Pursuit Capital, also known as Seed Capital, is equity that is situated extremely high in the capital stack: 85% of the capitalization and above. By definition, this Pursuit Capital is situated so high in the capital stack that it limits the amount of sponsor equity in the deal, leaving the owner/developer very little skin-in-the-game. Exacerbating the “skin-in-the-game issue,” are owner/developers who request aggressive up-front fees to reimburse themselves for their time and expense finding and controlling the deal. The lack of skin-in-the-game poses a significant issue for potential partners who want to ensure that the owner/developer is properly motivated to see the property through to completion. These partners would rather have the owner/developers retain all possible equity in the deal rather than provide up-front compensation or reimbursement.
Are we Chasing a Unicorn, does Pursuit Capital which fits this profile even exist?
Taking a gigantic step back, the unicorn does exist!...or rather used to exist. This firm originated and closed over $1B in equity placements that largely resemble the unicorn in various forms. The majority of these closings were closed on Lehman Brothers books and stretched from 90% all the way to 98% of project cost. Fortunately, these high leverage equity closings were made and repaid prior to the collapse of 2008. Does that mean this sort of equity exists today in this new business cycle?
The answer appears to be NO. Institutional, JV, Preferred, and Alternative Equity sources just won’t extend beyond the 80% to 85% cost threshold without exerting extraordinary control and cost. Significant co-investment on the part of the owner/developer is a critical path that simply can no longer be sidestepped. Further, the deal, each individual property, and its unique business plan must withstand rigorous due diligence. Thus, owner/developer skin-in-the-game is required, as is a clear business plan. The days of Pursuit Capital appear to be well behind us in this current business cycle.
There is, however, something new on the horizon: crowd funding. These sites allow the old syndication model to come into play, and this allows investors to participate in real estate deals in the equity tranche. The crowd funding model is attractive to owner/developers because it provides relative flexibility, low investor required returns, the ability to assess fees, and it extends very high into the capital stack. An owner/developer can utilize these sites to essentially fully fund the deal while limiting the previously mentioned skin-in-the-game. The real estate crowd funding industry is still very young. It is estimated that there are more than 50,000 real estate companies in the United States. So far, less than one percent of them have used crowdfunding as a vehicle to provide capital. Crowd funding is an emerging investment structure that we will continue to address in the future; its perceived flexibility and potential depth of market demand that we keep our eyes on it.
In the meantime, we will continue the hunt for the Unicorn. As we get further away from the market difficulties of the previous years, maybe, just maybe, Pursuit Capital will return to the marketplace.