It’s not surprising that real estate syndication has become an increasingly popular model for raising capital. Sponsors appreciate the ability to execute deals quickly, and investors enjoy the level of control that comes with deciding which deals they want to participate in.
However, sponsors must reckon with several limitations that make it difficult to scale this model. Syndications require you to raise capital only on a deal-by-deal basis, and because every deal must be set up individually with its own PPM, they can be expensive and time-consuming to launch.
A customizable fund, on the other hand, allows you to access all the benefits of syndications without the usual drawbacks. In particular, there are four major advantages to the customizable fund model that differ from real estate syndications.
1. Significant Cost Savings
Because our team at Avestor has built an end-to-end solution for the setup and management of customizable funds, we’re able to significantly reduce costs for new sponsors. Our one-time setup fee is 50% less expensive than traditional pooled funds, and includes:
- Entity formation
- Exempt Reporting Advisor registration
- SEC and state-level disclosures
- Subscription agreement
In fact, the cost of setting up an evergreen, customizable fund is similar to the cost of launching a single syndication deal.
2. The Ability to Raise Capital on Your Own Timeline
When you create a customizable fund, it gives you the ability to continuously fundraise outside the timeline of any one specific deal. Investors who decide to participate in the fund will initially choose one or more deals to invest in and allocate a certain amount of money to each of those deals.
Rather than requiring you to raise capital on a deal-by-deal basis, a customizable fund is evergreen. You can add new deals to the fund at any time, and investors can choose to add more capital to participate in new deals, or to reinvest their distributions over and over.
With a traditional syndication deal, investors must join by a specific deadline in order to participate. A customizable fund, on the other hand, allows you to build your investor base over time, raising capital and onboarding new investors 365 days a year.
3. Greater Business Model Flexibility
Unlike a traditional syndication, customizable funds allow sponsors an enormous amount of flexibility as they scale. One customizable fund can include multiple asset classes and even different asset types, including debt notes, syndication deals, and fixed interest notes.
Sponsors also have the ability to adjust their business model on a deal-by-deal basis, rather than needing to create a separate fund each time they want to try something new. This once again reduces costs for sponsors, and it’s an added bonus for investors who are interested in diversifying their portfolios.
4. Reduced Risk for Sponsors and Investors in a Recession
Along with diversification for investors, customizable funds have several other characteristics that reduce risk for both fund managers and for investors.
With a customizable fund, investors can fractionalize their investments across your fund. This creates a lower barrier to entry for investors who want to diversify, but can’t afford to invest in multiple syndication deals that have high thresholds for participation.
Additionally, the ongoing nature of a customizable fund builds trust between fund managers and investors. This is especially important in periods of economic uncertainty. Investors are much more likely to trust you and look to you for guidance if they already have a relationship and a successful track record with your fund.
For sponsors, the cost savings and added flexibility of not needing to adhere to one deal timeline are especially important when the economy is underperforming. And because capital stays in the fund, there are still opportunities to invest in new deals if one falls through.
If you’re interested in learning more about how a customizable fund can help you grow your business more efficiently than syndications, please contact us to schedule a time to talk.