Both Sides of the Table Book Discussion with Paul Shannon | The AAA Storage Podcast #47

Plenty has been written about the formulas behind passive investing. Very little explains how to apply them when a real sponsor is pitching a real deal. That gap is why Paul Shannon wrote Both Sides of the Table, and why I wanted him back on the show to discuss it. Paul has run deals as a general partner, placed other people's capital as a fund manager, and invested as an LP in nearly 45 deals over 10 years.

Three Seats, Three Lessons

Each seat taught Paul something different. As an LP, it was vulnerability: once the wire is sent, the investor has little control over an illiquid asset for years. As a GP, it was how tempting it is to adjust an underwriting model until it says what you want it to say. As a fund manager, it was a heavier fiduciary duty. When you invest other people's money into someone else's deal, you have to know where the risks are hiding, because the sponsor may only tell you what they choose to.

Reading the Cycle and the Sponsor

Paul borrows Howard Marks' image of a pendulum swinging between euphoria and fear. Near market peaks, when leverage is cheap and sponsors project IRRs above 20%, he gets defensive: more debt positions, more stabilized assets, less capital deployed. Near troughs, when values have reset and sentiment is poor, he leans in. The goal is not to time the market. It is to ask whether you are being adequately compensated for the risk.

On sponsors, he quoted Warren Buffett: "We've never succeeded in making a good deal with a bad person." He wants to hear about a sponsor's worst deal, see real skin in the game, and know the sponsor has been an LP in someone else's deal.

Value-Add Versus Development

We also covered a point I wish more investors understood. A value-add deal whose return depends mostly on the exit sale can carry development-level risk, plus an older building's maintenance problems. The test is the spread between yield on cost and the market cap rate. No spread, no value created.

Key Takeaways

• Passive investing still demands active evaluation, before and after you invest.

• Treat urgency language as a reason to slow down.

• Ask a sponsor about their worst deal and how they communicated it to investors.

• Use IRR partitioning and yield on cost to see where a deal's return actually comes from.

• Build an LP portfolio over years, staggered by sponsor, geography, asset class, and debt maturity.

For a deeper breakdown, read Passive Real Estate Investing Isn't Passive: Lessons From Both Sides of the Table.

And Both Sides of the Table is available on Amazon.

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