Incentive Alignment: The Importance of “Skin in the Game”

Depending on the type of real estate investment opportunities you choose, you may be entrusting your money to a third party manager. Real estate syndications and REITs all involve you putting money into a pool that is deployed by a reputable investment manager who will determine the best way to use that capital to generate a return for all of their investors. While entrusting your hard-earned money to a stranger can be worrisome, there are certain qualities that should alleviate these concerns.

While a proven track record is essential, it’s also important to consider how much “skin in the game” the principals have in the entity they are managing.

Motivation matters

Established investors often live by the mantra that, “no one will take better care of your money than yourself.” After all, you’re the person who has worked for that money, so it stands to reason that you are going to be the most protective of its long-term and short-term stability.

This fact also points to the importance that the investment manager has an adequate amount of skin in the game to serve as a motivator for them to work harder to sustain the health of the investment.

Let’s assume that you’re investing in a real estate syndication that has chosen a property that costs $3 million. The pool of investors has compiled somewhere around $2 million, leaving the need for another $1 million to complete the deal. The syndicator or sponsor may put the remaining $1 million into the fund in order to close the deal. Doing so ensures that they have an adequate amount of skin in the game. This investment from the sponsor also serves to let the investors know that the syndicator believes in the investment and will work tirelessly to better protect it and generate a positive return. Why else would the investment manager risk their $1 million?

Confidence also matters

If you run across a syndication in which the sponsor puts in little to no money, it speaks to their confidence (or lack thereof) in the investment. Generally speaking, you should look for investment opportunities in which the investment manager is willing to put their own money on the line beside yours. If you find an investment opportunity where this isn’t the case, it’s probably a good idea to look at it with a skeptical eye. If the investment manager doesn’t have enough confidence in the investment to use their own money, why should you?

How common is skin-the-game?

You may assume that virtually every investment manager is willing to put money into their own investment, but that’s simply not the case. According to a paper by Professor Ma Linlin of Peking University HSBC Business School and Associate Professor Tang Yuehua of the University of Florida, it is incredibly important for investment managers to have skin-in-the-game in any investment they manage. Just how much?

Tang and Ma vetted the majority owners of 1,610 active US domestic equity mutual funds that were in operation between 2007 and 2014. Based on their research, 70% of sampled investment managers (1,127) had invested in the funds that they managed. Additional information showed that these invested managers put around $540,000 into their investments on average.

For perspective, Streitwise’s founding partners have over $20 million skin-in-the-game.

Numbers never lie

In a study done of hedge funds, hedge fund managers with high skin-in-the-game yield better results than their counterparts on a risk-adjusted basis.

“Greater insider investment better aligns incentives between managers and investors and induces managers to limit the size of their fund, resulting in higher alphas,” according to the study.

In a separate study, Morningstar used a star system in order to discuss the overall health of different investment opportunities. Investments in which the investment manager didn’t invest any of his or her own money received an average rating of 2.93 stars. Conversely, investments in which the managers had invested at least $1 million received a rating of 3.51 stars.

“In the end, knowing that the manager has skin in the game isn’t the sole reason to choose a fund, but it makes sense as a basic criterion or a tiebreaker for selecting between two funds.”

Ensuring that the investment manager is also putting money into the investment itself ensures that there is an alignment of incentives between the investment manager and the investors.

As an investor, it’s a good idea to find investment managers who are willing to “put their money where their mouth is.” Doing so ensures that they are just as motivated as you to protect the investment and generate positive returns.

Alex Wills

Mr. Wills is the Marketing Director and Head of Product for Streitwise.

Prior to joining Streitwise, Mr. Wills was Head of Paid Media at Bitcoin IRA and Fortress Gold Group. Previously, Mr. Wills was the Director of Lead Generation at GTMA, a real estate marketing agency, where he founded the paid media department that oversaw a large nationwide portfolio of multifamily properties. Mr. Wills holds a Bachelor of Science degree in Marketing from the University of Florida.

SW Manager, LLC (“Manager”) is a wholly-owned subsidiary of and controlled by Tryperion Holdings, LLC (our “Sponsor”). Manager is the external manager and advisor of 1st Streit Office Inc. (“1st Streit Office”) and 1st Streit Office Operating Partnership LP (our “Operating Partnership” and, together with 1st Streit Office, “Our Current Offering”). 1st Streit Office is the sole general partner of our Operating Partnership, through which all of our assets will be owned and substantially all of our operations will be conducted. All references herein to “Streitwise” refer, as applicable, to Manager, 1st Streit Office, the Operating Partnership, or any of their affiliates (collectively, the “Streitwise Entities”). Unless explicitly stated to the contrary, all references to “we,” “us,” and/or “our” shall refer to the Streitwise Entities. By using Streitwise, you accept our Terms of Service and Privacy Policy.

An offering statement regarding this offering has been filed with the SEC. This offering is structured as a non-traded real estate investment trust, or “REIT,” under Regulation A+ of the JOBS Act. The SEC has qualified that offering statement which only means that Streitwise may make sales of the securities described by that offering statement. It does not mean that the SEC has approved, passed upon the merits or passed upon the accuracy or completeness of the information in the offering statement. You should read the Offering Circular before making any investment which is available here: streitwise.com/oc

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Performance: Past performance is not a guarantee of future results. All historical returns, target returns, or hypothetical projections may not reflect actual future performance.
Risk: This investment involves a certain level of risk and may result in partial or total loss. We cannot guarantee that we will reach our target return for our investors.
Tax: Prospective investors should confer with their tax advisors regarding the tax consequences based on their particular circumstances. Neither Streitwise nor any Solicitor assumes responsibility for the tax consequences for any investor.
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¹ Dividends & returns: Current annualized dividend based on the most recent dividend declaration as of the quarter ending 9/30/2024. Dividend return calculations based on NAV at the time of dividend return. 3Q24 dividend payout of $0.13/share equates to a 7.2% dividend based on the current NAV. The REIT has averaged a 7.2% annualized dividend yield since 2020 and a 8.3% annualized dividend yield since 2017 based on the average NAV for the respective periods. See Quarterly Report for all returns history.
² Source: FTSE NAREIT All Equity REITs vs S&P 500.
³Sponsor Performance: Related to investments by Sponsor, Tryperion Holdings, as part of one of its prior programs, and not of any of the Streitwise Entities. Reflects gross IRR on realized investments in the Sponsor’s investment portfolio since inception. Sponsor performance data as of 4Q23.
⁴Target returns: We will seek to invest in real properties and other real estate-related assets that we believe can produce a strong return through a combination of cash flow and appreciation. We cannot guarantee that we will reach this target return for our investors.

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