Due Diligence Framework for Private Equity & Real Estate Syndications
This framework is designed to help investors look past the glossy marketing brochures and understand the nuts and bolts of a deal. In private investments, you typically cannot sell your shares easily; you are married to the deal for 3–7 years. Therefore, the goal of this framework is not just to find high returns, but to protect your principal.
1. Sponsor Review
Concept: In private markets, the quality of the operator (the Sponsor/General Partner) is often more important than the asset itself. A bad sponsor can ruin a great building; a great sponsor can salvage a mediocre business plan.
Track Record & Experience
- How many deals has the sponsor completed, and what were the outcomes?
- Have they operated successfully across different market cycles—not just bull markets?
- Are past investors willing to reinvest
Team & Capabilities
- Who is actually making decisions day-to-day?
- Do they have in-house capabilities (asset management, acquisitions, capital markets) or do they outsource everything?
- Is the team stable, or is there frequent turnover?
Alignment & Transparency
- How much of their own money are they investing alongside us?
- Are their incentives clearly aligned with investor outcomes?
- Do they provide clear reporting and forthright updates, both good and bad?
Operational Discipline
- Do they have repeatable processes, risk controls, and real infrastructure—or is it a “hero model”?
- Are they realistic in their underwriting or consistently optimistic?
2. The Fee Stack: What Are We Paying For—and Is It Reasonable?
Concept: Fees are necessary to keep the lights on, but excessive fees create a drag on returns. You need to know if the Sponsor gets rich with you or off of you.
Upfront Fees
- Acquisition fees, due diligence fees, financing fees.
- Are these fees market-standard, or unusually high?
Ongoing Fees
- Asset management fees, property management fees, fund administration fees. Standard: 1% to 2% of revenue or invested equity.
- Do they scale reasonably as the portfolio grows?
Back-End Fees & Promote
- Carried interest, performance incentives, refinance fees, disposition fees.
- Is the promote structure fair and tied to true outperformance, not mediocre returns?
- Standard Structure: Investors get 100% of returns up to a certain point (the “Preferred Return,” usually 6–8%). After that, profits might be split 70/30 or 80/20 (Investors/Sponsor).
Total Cost Burden
- When you add up all fees, how much of the gross return goes to the sponsor vs. investors?
- Would the deal still make sense with average—not perfect—execution?
3. Stress Tests (What Could Go Wrong?)
Concept: The brochure shows the “Base Case” (what they think will happen). You need to look at the “Downside Case” (what happens if the economy tanks).
Downside Scenarios
- What if rent growth or revenue growth is flat?
- What if occupancy dips?
- What if expenses rise 10–20%?
- What if interest rates stay high or increase further?
Valuation Sensitivity
- What happens to investor returns if the exit cap rate is 100 bps higher than projected?
- How much of the business case depends on selling at the “perfect” price?
Liquidity & Cash Flow Sensitivity
- Does the deal survive low-cash-flow periods without requiring emergency capital?
Macro Shocks
- If the economy slows down, is there room to absorb the hit?
Exit Assumptions
- Sponsors predict what they will sell the asset for in 5 years.
- The Test: If they have to sell for less than they bought it for, do you lose all your money, or just your profit?
- Cap Rate Check: Ensure they assume the market will be worse when they sell than it is today (this is conservative). If they assume the market will get better, they are gambling.
4. Liquidity Planning (Getting Out)
Concept: Private syndications are “illiquid.” You cannot click a button and sell your shares like a stock.
Liquidity Profile
- Is this a closed-end fund, open-end fund, or single-asset deal?
- Are there any redemption options or secondary markets?
Distribution Expectations
- Is cash yield realistic? Has the sponsor historically hit their distribution projections?
- Are distributions dependent on refinancing?
Exit Pathways
- What are the primary exit strategies (sale, refinance, roll-up)?
- Is there more than one credible path?
Lockups & Gating
- What are the restrictions on redemptions or liquidity events?
- What triggers a pause in liquidity (gates)?
5. Capital-Call Pacing (The Checkbook)
Concept: Depending on the structure, you might not send all the money on Day 1.
Fund vs. Single Asset
- Single Asset: You usually wire 100% of your investment upfront.
- Fund: You commit an amount (e.g., $100k), but they only “call” (ask for) the money when they find a deal.
Funding Schedule
- Are capital calls front-loaded or paced over time?
- What portion of total commitment is typically drawn in the first 12–24 months?
Sponsor Behavior
- Do they over-call early and sit on cash?
- Do they under-call and then scramble during tight periods?
Cash Drag vs. Deployment Risk
- Is the fund likely to deploy quickly?
- Are we prepared for slower pacing in challenging markets?
Investor Considerations
- Do we have adequate liquidity to meet calls without forcing sales elsewhere?
- What notice period is provided?
6. Monitoring Cadence (Watching the Store)
Concept: Once you wire the money, the communication style changes. You need to know what to expect.
Reporting Quality
- Quarterly reports should include performance metrics, cap-ex updates, leasing/operational updates, financials, and clear “what’s going well vs not.”
Communication Cadence
- Quarterly reporting minimum; monthly or event-driven updates preferred in volatile markets.
- Is there a dedicated investor relations contact?
Performance Tracking
- Monitor distribution trends, occupancy, budget-vs-actual, leverage ratios, DSCR, and project timelines.
- Compare results to the sponsor’s original underwriting.
Governance & Transparency
- Are material changes disclosed promptly?
- Are we able to ask questions and get real answers?
7. Decision Framework Summary: The “Go / No-Go” Test
A deal is strong if:
- The sponsor is proven, aligned, and transparent.
- The fee load is competitive and justified.
- Stress tests show durability in normal and adverse markets.
- Liquidity risk is understood and acceptable.
- Capital-call pacing matches our planning.
- Monitoring expectations are clear.
If more than one of these pillars raises concerns, the default answer should be pass.
Summary Scorecard
| Category | Green Flag (Good) | Red Flag (Warning) |
|---|---|---|
| Sponsor | Has sold assets; invests own money. | First-time sponsor; 0% co-investment. |
| Fees | Acquisition < 2%; Clear hurdle rate. | Acquisition > 4%; No hurdle rate. |
| Stress Test | Can survive 75% occupancy. | Needs 95% occupancy just to pay debt. |
| Debt | Fixed rate or strict rate cap. | Floating rate with no cap. |
| Communication | Quarterly reports; K-1s early in the next year. | "We'll update you when there's news." |
Disclaimers: This article does not constitute professional advice. Information is accurate at the time of writing but may be subject to change.
Content is intended for informational purposes only and should not be considered as financial advice. Please consult with a professional financial advisor and perform your own analysis before making any decisions. It is very important to do your own analysis before making any investment based on your own personal circumstances.
Advisory services are offered through 25 Financial, a Securities and Exchange Commission Registered Investment Advisor.
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