Who You Invest with is Everything: 5 Things to Consider When Choosing an Investment Manager

Topics: Capital Markets/Commercial Real Estate, Due Diligence

Perspectives from a Due Diligence Professional: In today’s competitive DST environment, informed investment manager selection is essential to mitigating risk and maximizing long-term return potential. 

Each year, real estate investors complete billions of Delaware statutory trust (DST) transactions, and the number of DST investment managers continues to grow. In fact, total raise for DSTs in 2025 thus far have surpassed 2024’s total raise of $5.66 billion, positioning the sector to meet Mountain Dell’s ambitious $7.5 billion forecast by the end of 2025.1 An expanding DST marketplace elevates the need to complete extensive and thorough due diligence on potential DST partners. Each DST investment manager brings a unique mix of experience, strategy, and overall capability.

1. Review Background and Track Record

While past performance is not an indicator of future performance, an investment manager’s background and track record show how well a management team can execute on its strategy and can help investors identify potential red flags.

  • Evaluate experience, past performance, and reputation, which can be done through internet searches or by sourcing an investment manager level due diligence report.
  • Review prior offerings, exits, and any litigation or regulatory issues. Focus on DST opportunities that utilize the same investment strategy, property type, or leadership team.
  • Assess alignment of interests, such as co-investment and performance-based fees, to ensure the investment manager’s success is aligned with investor success. This often signals their commitment to delivering results.

 

2. Identify Fund's Investment Thesis

Understanding a fund’s investment thesis is essential when evaluating a DST investment manager, because it reveals the core strategy, priorities, and approach to generating returns.

  • The thesis outlines what property types and/or geographic regions the investment manager specializes in, allowing investors to choose an investment manager whose strategies align with investment objectives.
  • The investment thesis also identifies the acquisition and management process, which reduces the likelihood straying from the investment manager’s expertise.
  • Fund managers should be able to succinctly explain the fund’s investment thesis, and literature should be easily understood—even if the strategy is complex.

 

3. Perform a Market Analysis

Evaluating a DST investment manager’s market analysis reveals whether they have researched and understands the investment locations’ economic market.

  • Examine local market fundamentals including supply/demand, demographics, employment trends, and comparable properties.
  • Ask what market factors will drive the success of the DST offering.
  • Review third-party market studies and data sources when available. These resources can provide unbiased insights, helping investors better understand the local market dynamics.  

 

4. Understand Fund's Financial Model

Reviewing a DST’s financial model is essential, because it shows how the investment manager expects the investment to perform over time.

  • Scrutinize pro forma financials, historical operating statements, and rent rolls. Look for data sources and the presence of comparable properties,
  • Validate assumptions including rent growth, vacancy, expenses, and exit capitalization rate. These should be based on comparable properties and generally conservative. Excessive increases in rent and high expenses are red flags and deserve extra scrutiny.
  • Stress-test scenarios to mitigate risk and paying close attention to investment risk tolerance and expectations for future returns.

 

5. Examine Exit Strategy and Projected Returns

Assess the planned exit strategy in order to make sure these align with investment goals.

  • Understand the planned exit of the DST, including the anticipated timeline for a sale.
  • Review projected internal rates of return, equity multiple, and sensitivity to market changes. These numbers are estimates, not guarantees, so it is important to understand the underlying assumptions and potential risks.

Beyond these five primary due diligence areas, investors should also assess a real estate investment manager’s approach to third-party and property-level due diligence, the fund’s formation and structure, as well as the entity’s capitalization and the fund’s capital stack.

Needless to say, thorough due diligence is essential when evaluating a DST investment manager. From understanding background and track record, to reviewing investment thesis, market analysis, and financial model, each helps investors assess whether the investment manager’s strategy aligns with individual investment goals and risk tolerance. By asking the right questions and examining the details, investors can make confident, informed decisions amid an increasingly complex DST landscape.

Sources:

1  https://altswire.com/dst-sales-top-2024-total-as-market-surges-through-q3/

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