What is a Real Asset Syndication?
Black’s Law Dictionary defines a syndicate as, "A group organized for a common purpose; esp., an association formed to promote a common interest [or] carry out a particular business transaction.” In other words and in the context of real asset investing, a syndicate is the pooling of funds from multiple investors in order to acquire and invest in real assets, such as real estate, natural resources, commodities, and equipment. Syndicates can also be formed to invest in businesses.
How does a syndication work?
In a real asset syndication, a sponsor or a lead investor typically identifies the investment opportunity, structures the investment vehicle, solicits funds from investors, acquires the investment and executes the business plan to achieve the projected investment goals. The sponsor will then distribute returns to the syndicate’s investors based on the performance of the investment and the terms of the syndication agreement (Private Placement Memorandum or PPM).
The partners in a syndication can take on active or passive roles. The active partners - typically the lead sponsor(s) - are responsible for the heavy lifting on the project and are responsible for everything having to do with the management of it, including taking on the risk of debt and other liabilities associated with the management of the asset. Depending on how the syndication is structured, these active partners are usually considered General Partners. Passive partners invest their capital with the goal of receiving returns but have no working responsibility or liability related to the investment. They are usually referred to as Limited Partners, and their risk is limited to the capital they’ve invested.
Please note that I am not an attorney, and the information included here should not be considered legal advice. If you are considering investing in a syndication, check with your attorney regarding the legal implications.
Why should you invest as a part of a syndicate?
Access to Opportunities and Expert Management
Real asset syndications can provide investors with access to investment opportunities that may be too large, complex, or expensive to pursue individually. It is a way to mitigate risk and put the operations of the investment in the hands of someone with a proven track record, who can effectively manage the asset, execute the business plan, and potentially generate higher returns that any one person would be able to achieve on their own.
Completely Passive Returns and Steady Income
It is also a great way for a busy person, who has other responsibilities tied to family or work, to invest passively, so they can put their money to work for them. Real assets can provide a steady source of income the form of rent paymentsI, dividends, or other distributions.
Diversification
Investments in real assets offer a way to diversify your investment portfolio beyond traditional stocks and bonds. This can help reduce the overall risk of your portfolio and protect against market volatility.
Inflation Hedge
Real assets have historically appreciated over time in line with or often outpacing inflation. In an economic climate like today’s, with inflation on the rise and the U.S. dollar devaluing by the day, identifying and investing in opportunities that outpace that devaluation is an effective way to ensure that you are continuing to build wealth for you and future generations.
Tax Benefits
Another advantage to investing in syndications is the potential tax benefits provided by them, such as depreciation deductions for real estate investments. These tax benefits can offset your current income, effectively reducing your taxable basis. With that said, it is a great idea to consult with your CPA to see how such an investment would benefit you and your specific tax situation.
If you’re interested in learning more about investing in a syndication, please click on this link to schedule a call with our team.