I saw this article, Platforms take the spotlight in real estate's push for operational alpha, in Private Equity Real Estate just a few days ago.
It got me reminiscing and reminding myself that my heart is, and has been for a long time, in Platform Deals. My reminiscences took me back to an article I wrote a bit ago, entitled, Platforms – The Flavor of the Month in Real Estate Investing.
I knew I had written about it in the past but when I checked, I saw that that article was almost ten years ago. So platforms aren’t the flavor of the month – they are the flavor of the decade it seems.
Before delving, I should make clear what I mean when I refer to a Platform Deal. It is when an investor (the "Investor") doesn't just want to do a deal with the sponsor (the "Sponsor"), but likes the Sponsor itself so much it wants to be part of the growth possibilities available to the Sponsor; accordingly, it actually invests in the Sponsor’s platform. At the same time, the Sponsor is getting sick of raising money for each deal and wants the Investor to be responsible for funding. As a result, the Investor becomes responsible for fundraising and the Sponsor for creating value through its real estate platform.
So each party is doing what it does best. What could go wrong?
The answer is, plenty.
There are a zillion details to think about, and I will not prattle on about them. I will just highlight the essence of the upside and the downside.
The upside is, as somewhat alluded to above, the match is essentially made in heaven (sorry about the cliché). The Investor and the Sponsor each get to do what they do best. The Sponsor can stop the misery – and likely weakness – of hunting for capital, and focus on its mission critical goal of creating value in real estate. Meanwhile, the Investor can bring the capital, what it does best, and share the upside of the Sponsor's value creation.
But danger lurks.
From the Investor's point of view, if the Sponsor is a dud, is dishonest, is incompetent, dies, becomes disabled, or otherwise has a negative event, the Investor has real risk that it is difficult to protect against in documentation. In a lot of ways the Investor is really betting on the Sponsor and taking real risk for the upside of having a share of the value creation.
Meanwhile, the Sponsor is also at risk if the Investor has difficulties. Perhaps a change of control, a loss of its ability to fund, venality or even stupidity. The Sponsor cannot easily just dump the failed Investor and go on to someone else, since the Investor is now in the Sponsor itself.
The rewards are dramatic for both parties, but so are the risks, as they are really tied together.
One might easily conclude that the juice is not worth the squeeze – if I have that metaphor correctly stated. But shunning these tie-ups is not an easily viable strategy. If you are a Sponsor without an Investor, it puts you in a weak position to grab the best deals against those with financial backing. And if you are an Investor that doesn't do platform deals, you find fewer top quality dance partners, as the good/best ones get snapped up by your competition, and sooner or later you have a serious risk of underperformance.
So there is pressure to think about platform deals.
And increasing that pressure is the omnipresence of AI – which I admit I am sick of hearing about. It is making what is simple obsolete pretty darned fast. It used to be that Joint Ventures were tricky and difficult. And they still are, akin to Playing Chess in the Future (my phrase for it). But more and more people say things like it's just a joint venture, and most of the pitfalls are now well-known enough that even pedestrian players (clients and lawyers) can mostly either figure them out or just ask AI for help. Said another way, a JV expert doesn't have as big an advantage over a JV novice as it used to in the JV space.
But the final frontier that beckons those intrepid parties that still seek real estate outperformance is in the platform space. Platform transactions require a hodgepodge of cutting edge skills in brainpower, expertise, and human relationship sensitivity. That, plus platform deals nestle in the space that is still the Achilles Heel of AI, which is uniqueness. It is rare that one platform deal looks enough like another to be cloned out, like many other places in the real estate world.
As I think this through, I do put forth the view that those seeking long-term outperformance in the face of the changing (disrupted) real estate world should be focusing on these types of transactions.
From my own point of view, working on a platform deal allows me to use the highest and most challenging levels of my expertise and talents. At the same time I have the enjoyment of working with clients who are doing the same thing. Dare I say it is fun?
Finally, I am not an island at my law firm in touting this expertise. I have a bevy of partners who focus on this area. This includes Brian Blitz, Chris Gorman, Ryan McCaffrey, Paul Schwartz and Terri Adler.
Bruce Stachenfeld aka The Real Estate Philosopher