The syndication craze from 2018-2022 taught the market some expensive lessons, as we all know.

During that market run, investment dollars were flying around and deals were selling quickly. Many LPs weren’t asking the hard questions. As a result, they ended up investing with sponsors who clearly didn’t have a competitive advantage.

Here’s the question every passive investor should be asking GPs (but often don’t):

“Why are you and your team the best people to execute on this deal or strategy? What’s your competitive advantage?

If you’re an LP, here is who you don’t want to invest with: An out-of-state operator pursuing broker deals in a competitive market with no vertical integration, no management, no construction capabilities. They’re chasing the same 1980s B-class value-adds that everyone else wants, but they have no clear edge.

Who You Do Want To Invest With?

Specialized focus with demonstrable advantages. A robust direct-to-seller pipeline. Deep local relationships. In-house property management or construction. Unique financing relationships. Strong connections with local zoning boards. Maybe a specialized operational or value-add strategy like converting units to furnished midterm rentals.

The key

They should have a very clear answer with specific examples of why they have an edge over their competition.

Moving forward, focus on partnering with specialized sponsors who can demonstrate their competitive advantage – not generalists looking in multiple markets without a clear edge.

Given that most projects carry roughly the same projected returns (at least in value-add multifamily), LPs need to critically evaluate the team who is delivering these returns… and evaluate the likelihood they will exceed them.