Once again, we are not providing legal or tax advice. We ALWAYS encourage you to contact a trusted professional for advice on the legal and tax aspects of Private Placement Investments and to look over any documentation involved.
Who is the team? Who are you investing with?
The team is one of (if not the most important) aspect of the deal. Some of the people you will want to do your due diligence on is the syndicator, their team of advisors, and any other managing partners in the deal. Research their track record. Google their names. The person you will have the most contact with will be the sponsor. Set up an interview to learn more. What kind of experience do they have and what story has it told? What do they have to gain, what do they have to lose in this deal? Do they have skin in the game (this doesn’t always mean money)?
Why is the sponsor presenting the deal?
One reason may be that the sponsor is out of their own funds and are now creating opportunities for others to continue to invest. If a sponsor is out of money, it may not be a bad thing. They may be really great at finding and creating opportunities and are leveraging their experience and skills to continue to invest in deals. Do they have a passion for the deal? What is at stake for them?
Not every deal is a good deal-what is your return?
Just because the deal is a private placement, you know the team and have vetted the documents does NOT mean you should forgo all your goals and invest blindly. Always stick to your investment goals and plans. Understand the returns and how they will be paid out. Know what the investment is and get advice from TRUSTED advisors.
Where does the sponsor and team get paid?
This is an important question. It’s also an answer that must be disclosed. A good deal will be set up to reward the sponsor for their hard work when the deal is made, but will also insure the sponsor has a vested interest in the deal continuing to succeed. The tricky part is that this can be accomplished in a MULTITUDE of pay structures. This pay structure must be disclosed to members of the team. They may include all or some of the following: broker fee, Promotors fee, % of return, cashflow, fee paid upon sale. Some questions to think about when discussing the pay structure… Does the sponsor get paid when deal does well and paid more as deal does better? Are they only paid up front? Are they paid along with investors? Are there any upfront fees? Upfront fees are not a bad thing, but they must be reasonable.
Have you read the documents?
READ THE DOCUMENTS. Yes, they are long. Yes, they are legal and boring. But you want to invest your hard earned capital into this, right? Don’t be foolish, read the documents. Then after you have read them, have an attorney and even a CPA review them for you. We can’t stress this enough. Know what you are investing in, understand the deal, know the tax implications. There is always some risk involved in any investment, you won’t know this risk if you don’t look over the investment clearly and completely.