Cash Flow, Growth Investments, or Blend? Class A and B Breakdown
When investing in syndication you may see two different types of Classes of shares in a deal. These shares are known as Class A, and Class B Shares. Class A shares are cash flow shares. Class B shares have more growth and upside potential.
Class A Shares – Consistent Cash Flow
Class A investors want a stable consistent return. Class A investors may be retired, or just want a predictable style of investment. I have invested in 3 syndications so far, I did my first Class A shares investment this last month. It will represent about 10% of my total capital invested, but I wanted to specifically have a higher return. The deal was structured so that Class B shares cash flowed 3.5% year 1, and then slowly worked their way up to 7-9% Cash on Cash by year 5. I did not want to only get 3.5% cash flow yearly while we are seeing real inflation numbers at 20% +. So I went with the Class A shares that payout 10% yearly. My personal goal is to cover all of my monthly expenses with cash flow so at this time it made sense for me to settle for 10% and not accept lower cash flow through B Shares in this deal, even though I may make less long term.
Class B Shares – Growth and Upside
Class B shares give up a little bit of cash flow to the Class A group, but they also receive all of the upsides in the long term. While Class A gets the consistent 10% with no upside, the Class B shares may get lower cash flow upfront, but long term will achieve a potential 15-20% IRR (internal rate of return) upon the exit of the deal.
Blended Investing – using both
An investor may also want to invest in both types of shares. Maybe 60% A, and 40% B? Or vise versa. It all depends on your goals and your investment style.
Take control of the equity stack and invest to meet your goals. Think about what type of investor you are, and consider that before investing in your next deal!
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