The Guru Is In
A value proposition for intermediaries
By David A. Smith
5 min read
To stay profitable, an intermediary (syndicator, CDFI, mortgage originator, donor/technical assistance provider, development consultant) always has to have its own proprietary value proposition – a statement we make about ourselves that, if believed to be true, leads inevitably to the conclusion, ‘Do business with us’. Further, because intermediaries simultaneously face two ways (developer on one side, investor, lender or grantmaker on the other), their value proposition arrow has to point both ways – it has to be equally valid for capital consumer and for capital provider, and equally expressible to both.
Conceptually, our intermediary’s value proposition can include any of these elements:
- Reduced search costs. While investors and developers can go directly to each other, finding and fitting to the right counterparty can be faster, cheaper and more focused if the work is funneled through an intermediary.
- Reduced execution risk. No developer wants to pursue money that turns coquettish when it’s time to close. No investor wants to chase a CRA beauty-contest’s rising price. A good intermediary brings parties steadily to convergence.
- Preserving the air of mystery and creating the perception of competition. A developer wants capital providers to think they are competing for the scarce deal; a lender or investor wants capital consumers to think they are competing for the scarce money. By interposing themselves in the dialog, intermediaries can preserve the air of mystery, heighten the competitors’ desire and encourage them to demonstrate that in better pricing or terms.
- Reduced post-closing relationship risk. They say that documents speak, but actions speak louder, and character, as demonstrated through action under duress, speaks loudest. Integrity and commitment are proven in the instant of crucible and impossible to know until you have been there together. An intermediary that has worked with both parties previously validates each to the other and invests trust on which the parties will draw when stresses and crises inevitably arise.
- Up-to-the-minute domain expertise. Like objects in the overhead compartment, markets encountering turbulence shift rapidly, and each party wants to have its execution optimized to the current market. Being continuously in the arena through a stream of transactions gives a nimble intermediary good touch on it.
- Scaling up or scaling down. Capital likes to scale up into portfolios; real estate likes to scale down to specific locations. An intermediary can assemble a collection of unique objects that nevertheless meet portfolio-level diversification targets, aggregating the small into the large and vice versa.
- Refinement of raw material. To the capital markets, real estate ownership is a raw material full of irregularities and financial impurities (volatility, risk) that a good intermediary slices like a butcher into suitable capital cuts, returning to the developer the giblets, the investment’s parts the capital markets don’t pay for but that are nevertheless tasty to the developer.
- Uniqueness and standardization harmonized. Capital likes investments that perform as standardized abstract numbers of yield; real estate has physical grit and inherent volatility. Good intermediaries dampen variability by value-engineering it away via economic structuring provisions or building in safety valves, like property-level or fund-level reserves.
- Being the shock absorber of hard-to-price risk. When risks are new, perceived risk is usually much higher than real risk will prove to be. Intermediaries can take such risks out of the principals’ transaction by interposing themselves as the risk shock absorber. There’s a reason B pieces have a high yield.
For an intermediary seeking a winning value proposition, it is never enough to state anodyne platitudes. In a competitive environment—and when has our industry ever been less than feverishly competitive?—the value proposition has to be particular, specific and proprietary, to beat not only the intermediary’s direct competitors, but also the ultimate threat – the do-it-yourselfer.
Hence the intermediary’s market paradox: good eras for principals are bad eras for intermediaries.
Maturing markets tend not just to stabilize but also to commoditize. When the business space is thriving and grooved, when most of the players are the surviving and scaled veterans, when everything is known and knowable, electronically available in an instant, then the intermediary’s value diminishes asymptotically, tracking the compression of spreads toward zero. Eventually, when buyers and sellers can go direct, or can bring the previously arcane knowledge in-house, intermediaries’ entire business models are vulnerable to disintermediation.
By contrast, when a business or financial space is new or chaotic, rich with new opportunity and complex with new risk, capital takes flight to quality, spreads to safe rates widen to the level of the perceived risk of the unknown, and stakeholders hasten to take counsel from industry solons. In such times, when the upside is abstract and the way forward unclear, when the risks are hard to price because they are new and few have taken them yet, when paradigms are rare or unproven, then the intermediary can thrive.
Hence, another intermediary’s paradox: good eras for principals are bad eras for intermediaries, and today’s affordable housing intermediaries can choose to work in either future:
- LIHTC is thriving and grooved, spreads are minuscule, and (were one rude enough to ask) some of our most venerable intermediaries might find it hard to crisply state their value proposition.
- Opportunity Zones are nascent, wholly unformed, and in many ways distinctly different from tax exits: as-of-right, not competed; open-ended, not capitated; use-ecumenical, not use-restrictive; and neither income capped nor rent capped.
Challenge creates advance. As Ellsworth Huntington put it in Mainsprings of Civilization, the course of human progress has always been “coldward and stormward.” For intermediaries, the terra incognita is the Opportunity Zone, and the march of their effort and innovation should be riskward and impactward.
