Equity Financing: Start Before You Need It
The first time we engage with a new client they often have a deal under contract with a relatively short window to line up equity capital. Maybe they’ve outgrown friends and family capital raises; maybe a potential joint venture partner fell out. Whatever the reason, when you’re already under contract is not the best time to find a new equity source. In our experience, the time to start cultivating a new equity relationship is long before you need it on a particular deal.
“Getting to know you, getting to know all about you.”
Rodgers & Hammerstein
The King and I
Equity sources will become your partner. They want to get to know YOU…your team, track record, investment philosophy, management skills, reporting capabilities, deal flow, market knowledge, etc…looking for an alignment of interests that goes beyond “skin in the game”. Knowing they can rely on you as a partner is more important than any single transaction.?
As a sponsor you need to know about them. What is their source of funds? What are their investment hurdles and timing constraints? How does their process work? Who is the decision maker? What are their hot button issues? How much control will they want? Are you comfortable with them as a partner should there be a bump in the road?
The get-to-know-you period can take a fair amount of time.
I once asked a client how long it took him to get a commitment on his first joint venture deal with one capital group.
“Thirty days”, was his answer.
“Yeah. But how long were you speaking with them about deals before you showed them that one?” I asked.
His reply? “Three years.”
We recently obtained an equity commitment for the acquisition of a value-add multifamily transaction. The first meeting we arranged between the sponsor and this particular equity group was seven months earlier. Since that first encounter we’ve presented several transactions for review.? Some deals we closed with other capital sources; some just didn’t happen.? However, those deals gave the equity group opportunities to review our client’s process and get comfortable with them as a potential partner. The latest transaction was not a fit for our client’s previous sources due to size and timing; however, the new capital group was ready to step in.
“Louis, I think this is the beginning of a beautiful friendship.”
Rick to Inspector Renault
This week an equity group reviewed a new submission from us. While they are passing on the deal because of timing issues, they are intrigued by our client’s track record and are interested in exploring a relationship. So it’s not this deal, maybe not the next one, but starting the process now greatly increases the chance of success down the road.?
We’re not saying it takes seven months to three years to establish a relationship. The main point is that it you should expect it to take longer than the due diligence period you happen to be under right now.
So even if you don’t have a deal today, give us a call and let’s discuss how we can help you find an equity partner going forward. It’s never too early to start. Check out our Transactions page for information on some of our closed deals.