Here's a *hypothetical* LP thought experiment: Imagine you invested in a Sunbelt multifamily fund in mid-2022. In the first 1.5 years, your distributions are less than 1% annualized, which is 80%+ below projections. During the same 1.5 years, you received an email from the same GP to invest in the their next fund... And their next fund... And another... And another... AND ANOTHER... AND ANOTHER... AND ANOTHER... A total of 7 new funds. Also, during the same 1.5 years, you received countless emails from the GP to "invest" in coaching programs, educational courses, conferences, and "vacations". Now it is Q3 2023. Seemingly unrelated, a series of devastating wildfires break out in Maui. Now, imagine the GP in our hypothetical thought experiment has a personal connection to the affected area. They elect to send you an email, requesting that you to donate to a relief fund. Fair enough. But, two weeks later, you receive an update on the fund. The GP has paused distributions... Again, since the fund's inception, your actual returns were 80%+ below the projected returns. Now it is Q1 2024. You receive another fund update. The GP says the distributions are still on hold. Also, that the actual performance is ~95% below projected performance... A month later, you receive an email from the GP, announcing...WE'RE LAUNCHING ANOTHER FUND! Don't miss out, because they are only launching ... 2 to 3 "similar" funds in 2024... Shortly after the New Fund launch email (~one week), you receive another fund update. The GP is considering a Capital Call "Alternative"... You are asked to "vote" on one of two options: 1) Sell 2) Bring in outside pref equity (which will have priority over your equity in the capital stack) If you "vote" for option 1, you will receive ~0.4 EM (so will lose over 60% of your investment). If you "vote" for option 2, based on the new projections of lower interest rates, higher rents, cap rate compression, and a 10-year hold, you will receive a 5%-15% ARR and 1.5-2.0 EM. Bonus: You also know that a portion of the GP's other 16 FUNDS are facing distress... Double Bonus: Just today, you receive an email from the GP about their newest fund - they have two deals under contract. The asset names are "intentionally withheld" to "protect confidentiality". But based on their preliminary underwriting, they projected an 18%+ ARR and 22%+ ARR!!!! Of course, their is literally no info on underwriting analysis... Final Bonus: The GP has nearly $1 billion in AUM. ---END OF THOUGHT EXPERIMENT--- Now, based on this total hypothetical thought experiment I just made up, I have the following questions for LPs: 1) Would you vote for option 1 or option 2? 2) Would you invest in their new fund?
@theohicksLP I’d vote sell. Cut the loss, take the hit and go reinvest at today’s basis rather than increasing 2021/22 basis with expensive capital.
@ToryJSheffer Yeah. From the very small sample size of LPs I found, they all voted to sell. Although, they didn’t believe it was a *real* vote. And I don’t know what PPM says.
@theohicksLP I'd be doubtful that the vote has any meaning outside of the GPs putting themselves in a position to defend it in the future by saying it was at the request of LPs to sell and take a hit rather than owning the responsibility of a failure.