On today’s show we’re talking about the merits of two different approaches for raising capital.

It’s a bit like asking which is better, Ketchup or Mustard? Some people like ketchup, some like mustard, and some like both.

The two funding models are the blind fund and the syndication for each project.

Some syndicators have a preference for raising capital for each new project. Each project stands on its own and investors who qualify to invest in these exempt market offerings make the decision to invest in each offering independently. They diversify their investments by investing in multiple different projects.

Each project sits in its own separate entity and there is no chance of a problem in one property cascading and affecting any other property. There is a veritable fire-wall between each property.

This structure is ideal for many investors since it allows investors to make individual choices on which project they want to invest in.

The blind fund model requires a stream of similar investment over a period of time that matches the life of the fund. The benefit of a fund is that you raise the money into the fund at the beginning. Once you have access to the funds, you can execute quickly on deals. You don’t have to worry about being too aggressive when placing an offer. You know that you’ll be able to close since you already have all the funds you need to get the deal done.

In today’s environment, if you’re going to be in the market for distressed deals when they become available, you will want to have the cash on hand before you even place the offer. There will be competition for the best deals and they will go to the ones with the strongest track record for closing.

If you’re going to raise a fund, your investors are going to want to see a track record. Some investors will not invest in a company’s first fund. It’s not hard to see the paradox that this logic creates.

When you have a fund, there is an expectation that the fund will be generating returns for the investors. Between the date the fund closes and the money being put to work, the investment capital is sitting in the fund manager’s bank account and earning zero. All the while, the investors are expecting a return on investment.

It’s possible to raise too much money into a fund. If you can’t put the money to work, you might feel artificial pressure to accept a deal that doesn’t meet your standards because a deal that delivers 2% less than your target is still better than zero.

In a fund, you’re restricted to a stream of investment deals that meet a similar criteria. They might be multi-family apartment complexes in Arizona. Or perhaps you might do a fund that specializes in mobile home parks. You could have a fund that invests in assisted living projects, or hotels.

But if you’re a new fund manager, how do you create a new fund with no track record?

In our business, we actually have both. We have raised a fund, and we have also raised capital for individual projects.

Both have merits. But you also have to remember that a single project creates an aura of exclusivity, whereas a fund suggests that it’s open to all comers who qualify for the investment.

It comes down to knowing your investors. The investor who invests in a single project may not be the same investor who would invest in a fund. Funds tend to be a little more opaque than single projects. Some hands-on investors will want the higher degree of transparency and reporting that is associated with a single project.