Capital Calls 4, 5, maybe 6 ... and one positive surprise

The woes of syndicators continue deep into 2024. As reported on this blog, our portfolio of about 20 deals has had three capital calls in the past year or so. That number has doubled quickly as rates have stayed high longer into the year than some had predicted. Or, at least, longer into the year than many had hoped...

The scenarios were similar but not exactly the same. And now essentially all of the different syndication companies we have invested in with have been affected. No one seems untouched by the challenges of 2024.

The rationale for each of these three recent capital calls was different one to the next. One deal needed a capital call because the real estate taxes in Texas jumped up so, so much (while under appeal, still need to be paid). Another deal in the Sunbelt requires a capital call because the insurance rates jumped so much (nothing to be done but pay the bill?). And a third deal needs a capital call because cost of covering the floating rate debt is eating too far into the cash flow. The market is lousy for selling any of them and, correctly, the syndicators want to play for another day. As do we.

So at this point, 6 out of roughly 20 deals have needed more cash. None have gone under (yet?). A few are still cash-flowing. The majority are neither cash-flowing nor asking for more cash. We continue to have a normal distribution, or bell-curve, in terms of our deals.

And we have chosen to meet every one of the capital calls. We'll see whether that proves to be the right decision in the long run.

"Stay Alive Til '25" is still the watchword for real estate syndications??? Let's hope.

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The upside surprise actually doesn't have to do with real estate syndications, but it struck us as relevant to the story all the same. About a decade ago, we invested in the angel round of a technology start-up. That company chose a good niche, performed well, and gained a loyal customer base. We had a chance to add in a bit more capital and stay at our pro rata share once along the way, which we did--not formally a capital call but functionally the same.

Last week, we got the nice surprise that the company is selling at a handsome profit. We will get a good multiple on the original investment. There was no notice--just a pure "upside surprise."

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Putting these two recent experiences together:

Why is this relevant to the Syndirater story?

One, private investments have a way of "popping" at unexpected times. You shouldn't be investing in this kind of thing if you need the cash on a regular basis. But if you can cover your costs of putting food on the table and shelter for your family through other means, you can get paid for accepting the illiquidity of these deals.

Two, in this space, you have to be OK with the investments being really out of your hands. You're not the decision-maker if you're an LP in a syndication or an angel investor in a tech start-up. The big choices are made by others. You don't have to worry about the tenants of the apartment building, nor the hiring of staff for the tech start-up. But you also don't get to make the call if it is time to sell, time to hold, time to seek more cash from investors--you are along for the ride. That's true of course for stocks and bonds in the public markets. But with the private deals you can't just "sell" when you like.

Bottom line: buyer beware. Know what you are doing when you invest. The rewards can be terrific but the ride is unlikely to be smooth or for the faint of heart.