Investment Management

June 17, 2024

Why we invest with local operating partners: The optimal strategy for the middle market space

Why we invest with local operating partners: The optimal strategy for the middle market space

Sometimes, investors wonder why WDIP’s equity funds choose to invest with local operating partners instead of investing directly as owner-operators. We adopt this approach because partnering with operating partners is the most effective way to build and aggregate a diversified institutional portfolio of middle-market investments.

The landscape of middle-market commercial real estate is highly fragmented. Leveraging operating partners is a strategic choice that significantly enhances both the breadth and quality of the investment opportunities our acquisition team targets. By collaborating with specialized local operating partners, we greatly expand our reach, gaining access to a broader array of pre-vetted deals that align closely with our strategic investment criteria. The advantages of this approach include:  

Multiplicative effect of operating partner networks

Investing through operating partners creates a multiplicative effect on deal flow. For instance, consider a scenario where a member of an acquisition team maintains relationships with ten operating partners. If each partner sources approximately ten potential deals annually, this single team member can effectively review 100 actionable investment opportunities. This extensive reach is not merely about the volume of deals but also about the quality and readiness of these investments.

Enhanced due diligence and pre-vetting

Operating partners identify potential deals and conduct preliminary assessments based on deep local knowledge and sector-specific expertise. This pre-vetting process ensures that by the time a deal reaches the acquisition team, it has passed through a rigorous initial screening. This layer of scrutiny adds a level of security and confidence, as the investments have already been evaluated for their feasibility, market alignment, and potential for returns.

Strategic allocation of internal resources

We can optimize our internal resource allocation by delegating the initial stages of deal sourcing and assessment to operating partners. Instead of dispersing our efforts across numerous markets, our team can focus on finding the best partners with readily investable opportunities, strategic analysis, capital allocation, and portfolio management. This operational efficiency allows us to concentrate on a top-down and bottom-up approach to the investment decision-making process.

Access to specialized opportunities

Operating partners often have preferential access to specialized opportunities, including off-market deals, typically less accessible through general channels. These relationships can prove invaluable, providing investment firms with a first-mover advantage in competitive markets. The direct link to local players through operating partners enables us to tap into a deeper, more diverse pool of investment opportunities that might otherwise remain out of reach.

Greater diversification

By investing capital with a variety of local partners, we can achieve a higher level of diversification across different regions and property types. This approach mitigates risks associated with any single market or economic condition. In contrast, a direct investment with a single operator fund typically results in exposure concentrated in fewer markets or assets.

Flexibility in investment size, scope, and structure

By partnering with various local operators, we can allocate capital with greater flexibility, tailored to the specific opportunities and market dynamics at hand. This adaptability enables investment across a broad spectrum of projects, ranging from small-scale developments to significant acquisitions. Adjusting investment scale optimizes returns by matching capital outlay with project potential.

Additionally, we maintain significant decision-making rights and can implement structures where operating partners may assume specific risks. For example, operating partners might be responsible for covering cost overruns or contributing a portion of their equity in a subordinate position through a hybrid preferred equity/JV equity structure. This approach mitigates risks for the fund and aligns the interests of all parties involved, enhancing potential outcomes for the investment.

All these factors contribute to our decision to invest through the strategic employment of local operating partners. These advantages collectively contribute to the potential for higher returns and achieving alpha for our investors.

To learn more about our investment strategies in the middle market, reach out to our team of experts today.

Investments have risk of loss, including loss of principal; past performance is not indicative of future results. WDIP’s investment strategies are offered only to sophisticated accredited investors. This communication and does not constitute an offer to sell or a solicitation of an offer to purchase any security or interest in a private fund. Any such offer or solicitation shall be made only pursuant to the confidential private placement memorandum of any investment fund as it may be amended, supplemented or restated from time to time (the “Memorandum”), which would contain material information (including certain risks of investing in the Fund) not contained in this communication and which would supersede and qualify in its entirety the information set forth herein.

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