Who can you trust?
You want to invest in real estate, and you spent a lot of time looking at different private equity real estate firms to try to figure out who you should invest with. They all seem like they are good PE Firms. But how do you really know if they are credible?
The answer is - you have to do your due diligence. In the private equity world, we call this vetting.
To properly vet a PE firm, there are a number of things that you need to review that will provide you with most of what you need to get a feel for how successful your investment is likely to be. Once you have that information, and have thoroughly reviewed it the next challenge you have as an investor is to verify what the private equity real estate firm you are vetting has told you.
First, let's look at what types of information you should review and then will talk about how to verify that information.
What Information Should You Request From A PE Firm?
There are a number of specific pieces of information you should request from the private equity real estate firm you intend to work with. Most of this information is designed to give you some insight into their level of experience and their prior track record with investments of a type similar to the one you're contemplating. I recommend that you request or review at least the following:
- Review resumes and background information for the management team
- Review a listing of prior investments the company has made along with the necessary metrics for you to determine how well the investors did on each of those transactions
- Review management's and the company’s social media presence including LinkedIn
- Review the company's website
- Complete a simple Google search for the company name and the management team
- Of course you will have to review the Private Placement Memorandum and Operating Agreement for the deal or fund in which you would like to invest
- Schedule and call with a member of the management team and ask them questions designed to convince you that they do in fact know what they're doing and that they put their investors first
- Review the fee structure associated with the deal or fund you are considering to make sure that your goals and management's goals are as closely aligned as possible
I could easily double the size of this list. What is important though, is that you do enough research to get comfortable that the firm and the management team have the necessary experience investing in the types of deals you are contemplating.
It is impossible to predict what sort of difficulties or challenges the management team will face during the period in which the property is owned. However, it is critical that you make sure the management team has enough experience to successfully manage whatever challenge lies ahead.
Oftentimes investments and projects fail because management was not able or did not have the necessary experience to deal with the challenges that face the investment. A perfect example of that is the challenges that were brought about by the pandemic of 2020.
How to Verify the Information the PE Firm Gave You
OK, you've done your homework. You have reviewed all of the possible available information. The private equity real estate firm you want to invest with seems like a great firm. Now comes one of the most difficult challenges investors face. That challenge is verifying the information that the company provided to them during the vetting process .
Do you just assume that everything they told you is correct? Absolutely not!
To properly vet a private equity real estate firm, you should attempt to verify their track record and their experience. To do this properly, you should review source documents such as settlement statements, tax returns and maybe even bank statements. You should run a background check on the company and its Founder. You should check with their legal counsel and outside CPA firm to confirm that they're actually clients of the firm.
Seems like a lot of work, and it most definitely is. However, if you skip this step in the process you run the risk that the company you're investing with has inflated their track record or worse yet, has had legal or law enforcement problems in the past that have not been disclosed to you.
The reality of the investment world is that almost no investor, other than institutional investors, does the homework they should do prior to investing. Here at KRI, we have found a much simpler way for investors to vet our firm. We have paid an outside company called Verivest to review and verify our 20 plus year track record. That review included a review of the settlement statements on all our prior investments, a review of prior year tax returns, operating agreements, a complete background check on me and finally they even monitor us on an ongoing basis to ensure that we are following our operating agreement. We believe this company provides an invaluable resource to the private equity real estate industry. I strongly encourage you to see if the firm you are planning to work with has been “Verivest Verified” as we have been.
As I wrap this up, let me leave you with one important thought. Regardless of how you vet the PE firm you are considering an investment with, please make sure that you do take the time to vet that firm. It will be much easier for you to sleep at night knowing that you did your homework and the firm that you are investing with is credible.
Please Note: Neither KRI Partners, nor any member of our management team owns any part of Verivest nor are we being paid to recommend them. I cite them as a valuable resource only because they seem to solve a very important problem that investors face when vetting a private equity real estate firm.
