The simplistic answer is no (at least so far across 140+ closed offerings). Since the inception of our Marketplace in April 2014, every offering in which the sponsor intended to close the transaction (i.e. those that the sponsor did not terminate its contract to acquire the property) has proceeded to close regardless of the amount ultimately contributed by CrowdStreet Investor Members.
While CrowdStreet has grown to become an increasingly significant channel to sponsors for capitalizing their deal flow, it is typically not the only channel deployed by sponsors for raising equity. In most scenarios, CrowdStreet investors are investing alongside a sponsor’s own balance sheet equity as well as its existing network of passive investors. This structure inherently leads to variability in how much each channel contributes to the end goal.
Capital Targets Can Be Flexible
Once a deal is live on the CrowdStreet Marketplace, CrowdStreet actively collaborates with the sponsor in reaching the total fundraising goal. In essence, CrowdStreet becomes the sponsor’s online channel partner for the duration of the capital raise.
As it translates to funds raised, in some instances CrowdStreet contributes more than our original expectations (on average 23% more than expectations) and sometimes we contribute less. In certain cases, a sponsor’s existing network of investors subscribe the deal faster than expected, which, in turn, can leave less equity available for CrowdStreet Investor Members. While that scenario is certainly disappointing to a CrowdStreet Investor Member who might see an offering but ultimately did not act fast enough to participate in it, investors should keep in mind that such an outcome is an indicator of the strength of the sponsor and the strength of the offering.
In addition, fundraising for a specific offering can be a moving target. As the capital stack of a deal comes into focus (often at the conclusion of the due diligence period), assumptions can change or assumptions can transition to known facts, such as locked interest rates and loan amounts or firm bids on capital expenditures, all of which can increase or decrease the amount of equity required to close the transaction. Such changes to the assemblage of assumptions used to underwrite a deal (also known as a pro forma) create a certain level of equity uncertainty until the later stages of an offering. As a result, investors should not be surprised by movements in the targeted equity amount as a deal nears its closing.
What Happens When There Is Too Much Capital?
On the flipside, what happens if an offering exceeds its target equity raise? In that scenario, the majority of sponsors are happy to accommodate more CrowdStreet Investor Members into a deal and adjust accordingly amongst the other investors in the deal. As our platform has grown, CrowdStreet commonly finds itself advocating on behalf of our Investor Members for increased allocations in Marketplace offerings. On rare occasions, a sponsor will hold firm to CrowdStreet’s initial equity participation goal. When that happens, CrowdStreet Investors Members do need to complete their review an offering and fund in a reasonable timeframe in order to secure a spot in the deal. Participation is typically determined, initially, on a first-to-offer basis but, after a due diligence period, it transitions to a first-to-fund basis.
It is also not uncommon for a handful of investors (either existing relationships of a sponsor or CrowdStreet Investor Members) to drop out of an offering when it comes time to commit capital. Sometimes investors experience changes in liquidity during the offering period or they simply become interested in a different offering and move on. To mitigate this risk, CrowdStreet will typically oversubscribe an offering by approximately 10% of the CrowdStreet allocation amount. Once oversubscribed, CrowdStreet will communicate to the last investors in that they are in a back up position. CrowdStreet will also communicate to the earlier investors that they have been accepted to the offering contingent upon their performance within a reasonable timeframe or else lose their position to one of the backup investors. The time allotted to Investor Members to perform can vary depending upon the time constraints of the particular offering.
Thinking Beyond The Current Deal
The biggest reason that sponsors are willing to accept the inherent uncertainty of the best efforts model of the CrowdStreet Marketplace is that the sponsor is willing to embrace a longer-term perspective in its partnership with CrowdStreet (i.e. they are thinking beyond the current deal). For example, if a sponsor is capable of acquiring and funding four assets per year on its own with its existing network of investors, by working with CrowdStreet, the sponsor is now able to acquire five or perhaps six assets over the same time frame. This not only helps sponsors to scale their platform faster than they could otherwise do alone (keep in mind that many of the best real estate operators are challenged when it comes to marketing themselves) but it also helps to diversify their own capital across a greater number of assets.
Sponsors come to the CrowdStreet platform because it helps them to transform their method of capital formation to include online capital formation. CrowdStreet’s ability to assist sponsors in this transition is part of the core value of the CrowdStreet Marketplace. It’s also one of the key factors we leverage daily to grow both the quality and quantity of Marketplace offerings. To learn more about online real estate investing, please visit www.crowdstreet.com