Doing things backwards

Just had an interesting exchange on a call with the other people participating in my panel at IMN’s Winter Opportunities conference.

Our moderator, an attorney experienced in putting together large real estate funds, asked the panel about our experience transitioning from raising capital on a deal by deal basis to raising commingled funds.

I piped up that, actually, we haven’t made that transition at all. Instead, our commingled funds act almost like marketing vehicles for our much larger joint-venture business.

That’s really unusual for our business, where everyone wants to get on the gravy train of raising larger and larger funds and collecting that tasty 1-2% / year management fee. So, of course, our moderator wanted to know why we are doing things backwards.

The answer is pretty simple. Through a fund, we can commingle the capital of lots of investors writing checks for $500k-1MM, then use that money to buy a small portfolio of projects.

A really rich family can write a check for $500k or $1MM without negotiating the docs, doing much diligence, etc., since, even in an absolute disaster scenario, the loss would not affect them in a meaningful way.

So, that kind of family can invest in a fund and then, once they’ve seen us operate, get comfortable with writing a $3-10MM check for a joint venture with us, where they provide all the capital and we do the work.

Obviously, this is not the normal way real estate private equity businesses develop. But nothing about how we operate is normal, so what’s new?