Choosing the right capital raising structure is a big decision that has major implications for the types of capital and investors you’ll be able to take on, and even the types of deals you’ll be able to raise for.
Funds, syndications, and fund of funds are the three most-used fund structures for capital raising. Each one has its pros and cons, so it's important to understand which structure is ideal for you based on factors like your financial goals, budget, risk tolerance, and what your investors are looking for.
To make the right choice, you need to understand how these three structure are different from one another. In this article, we’ll break down their key differences so you can make a well-informed decision.
Benefits of Starting a Fund: Diversification and Long-Term Cost Savings
Funds allow capital raisers to pool investor capital and use it to acquire and manage a portfolio of investments. These income-generating assets can range from real estate, to investments in startups, to debt deals, and more.
Funds may have a higher minimum investment amount than a single syndication deal, but in turn, investors enjoy the benefits of diversifying across multiple assets, instead of putting all their capital into one deal.
However, investors who want the opportunity to choose the specific deals they’re investing in may prefer a syndication or Customizable Fund model, compared to the traditional blind pool fund where the fund manager chooses where to allocate their capital.
For capital raisers, starting a fund requires more money up front than launching a single syndication deal, but it can save you money over time compared to the cost of doing multiple deal-by-deal raises.
Benefits of Syndications: Direct Ownership & Active Involvement
Unlike a fund which contains multiple deals, the syndication model allows investors to pool their capital with the goal of acquiring one specific asset.
A syndicator or sponsor is leading the acquisition, management, and eventual disposition of the asset. The sponsor is responsible for locating every asset and informing investors of precise property locations, details about the local area and market conditions, summaries of tenants, and comprehensive financial data on the property.
Investors may prefer this model if they want to take an active role in choosing the assets they invest in.
For sponsors, the syndication model is often preferable when first starting out, because it’s less expensive to set up one single deal than to launch a full fund. However, if you’re doing multiple deals a year or plan to scale your capital raising over time, this model quickly becomes inefficient.
Fund Of Funds: Passive Diversification and Reduced Risk
Funds of funds, as the name suggests, are pooled investment vehicles that invest in other funds. By diversifying investments across various funds or syndications, this model can offer reduced risks and higher returns for the investors.
This fund structure is appealing for small investors who want more exposure to the real estate market with fewer risks compared to investing directly in one or two syndications.
What if You Could Combine The Best Of All Three Capital Raising Structures?
While traditional investment structures each have their merits, imagine if you could enjoy the best of all worlds in one platform.
Combining the flexibility of funds, the scalability of syndications, and the diversified portfolio of a fund of funds, the Customizable Fund is an excellent option for both new and experienced capital raisers.
With a Customizable Fund, you can seamlessly diversify your investments across various asset classes, add multiple deals under one PPM, and streamline the legal process, all while enjoying significantly lower costs and greater flexibility for your investors.
And once you start a Customizable Fund, that fund does not expire, and you can continue to add deals over time. There’s no need to file new PPMs or go through the hassle of onboarding the same investors multiple times.
To learn more about how an Avestor Customizable Fund can work for you, schedule a free strategy call with our team.
