Why it is So Hard to Find Joint Venture Equity for Real Estate…
Article by, Brent Virkus – President and CEO of TRiTON Capital Advisory
One of the most frequent questions we get from our clients is “Why is it so hard to find Joint Venture equity for real estate”? In this article, we are going to outline exactly why this is….
There’s really five main challenges real estate professionals face when trying to locate private equity funds that provide Joint Venture equity.
- First, it’s virtually impossible to find true Joint Venture equity funds that focus on real estate. Most of the database services out there highlighting capital sources focus on venture capital funds for start up business rather than real estate. There are a few, but the data contained in these services is usually dated and not accurate. Not being able to simply sign up for access to a database of Joint Venture equity sources forces real estate professionals to more traditional methods such as search engines.
- This leads to the second challenge. When you use search engines the firms that come up are typically the firms that have been around for a long time. These are not the best sources of capital, especially considering the real estate crisis we just came through. The older more established funds are still trying to clean up the mistakes they made over the past ten years. The funds that are active are the startups and these rarely show up in the search engines.
- The third challenge – when you do finally find a potential Joint Venture equity source, it’s difficult to determine whether they are truly looking for deals and what their focus is. The only thing you have to go on is their website, which is rarely up to date or accurate.
- The fourth challenge we face is it’s virtually impossible to locate the appropriate person to submit your deal to. Originators for private equity funds are constantly changing funds. This said, once you do locate them, they rarely will return your phone call unless you are with one of the national firms.
- Finally and probably most importantly, the fifth issue. Once you’ve get through the first four challenges and have actually found what you feel is the right source, you need to make sure they actually are the money and not just a broker representing they are the money. So many times real estate professionals fall for this trick. In an effort to get deal flow, the broker represents he or she is the capital, takes a due diligence deposit from you and once engaged, tries to shop your deal to other equity sources. When they are unsuccessful in sourcing the capital, they make up an excuse as to why your deal no longer works and you are left under contract with hard money up and no capital to close your deal.
Knowing the five challenges a real estate professional faces when trying to find Joint Venture equity, we thought it would be valuable to walk you through how the private equity world actually works.
Joint Venture real estate capital runs in cycles driven off of the current real estate market, availability of capital in the conventional markets and how and where they get their funding.
Let’s look at the current cycle:
When the real estate market collapsed in 2007 and the credit crisis came into play, an opportunity was born for private equity funds, with the goal of equity type returns, to focus their investment strategy on providing mid to high level senior bridge loans. With conventional financing basically non-existent and the banks needing to get deals off their books quickly, private equity funds were able to focus on quick close bridge debt rather than Joint Venture equity and still achieve equity type returns to their investors without taking on equity type risk in the deal. Hence, every fund that was set up to do Joint Venture equity no longer needed to take on equity risk to achieve their target returns and simply became a bridge debt fund. This point in the real estate cycle virtually eliminated all true Joint Venture equity funds.
As we have moved further into the real estate recovery, conventional credit markets have loosened and the need for a quick close has significantly reduced. True bridge debt sources are now able to leverage their portfolio bringing the rates on bridge debt down to the mid single digits. Private equity funds looking for equity type returns are no longer able to achieve this in the bridge debt world so they are now forced further up the capital stack. The same funds that were doing bridge debt are now focused on Mezzanine and Preferred equity financing to achieve their required return on investment.
As things continue to improve, these same funds that are now focused on Mezzanine and Preferred Equity will be forced back into true Joint Venture equity structures as the ability to achieve Joint Venture type returns will no longer exist in the Mezzanine and Preferred Equity world.
This whole cycle is what makes it virtually impossible to find Joint Venture equity funds focusing on real estate. If you are forced to identify and research capital sources through a website to determine if the fund is the right group to bring your deal, you will continually be mislead and fail to raise the capital you need. This is because private equity funds are constantly changing their investment focus to meet the demands of the current real estate cycle, manage fund diversification and to accommodate their own capital raise cycles. It’s impossible to keep a website up to date so their solution is to just say they do everything…
So how does a real estate professional work though these difficult challenges when trying to raise Joint Venture equity?
The key is database management. You need to build a long term database of contacts and constantly be updating each funds focus within your database. Until someone comes up with a database focused on just Joint Venture equity for real estate and does this for you, there is no other way to know who to call, with the obvious exception of hiring a good Joint Venture equity placement company. As I’m sure you can attest, finding a good joint venture equity placement is much easier said than done…
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