To “Fund” or Not to “Fund”?

To “Fund” or Not to “Fund”?

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There seems to be much misinformation out there around doing a Fund. Some “Institutional” people believe it impossible for someone to launch a Fund less than, say, $250,000,000. They will tell you that you shouldn’t even try it because it is just too hard. Yet we have seen plenty of small balance private money originators put together very solid, profitable and well-run Funds in the $10 million $20 million or $50 million range.  

Our CEO, Matt Burk, went to a real estate finance conference in Miami some years ago and spoke on a panel about “how to put together a real estate fund.”  He listened while his fellow panelists basically told the audience not to start a fund. It’s too hard. Capital is scarce. There are bigger players. The rewards aren’t worth it. There are no institutional investors for emerging managers. And on and on and on. One thing you learn early when you do a fund is everyone has an opinion…and most of them are negative on your chances of launching a fund.

Don’t get us wrong. We are not saying everyone should start a fund. In fact, we think most shouldn’t. You have to be very smart about it, which can be tough to do. People tell us “I want to put a Fund together”, but most have little to no idea where to start. To us, there are only a few critical metrics to consider when assessing whether or not to start a Fund. First, you have to have the right type of asset model. Many models just are not conducive to a Fund capital structure. Second, you need to do some basic financial modeling to see what the potential differences are between where you are today and where you want to go if you do a fund. Third, you need to have a grip on how you intend to raise capital. And fourth, figure out how you are going to administer the fund.

Back to the conference, our CEO says there were several dozen perfectly capable people in the audience, at least partly interested in the idea, or maybe even dreaming, of starting their own fund. They didn’t really know what to believe from our panel. How could they? If you haven’t done it before, there is no way to truly know what it is like. It’s like going to a foreign country where they speak a completely different language. You can read about it in a travel book or look it up on the internet. But you don’t know what it is really like until you’ve been there. No, actually you don’t know what it is really like until you have lived there for a while. However, we think if you have 1) integrity, 2) competence and 3) will, then you have the foundation to take, and even enjoy, the journey. After all, isn’t part of the fun of it proving to others that you can do something they just said you couldn’t?

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Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions.

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