Protecting the Limited Partner in a Deal

New limited partners don't know what they don't know

Sep 10, 2024

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We recently spoke with Aleksey Chernobelskiy on our Breaking New Ground podcast. In our conversation we discuss his journey building his new business protecting LP investors after managing a multi-billion dollar institutional real estate portfolio. He currently advises Limited Partners (LPs) on the pitfalls of investing in private deals. In the episode, we also discuss the role social media has played in helping him build this incredible business.

For investors, private deals can be very rewarding, but if done incorrectly, they can result in more risk than reward.

If you are or are considering participating in a private equity real estate deal as a limited partner you should check out Aleksey’s Substack Limited Partner (LP) Investing Lessons.

Below is the embedded episode and here is a link to the episode on Spotify.

Topics we cover in this podcast episode:

Transitioning from being a W2 employee to becoming a trusted advisor in commercial real estate
The underserved market of limited partners in the syndication space
The importance of education in making informed investment decisions
The need for transparency in the industry and bridging the gap between LPs and GP
How social media allows the development of relationships at scale and how you can reach a larger audience than with traditional channels
Authenticity and engagement with the audience are key to building a following
Strategic considerations include deciding between building a company or maintaining a flexible lifestyle
Learning from other business models and seeking advice from experienced entrepreneurs to help navigate the challenges of business growth

Why This Conversation Matters

The number of newbie limited partners has increased substantially over the past 10 years. Especially from 2018 to 2022 when real estate was booming. Many new players began syndicating money from retail investors. Some, not all, of these syndicators, promised investors “guaranteed” big returns on deals they knew were thin to begin with.

Experienced real estate operators know this type of behavior is dishonest at best and, at worst, can wipe out investor equity completely. Over the past 12 months we have seen massive implosions of some of the biggest multifamily syndicators, such as Tides Equities, GVA Real Estate Investments, and Think Multifamily.

Here are a few links to stories describing this phenomenon.

Many Baby Boomers and Gen-Xers in our country over the past 30 years have experienced significant growth in their wealth. This has resulted in a large amount of new money in the hands of novice investors. Unfortunately, this has created a vacuum that many questionable characters have stepped into.

That is not to say all multifamily syndicators are bad, many are just fine and are doing their best to access the capital available to them. But where there is a large amount of money to be made, there will be crooks who take advantage of the situation.

Below are just a few actual deal terms limited partners should be concerned about on private real estate investments.

How much are the general partners getting paid in fees versus how much they are investing in the deal? If they get “cashed out” with their “acquisition fee” or something similar, then they don’t have enough to lose.
Does the marketing material for the project present “guaranteed returns"? The general partners are a fiduciary for your money and no returns can be guaranteed…ever. That is the essence of an equity investment; you get wiped out first if the project doesn’t perform.
Is there a “bad boy” clause in the contract that allows the LPs to take over if the project is poorly managed or fraudulently managed?
What percentage of the general partnership’s assets are invested in the project? This is easier to discuss if you have an existing relationship with the GP. If not, then at the very least you need to understand how much of the firm’s total capital is invested as opposed to being invested in other deals.
How many deals are the firm currently committed to and/or invested in? It’s important to understand the general partner’s business strategy to determine if they have the potential to be “spread too thin” from an operational standpoint.

I could go on, but if you’re interested in this topic I suggest you do some research and follow along with Aleksey Chernobelskiy. From what I have observed he is the real deal and truly cares about investor outcomes.

Cheers, John

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