they want to structure the deal, including the returns to provide investors, the fees to charge, the capital stack, and the overall splits.

In many cases, this works out just fine. The main consideration here is if your investors are used to a certain deal structure or preferred return, and then you do a deal with a different sponsor who structures it differently, you may not have the ability to change the deal structure.

Con #3: Usually No Ongoing Fees

This can differ depending on the arrangement you work out with your sponsor partner, but in many cases, co-GPs may not participate in the ongoing asset management fees. Most co-GPs participate in the acquisition fees at closing, as well as a portion of the proceeds upon the final sale. So, while you will own equity in the deal, you might not get ongoing fees, depending on how you structure the partnership.

If you’re doing this as a side hustle while keeping your day job, in most cases this is just fine, since you have a steady stream of income. However, if you’re doing this full time, and if doing deals is the only stream of income in your business, it could lead to some financial strain if you go for a period of time without finding new deals.

Con #4: Your Investors May Go Around You

As part of promoting a deal with a sponsor partner, you will need to tell your passive investors about the sponsor group and their track record. As such, your investors may sometimes go around you and invest directly with the sponsor.

This doesn’t happen often, but it’s definitely something you should consider. The best way to combat this is to ensure that you are providing the best possible service to your investors, so they will never want to invest with anyone else.

Legal Considerations For Co-GPs

As a co-GP, there are two main regulations from the SEC (Securities and Exchange Commission) that you should be aware of, to make sure that everything you’re doing remains above-board.

Raising Capital Cannot Be Your Only Role

The first thing to know is that you cannot join a deal purely to bring capital to the table, without having other roles in the deal. The reason the SEC put this guideline in place is to protect investors. They don’t want you to “drop off” your investors and then leave without taking any responsibility.

To ensure you’re staying in compliance here, make sure to work with the lead sponsor to identify multiple areas of the deal that you can contribute to, including due diligence, signing on the loan, or asset management. Make sure to document your participation in your various roles, so you can easily show that you’re doing more than just raising capital.

You Cannot Be Compensated Based On The Amount You Raise

The other main regulation you should be aware of is that your compensation in the deal cannot be dependent on the amount you raise.

For example, let’s say you have an agreement with the lead sponsor that if you raise $500k, you’ll get $15k in acquisition fees, and if you raise $1 million, you’ll get $30k. That’s a no-no.

Instead, you’ll need to work out a flat fee or split, so no matter how much capital you raise, you get compensated the same amount. 

Important Reminder

Before participating in a deal as a co-GP, we highly recommend that you consult your own legal counsel regarding your unique situation and to make sure that you have an accurate understanding of SEC regulations.

How To Get Started As A Co-GP

To get started as a co-GP in the world of private equity real estate, there are two key areas you need to focus on. One is establishing key partnerships, and the other is building up your investor base.

Establish Key Partnerships

In order to participate as a co-GP in someone else’s deal, you’ll need to first put your feelers out and get to know potential sponsors that you might want to work with.

The best place to connect with potential sponsor partners is through real estate conferences, particularly those focused on commercial syndications. While you can certainly meet people online and schedule Zoom calls, there’s nothing like meeting in person.

Plus, if you’re going to partner with someone on a deal for five years or more, you likely want to take the time to really get to know them, including their body language, what they’re like outside of work, and more.

Our first year in business, we went to roughly 10 different real estate conferences, and many of the partners we continue to work with today are people we met through those events.

Build Up Your Investor Base

As you’re getting to know potential sponsor partners, you should simultaneously be talking to friends, family, and potential limited partners. Let them know what you’re doing, why you’re doing it, and what you hope to help them achieve as far as building their own wealth.

If you haven’t yet found a sponsor partner, put together a sample deal and run that by potential investors to get their feedback. This will also be great info to have as you’re evaluating potential deals to join in on, so you can make sure you’re finding opportunities that your investors would actually invest in.

Take the time to build your brand and educate your investors via blog posts, videos, and other resources, so that they build trust with you and start to see you as a thought leader in the space. 

This will not only help to answer their questions and build their confidence, but it will also build up in them the desire to invest, so when you do find that first deal, they’ll be chomping at the bit to invest with you.

Evolving Your Business Model From Co-GP To Lead Sponsor

Over time, as you gain more experience as a co-GP, you will be able to bring more and more capital to the table and to build up your own team and capabilities, which in turn will allow you to take on more of the responsibilities within the acquisitions and operations of the deal.

As part of this evolution, you may get to a tipping point (say, once you’re able to raise a few million dollars in investor capital), where you can shift from being a co-GP to structuring more of a JV (joint venture) partnership. 

A JV partnership may give you the opportunity to take on more responsibility in the deal, have more control, sign on the loan, raise more capital, and negotiate a higher split for your role.

Over time, as you evolve further and also build up the reserves in your business, you may be in the position to forgo JV partners altogether and become the lead sponsor of your own deals. Full circle moment!

Next Steps

If you’re considering becoming a co-GP, start by talking to your friends and family to gauge the baseline interest. If you start to see some interest, take the next step in growing your brand and educating your investors. 

If you’re already a co-GP and are looking for ways to find more investors and increase your raise capacity, take a look at your existing investor resources and see where there might be gaps and opportunities to provide more education for your investors, to get them more comfortable with and confident in the process.

If the thought of building a brand or writing blog posts sounds intimidating, no worries – we got you. Through our signature Real Estate Accelerator program, we can build your entire brand for you, even if you have no business name or logo. 

We’ll take everything in our business that has worked for raising $100M+ in under 5 years to help you launch your business so you can hit the ground running. Learn more and apply today.