Most passive syndicated investments don’t provide for investors to maintain many voting rights. Accordingly, the passive investor must spend time and perform due diligence on the operating partner, in our case, Stelvio Equity Group LLC. In addition, passive investors will have very little insight into the other passive investors who are participating in the offering.
Limited voting rights may sound like a bad thing, but in reality, it’s probably a good thing.
Let’s say for instance you invest in a passive syndicated deal with significant voting rights. What this means, is that by having significant voting rights, you’re allowing your investment capital to be controlled by other passive investors whom you may know very little about and who are likely not experts when it comes to the asset management and property management of the investment.
Look at this extreme example: Let’s say Stelvio Equity Group LLC is raising $2,000,000 in capital to purchase a beautiful apartment complex. In this scenario, let’s say one investor invests $50,000 and another investor invests $200,000. Then, let’s assume a third investor invests the remaining $1,750,000. If the Operating Agreement for the limited liability company the investors are investing in grants passive investors a significant amount of control via voting rights, and their voting weight is based on their proportional investment amount or number of shares, the $50,000 and $100,000 investors’ entire investment is subject to the whims of another passive investor. Further, it is unlikely they will know anything about the controlling interest investor and their financial interests may not be aligned with the passive investor pool.
Furthermore, the general public at large tends to make the wrong decisions during stressful times. You don’t want to be in a position where one person or a very small group can force a sale at an inopportune time.
Conversely, any good syndicator who wishes to have success and longevity in the business is going to present a business plan, do the best job possible hitting the marks of the plan, and effectively communicate with the investor pool to continuously work toward overall investor satisfaction. The syndicator assumes a fiduciary duty to the investors as a whole.
This is not to say passive investors have no voting rights. Generally, voting rights are not granted for day-to-day matters or management decisions. However, rights are provided to the investors for removal of the manager, changes in distribution methods, and additional capital needs.
Limited voting rights can seem counterintuitive on the surface, but the structure is actually designed to protect the investor class from rouge investors.
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