Operator co-invest or operator track record, which one carries more weight when you can only really verify one

Question

Two operators approached me in the same month and I can't have both, so I've been sitting with what actually separates them.

Operator A wants to put in 15% of the equity out of his own pocket. He's done two deals, both small, both fine, nothing that tested him. His money is real money to him and I believe he'd feel the loss.

Operator B wants to put in 2%. He's completed eleven projects of this type over nine years, he handed me a list with addresses and lender contacts, and two of those deals clearly went badly and he told me about them before I asked. He says his capital is deployed elsewhere and he's not going to pretend otherwise.

The skin in the game argument says A is aligned and B isn't, that a 2% partner can walk away from a bad outcome and only lose his time. The track record argument says alignment doesn't build anything, capability does, and a first-timer with 15% in can lose 100% of my money while feeling terrible about it.

For context on where I am, I haven't written a JV check yet and I'm trying to work out which signal I should be weighting when I do. Track record I can check by calling people. Co-invest I can verify with a bank statement. Both are checkable, they just tell me different things.

tashaford30 · Answer

The fact that B volunteered the two bad deals is worth more to me than either number you gave. That's the thing you can't fake and can't buy back later.

I'd also push on what A's 15% actually is. If it's 15% of the equity and the equity is $400k, that's $60k, and if $60k is most of what he has, he's not aligned, he's fragile. A partner who can't fund a capital call because his whole net worth is already in the deal is a problem you inherit in month eight. I'd rather he put in less and kept reserves.

So I'm voting track record but I don't feel great about the 2%. Somewhere between those two there's a number that means something without breaking him.

jordan_ellis2 · Answer

@quill said the thing I was circling. Co-invest is only a signal if it's painful and survivable at the same time, and that window is narrower than people talk about.

I've read enough over six months to distrust the phrase skin in the game as a substitute for reference calls. @meridian, when you call B's lender contacts, ask what happened on the two bad ones specifically, whether he funded the shortfall himself or went back to his investors, and how he communicated while it was going wrong. That answer tells you more about your downside than any percentage does.

I'd take B. But I'd want his co-invest at a level where a total loss actually hurts, even if it's 5% rather than 15.

Operator co-invest or operator track record, which one carries more weight when you can only really verify one

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