The first step in raising private equity for any developer is usually to compile a detailed information package. This typically including comprehensive pro forma spreadsheets, investment vehicle structure, site details, and other such information.
However, the packages often neglect to include a snapshot of the deal from the investor point of view. At a high level – how much investment is required, for how long, at what rate of return and how will that investment and return be repaid.
Investors first want to know the basics and establish if a deal matches their investment criteria and how it rates against other deals currently on offer.
If a deal is presented in a beautiful, large package that has to be read from cover to cover to determine its essence it can be a major turnoff to the busy investment professional and casual investor alike.
The more detailed information is really only necessary when an investor has established its suitability on a general level. What is suggested is first producing a more simple deal overview for the potential investor to review.
Begin with the name of the project and a very brief description of the deal (it may be that this is the only document that the investor will look at to determine their interest in your project).
The next piece of information to be included is the cost of the deal and so the equity needed. This part of the document will resemble a traditional debt term-sheet. It shows the investor how much the sponsor is committing to the deal themselves and how much is being sought externally. A typical equity split involves investors providing 90% of the required equity with the sponsor adding the remaining 10% (a 90:10 split).
Moving on to one of the more important sections, for obvious reasons. One needs to display exactly what the investor will receive in return for their equity contribution – “Expected Returns to Investor”. You state what you are going to pay (typically per year) followed by an IRR calculation. The IRR tells the investor what their annual return would be if they invested in your project for x number of years.
The most common time frame for real estate investment opportunities is probably between 3 to 4 years. But, investors can also be sweet to deals that have a high long term return if the figures stack up. When the equity requirement and the associated returns over the timeframe have been established, the next step is proving the model. This requires presenting a breakdown of the various cash flows to the investor and sponsor, along with the refinance assumptions that feed the model.
On the supporting worksheets it is best practice to build the model in such a way that when an investor sees a number in the summary sheet that isn’t clear, they can follow the links and understand its origins.
Constructing an investment summary can be relatively easy, especially if you have the proforma model outlining all the costs and revenues – it is really just highlighting the right information and presenting it in a clear and concise manner.
Without it however, your deal can die before it is even reviewed by the investor.