Pledge Funds - The Relaxed Way To Syndicate Your Deals
As the world continues to change as a result of COVID-19 and the ensuing global pandemic, investment managers, syndicators, and general partners are beginning to see not only a more conservative approach to real estate investing but also significant opportunities. One of the key challenges that managers may face in seizing these new opportunities is securing enough locked-up capital. With a Pledge Fund, investment managers can set themselves up for success by creating a more flexible source for capital investments.
So, What Is a Pledge Fund?
A pledge fund is like a standard portfolio fund, except pledge funds don’t require investors to pay the capital upfront and instead only ask them to “pledge” the total capital investment upon joining. Investors can then decide whether to participate in investments on a deal by deal basis. In a nutshell, the fund manager finds deals, brings them to the group, and if there is enough interest, the fund invests in the deal. No investor is obligated and can sit deals out, but those who opt in must commit and pay their capital within 5-10 days so the manager can secure the deal. Typically, because the terms for each investment are all pre-negotiated upon forming the fund (e.g. distributions, participation rights, etc.), when there is a good deal on the table and the group invests, the process is automated for success.
Benefits Beyond Flexibility
Provides managers with a source of “go-to” capital
Puts investors at ease by not requiring upfront paid-in capital
Investors can diligence each deal themselves, which might be important current pandemic-market conditions
Allows the Manager to pursue deals more confidently
A good way for Managers to establish a track record for success
But What About Risk?
While the benefits are plenty, managers and syndicators should also make note that with a pledge fund the risk is that the capital won’t be available for any given deal. If too few investors come in on a deal, Managers may not be able to fund and would lose the opportunity. Plus, diligence periods might be shorter because Managers have to act faster to lock up capital.
Lastly, don’t forget that at the end of the day the Pledge Fund is still a fund and Managers are still selling securities to investors, though there may be some nuance as to timing/structuring. This makes the fund subject to a number of SEC regulations, including the Securities Act and (possibly) the Investment Advisor Act. Each fund and its goals can be different but, ultimately, the structure of the pledge fund might prove useful in times such as these. We recommend consulting your attorney to see if it seems like a good vehicle for your fund, and the team at MW Law would be happy to assist.
Mr. Merchant is a partner at M&W Law, PLLC, a Dallas-based business law firm. He focuses on corporate structuring and corporate finance, specifically private placement deals.
Disclaimer: this article is should not be taken as legal advice, as each situation can be unique. Please consult your attorney prior to taking any steps. If you do not have an attorney, please feel free to give us a call to set up a consultation.
