Found out three of my six deals shared a sponsor, after two stopped paying

I spread 12k across six equity deals on one platform over about eight months, 2k each. Different states, different property types, two small multifamily, one self storage, one industrial flex, two build to rent. I felt good about the diversification because I'd been told the whole point of low minimums is deal count.

Distributions on two of them stopped in the same quarter. Same month, actually. I went digging and the sponsoring entity names were different on every offering page, but three of the six rolled up to the same management group. The platform doesn't display that anywhere on the deal page. It's in the PPM, in the section about the manager and its affiliates, and I had skimmed those because I thought the deal-level numbers were the thing to read.

So my 12k across six deals was really 6k across four sponsors, and one of those sponsors had 6k of it. When their construction lender repriced across their whole book, all three of my positions went to zero distributions at once. Two are still holding, one has a capital call I'm not funding.

Marked value on those three is somewhere around 3.9k against 6k in. Might come back, might not, the sponsor's updates are getting shorter every quarter.

What I'd do differently is boring and I should have known it. Before funding anything, find the actual sponsor entity and its principals, write the names in a spreadsheet, and cap the total exposure per name. Deal count was never the diversification. Sponsor count was.

Answer

4samantha_ruizAU4APRO6

The correlation you got hit by isn't really the sponsor's name either, though the name is how you'd have caught it. Those three deals were all funded off the same construction lending relationship and probably the same interest rate assumption. That's the thing that moved together.

So the spreadsheet column I'd add next to sponsor name is capital stack and debt type. Fixed rate agency debt on a stabilized asset and floating rate construction debt on a lease-up are different animals even from the same sponsor, and floating rate construction debt from four different sponsors will still all go bad in the same quarter if rates move. I learned that on the operating side with two bridge loans I thought were unrelated because the properties were 400 miles apart.

Practical version for a platform book: three columns, sponsor entity, debt type and rate structure, and business plan stage. Then look at whether any single value in any column holds more than a fifth of your capital. Six deals at 2k can't clear that test in any real way, which is the harder truth in your post. At 12k total you're picking two or three bets and calling it a portfolio. Not a reason to stop, just a reason to stay clear-eyed about what the money is doing while you build it up.

5 replies

2jordan_ellis2ActivePRO6

The affiliates section being where the sponsor identity hides is exactly the kind of thing I'd never have found on my own. Thanks for writing it up. Is there any faster way to check than reading the whole PPM, or is that just the work?

1paulgrant17PassivePRO5

@pike search the PPM for the word affiliate and read every hit, then search the principals' names in the state business filings for whichever state the entity is registered in. Filing search quality varies a lot by state, some are searchable by officer name and some really aren't. It's twenty minutes rather than two hours.

1diane_kowalskiPassivePRO9

Slightly different read. You had 12k and six positions. Even with perfect sponsor diversification, two thousand dollar slices of illiquid equity mostly buy you an education, and it sounds like that's what you got for 2.1k of paper losses. Cheaper than most educations.

2derekj19SB1B

The part that stuck with me is the updates getting shorter every quarter. That seems like it would be a signal you could act on earlier than the distribution stopping, if you were tracking word count or just whether they answer questions.