Platform diligence or deal diligence, because at twelve positions a year I only have room for one

Question

My scoring sheet has two halves and I've started to notice I only ever fill in one of them properly.

The platform half is things like how many offerings they've taken all the way to a realized exit, whether they publish the losers next to the winners, how they handle a sponsor who stops reporting, and where their fee sits in the stack. That work is slow the first time and then almost free. Once I've done it for a platform, every deal that comes through inherits the score.

The deal half is the actual underwriting. Rent assumptions, exit cap versus entry cap, the sponsor's realized history on this property type at this size, the waterfall, the extension options on the debt. That work does not amortize. Every deal costs me the same three or four hours and I've been skipping to the summary page more often than I want to admit.

The case for going platform-first is that the platform is a filter I can buy once, and at 5k a position the deal-level hours are not paid for. The case for going deal-first is that a platform's screen tells me nothing about whether this particular sponsor can hit a 6.1 exit cap, and my two worst positions both came off a platform I'd rated well.

Curious where the room actually sits, because I don't think both answers can be right at my check size.

marcus_hale41 · Answer

I sit platform-first and I'll defend it, with one condition attached.

The condition is that platform diligence has to mean something harder than reputation. Mine is a short list: show me every offering older than the average hold period and what it returned against pro forma, and show me what happened the last time a sponsor on the platform missed distributions for two quarters. Most platforms will answer the first in some form and go vague on the second. The vagueness is the answer.

What I get for that work is a pipeline where the median deal is tolerable, and then deal-level review can be shallower on purpose. I read the fee table, the waterfall, the debt maturity against the stated hold, and the sponsor's realized count on that exact property type. That's forty minutes, not four hours. Anything that looks strange goes in the pass pile without a second look, because at 5k I don't need to be right about marginal deals, I need to not own them.

Where your framing breaks for me is the two bad positions off a platform you rated well. That's not evidence the platform screen failed. Sponsor-dependent returns mean a good platform still hands you a distribution of outcomes, and two bad ones out of twelve is inside the range I'd expect. The number I'd want from you is how those two compared to your two best on the same platform. If the spread is wide and random, deeper deal work probably wouldn't have caught it either.

dmitri_v6 · Answer

Neither half is where I'd spend the marginal hour. I'd spend it on the documents that govern what happens when the deal goes sideways, which sits underneath both of your columns.

The operating agreement or the subscription docs will tell you who can call more capital and what happens to your interest if you don't fund, whether the sponsor can be removed and by what vote, and how a sale gets approved. Those clauses do not change much within a platform, which is exactly why they're cheap to learn once, and they matter more to my outcome than whether the exit cap was 6.1 or 6.4.

Canton, on your forty minute read, the fee table and the waterfall are the two I'd keep. I'd drop the debt maturity check in favor of the amendment provision, because a sponsor who can amend the LLC agreement without a member vote can rewrite most of what you underwrote.

And platform reputation has a specific meaning I'd narrow further. I want to know whether the platform is a party to the deal documents at all or just an introduction service that collects a posting fee. Those are different products and the marketing pages often read the same. That distinction changes who you'd actually have a claim against, and if you care about that answer for a particular offering, a securities attorney is the person to ask, not me.

I voted platform, but only because that's where the documents repeat.

Platform diligence or deal diligence, because at twelve positions a year I only have room for one

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