What we are doing here at Adaptive

Our business generally obeys a truism about investing: It’s relatively easy to generate market-beating returns with small amounts of money, but very difficult to do so with large amounts of money.

Because we were capital-starved in the beginning, and needed to generate market-beating returns to attract more, we tuned the Adaptive model to generate market-beating returns on small deals. Over the past two years, we’re probably averaging roughly $2.5MM total capitalization per deal.

That might sound like a lot, but it’s not. If you assume reasonably conservative leverage of, say, 60% loan to cost, we’re only putting out $2.5MM x 40% equity = $1MM in equity per deal.

And, because we’re good at what we do, we’re able to generate pretty great yields on those $1MM investments.

The problem is that you can easily starve doing $1MM investments. To keep the lights on, a real estate private equity business like ours probably need to have $100MM under management, and that would mean doing a 100 of our type deals.

This is why most real estate sponsors eventually move towards doing larger deals, even though these larger deals generally generate lower returns.

We have not done that. Instead, we are slowly but surely building a platform that can handle 100 small deals. It’s so painful that I’m pretty confident it’s never been done before (at least, in LA).

But I think I can see a path to doing it, which would allow us to have our cake and eat it, too: Generate the kind of market-beating returns you can get from doing small deals, while deploying a sufficiently large amount of capital to make the business interesting.