by Marc Halpern, Part Time Investors LLC
August 29, 2024
I am an accredited private investor. I am your target audience if you are raising capital for a private placement investment. In this article, I will tell you what I like to see when you pitch me an offering and what are my pet peeves during all stages of that pitch from meeting you on the lunch line at a conference to performing DEEP due diligence after significant screening of your private placement offering.
As an added incentive, be aware that if you pay attention to the content of this article, you will likely be more successful with a larger group of investors. I founded a group of private accredited investors (currently 57 members) who form teams to perform DEEP due diligence (DDD) on private placement offerings that meet the investment criteria of members who have cash available to deploy at that moment. Our group is the DDD Mindset Club and our members enjoy massive deal flow, up to about 300 private placement offerings per year. Since each of our members invests in 2-6 private placement investments per year, that means that we reject 98%-99% of the deals we are pitched. That’s what you’re up against as a capital raiser.
As a result, we have established screening mechanisms to avoid wasting humongous numbers of hours chasing deals that don’t make sense or don’t meet the diverse and changing investment criteria of our individual members.
Following is a NON-COMPREHENSIVE and NON-PRIORITIZED list of do’s, don’ts and comments if you want to raise capital from passive LP private investors like me and my colleagues at the DDD Mindset Club.
1-Pager: Create and send me a 1-pager that I can browse in 30-60 seconds to get an idea if your private placement offering is even in the ballpark of meeting my investment criteria at that moment. The 1-Pager should specify:
project name or fund name
asset class
a short paragraph describing the investment
the preferred return
the equity split
the waterfall if there is one
the expected timing of distributions and milestones
a range of target IRR’s (believe me…I will challenge every assumption that goes into your IRR projection!)
a minimum investment amount (that we know is usually flexible)
a very brief description of the team’s experience/track record and
your contact information.
Alternative to 1-Pager: If you don’t have a 1-Pager and you want to pitch the deal to my group, complete the form shown at https://www.parttimeinvestorsllc.com/sponsor-info-upload.
Confidential Information: If you want me to proceed to DEEP due diligence (DDD) with my team members, grant written permission to do so. Most offerings are marked confidential so if you don’t provide written permission to share with my group members, you reduce the probability of being considered seriously.
A pitch deck is NOT a 1-Pager: Do not send me a 35-page pitch deck in place of the 1-Pager. Don’t make me waste time searching the 35-page pitch deck for more than 60 seconds for the key summary information that should be in the 1-Pager. As a data freak, I definitely want all that information AFTER I decide to proceed to preliminary due diligence but don’t make me do an archeological dig to sift through dozens of pages to find the most important basic information when I am screening dozens of Emails when I wake up in the morning.
Pitch Deck: Having said that, feel free to send a pitch deck IN ADDITION to the 1-Pager so I can proceed to preliminary due diligence if the 1-Pager meets my investment criteria at that moment.
Sensitivity Table: In your pitch deck, include a table with a sensitivity analysis that shows potential IRR’s at various future cap rates and average rents at exit (rent is usually the biggest contributor to NOI) if the offering is related to commercial real estate (multifamily, NNN lease industrial sale-leaseback, etc.). The reality is that no one can predict an IRR with 3 significant digits. Estimated returns are best communicated as an EXPECTED RANGE. Know that I will eventually challenge the assumptions that go into those estimates, so don’t do a poor job by overselling since that will kill your credibility going forward.
“5 Minutes:” If you don’t already know me, don’t ask “can we chat for 5 minutes?” I do not have time to chat for 5 minutes with 300 sponsors! This is one of my biggest pet peeves along with “can I take you out to lunch to pick your brain?” My brain is not roadkill that should be picked at! My time is a lot more valuable than my money and they are both more valuable than you perceive.
Track Record: Did you continue buying highly leveraged assets in early 2023 that you pitched to investors even as you realized that interest rates were rising too high too fast? If you did, you will likely not pass our DDD. Maybe you needed to maintain your pipeline, but I am questioning your decision making abilities.
More Track Record: Your track record pre-March 2022 is not relevant now in 2024 unless you explain how different your assumptions are now versus pre-March 2022 for choosing investments. As you know, many syndicators and sponsors who were wildly successful pre-March 2022 were forced into capital calls, mezzanine debt rescue capital or even total failure in late 2022 through July 2023 and beyond. Macroeconomics are so different now in 2024 that it is hard to correlate pre-2022 decision making with decision making today in 2024 unless you were super conservative with financing pre-2022 and you’re lucky enough to not have suffered from oversupply in your micromarket (e.g., local overbuilding in self-storage). If you are reading this in 2026 or later, adjust this thought process for your current market conditions and current macroeconomics.
Communication: If you have bad news, let the investors know soon and often. I get it…it is very unpleasant for both the sponsor and the investor to confront bad news or devastating news but non-disclosure ruins the relationship if you want to have any credibility for future investment in the long term.
Every Investor is Different, Especially as it Relates to Income and Growth: One size definitely does NOT fit all! Be aware that every private investor has different targets for income, growth and ratios between income and growth. Moreover, the ratio of income to growth in an investor’s portfolio changes as the investor proceeds through different life stages. For example, if your private placement offering is projecting first distributions in 3 years, investors who happen to be focusing at that moment on short term income, will not be interested. In another common example (that irritates me!), sponsors are often surprised when I reject their offering of a deal in which they very skillfully create huge equity in the first 5 years, then refinance to return my initial capital investment and claim that my cash-on-cash return is infinite thereafter. What’s the problem with this seemingly great pitch? I reject your offering due to the fact that after your outstanding 3-5 year equity creation period, I am looking at cash-on-EQUITY return, NOT cash-on-CASH return. If you have skillfully created 80%-90% of the maximum possible equity in those 5 years, I might want to cash out the proceeds from that equity in order to redeploy in whatever is more appropriate 5 years later, especially if I am using self-directed IRA/401(k) funds or their Roth equivalents when I don’t pay tax upon exit (not even UDFI for self-directed 401(k) investments, like I have). I don’t want 10% on my initial capital contribution five years later if I can invest it at 15% or even 20% at that same moment five years later. I see this a lot in mobile home park offerings and other offerings.
For Fund Managers: It’s not a winning strategy to ask for a commitment with 10% upfront and call the rest of the 90% capital over an unknown time period. That might work for investors rotating out of stocks into private placement investments but most of us private placement investors want to deploy available capital and have that capital accrue value as soon as we complete our process to identify, screen and approve attractive deals.
Apartment Syndications in 2024: Apartment syndications are undergoing much more scrutiny in 2024 than before the Fed started raising rates in March 2022 and private investors like me are looking at a lot of other asset classes these days. It’s not quite as bad as the office sector since COVID-19 (though there actually are opportunities in Class A office right now), but apartment syndications have suffered from negative perceptions due to widespread distress and capital calls. You can still impress a private investor today if the opportunity pencils well without aggressive assumptions, but expect more resistance these days if you’re pitching a multifamily deal. If multifamily is all you do, you better be best-in-class with excellent justifications that will pass DEEP due diligence.
Capital Calls: When faced with the need to call capital for a project that needs rescue, consider mezzanine debt as rescue capital since many investors do not want to throw good money after bad money. I heard but cannot verify that 2/3 of capital calls fail to get the money from the LP's. Of course mezzanine debt is bad for the existing investors since the "mezz debt" becomes senior to common equity. Even rescue capital cannot rescue all projects. I am currently being asked to fund mezzanine debt as rescue capital for an apartment deal I’m already in with common equity. This is not a pleasant investment to make.
Be Upfront with Discussion of Risk: If you want to reinforce credibility, address key risks in the introductory pitch deck or webinar. If 100% of the presentation is rosy, that’s a red flag. There is one sponsor raising hundreds of millions of dollars over the past few years that I refuse to watch their webinars because they are 100% rosy. In addition, one of my pet peeves is Email pitches that include hype such as “Imagine the impact on your family’s future if you invest in this offering!” The person who wrote that clearly has no understanding that a prudent private placement investor does not put so many eggs in one basket that the one investment will have that magnitude of an impact on that family’s future. I don't know if that is a rookie mistake or simply ignorance of private investor thinking after attaining accredited investor status (which is easy to do in 2024 until legislation changes).
Very Effective Prospecting for New Investors: There is no substitute for face-to-face meetings and the best place to meet us investors is at investor conferences where our primary goal is looking to meet sponsors, like you. HOWEVER, don’t expect to meet with me for more than 5 minutes at a time unless I ask you for more information. Do not try to hold on to me for 30 minutes at a reception when I’m trying to maximize the number of new opportunities I learn about. If I’m interested, I’ll proceed to deep due diligence after the conference anyway. In fact, YOU shouldn’t be wasting more than 5 minutes of YOUR time pitching me when you could be making more contacts and increasing your probability of recruiting new investors. My number one venue for meeting the highest number of sponsors in the widest range of asset classes is Family Office Club events. BEC is quite good, though mostly for real estate. As a capital raiser, be aware that we investors are investing in diversified asset classes outside of real estate. I am hoping that with the new formation in August 2024 of Passive Pockets (from Bigger Pockets), this organization will put on some valuable high-attendance events for networking and education for private placement investing. If so, I'll be attending (maybe even as a speaker if invited, like at Family Office Club and BEC).
Business Cards: Most of you will cringe at this topic which is a pet peeve for me. When you meet with investors at investor conferences, be aware that a certain percentage of investors who have money that you want, are over the age of 70 and still want to write handwritten notes on business cards that are not glossy that they put in their wallet and read on the plane home. You can’t write on impressive metal coins and a 5-second exchange of electronic information while waiting online for food, will get lost in the electronic nirvana of a 70-year old’s smartphone. Bring business cards for those few investors who prefer them or decide that you absolutely do not want their money. Just because you throw out business cards in your hotel room, that is not relevant to investors who have been using business cards for 30-40 years who have the money you are chasing. Don’t tell me that I need to get an app that will organize my notes on each sponsor and send me electronic reminders. If you don’t want my money, then insist that I comply with your smartphone app. If you want an example of the perfect business card of a master capital raiser, contact Dan Zitofsky (www.zitofskycapitalmanagement.com).
Whova and Email: When reaching out to potential investors through the Whova app at investor conferences such as Family Office Club and BEC or by Email, prepare in advance a one sentence summary of why I should connect with you and paste it into your inquiry. Make sure it is INVESTOR-CENTRIC!! The worst Whova message is the default “I would like to exchange contact information with you.” This gives me absolutely zero incentive to respond! This is also the most common message I get on Whova. Another poor version in Whova and LinkedIn reads: “Based on your profile, it looks like there are many ways we can help each other in 2024. Let’s connect” Really?! What ways are those? Did you even read my profile? Believe it or not, I actually respond to about 30-40 Whova requests at each Family Office Club event and I prepare in advance my own 1-sentence message in my Notes app that I paste into Whova when someone gives me a reason to respond!
Skin in the Game: Invest your own real cash in the deal you are pitching to me or better yet, put your 2% fees at risk to be paid upon exit if you’re raising $100 million. Otherwise I have to wonder if you're in this for the fees or pay-for-performance. If I want to pay people for buying and selling assets regardless of performance, I can always invest with the big stock market brokerage houses.
This is obviously a non-comprehensive list of do’s, don’ts and comments and they were written in the order I thought of them, not in order of importance. I may add more to this list in the future if I think of something that you need to stop doing that pisses off investors.
The bottom line is that you must do the obvious which is to look at every aspect of your pitch from the INVESTOR’S standpoint and NOT YOUR standpoint, in order to maximize the probability that I will first even consider your offering and subsequently proceed to DEEP due diligence.
For more information on the DDD Mindset Club to join with other critical thinking private investors to perform joint DEEP due diligence to improve performance and minimize risk, click here.
If you’re interested in learning how to be a much more sophisticated LP, check out my course “High-Return Private Placement Investing: Best Practices & Risk Management” click here.
