When Is the Right Time to Start a Fund?

When Is the Right Time to Start a Fund?

We often hear from clients “should I start a 506 Reg D fund now or should I wait and get a track record first?” In our experience, there usually is not a “right” or perfect time to start a fund, or to do anything in life that steps beyond the bounds of what you are currently doing. There tend to be things going on in life that can be used as a reason or an excuse not to do something you really would like to do but that you know is going to be hard.

Often the hesitation is more about the fear of the unknown than it is about whatever reasons are being put forth. Our CEO was listening to the audio program “the Speed of Trust” and heard Stephen M.R. Covey quote a beautiful Chinese proverb that we think fits the topic perfectly. When asked the best time to plant a tree, the wise old Tibetan man said “The best time to plant a tree is 20 years ago. The second best time is now.”

If you have been doing private money lending for any reasonable period of time and you understand how to underwrite deals well, you have some of the basic and most important tools to start a 506 Reg D fund.  Generally, we have seen that when clients reach a point where finding investors one deal at a time (or worse yet, finding multiple investors per individual deal and fractionalizing) has become a detriment or hindrance to funding qualified, worthwhile loans they are able to originate, they might want to start investigating moving to a more efficient capital structure. The reason is that this situation means they have developed an origination capacity that exceeds their capacity to raise capital efficiently. It is unlikely that ability to raise capital from one (or more) investor at a time catches up with or surpasses ability to originate good loans. This creates a fundamental limitation. Does this mean you cannot make a good living funding loans on a whole loan basis? Absolutely not. But it does mean that you are very likely going to have to live with the frustration of capital raising lagging behind loan origination volume at times. A 506 Reg D fund – done right, and given enough time and attention –may enable you to transcend this limitation.

A 506 Reg D fund is simply a capital structure.  The complexities have to do with proper structure to attract capital and administering the pooled nature of the assets. However, these are skills and expertise that you can contract. The advantages of having a single investment to sell to all investors (rather than each deal being a different investment you are selling to different people) and of continually raising capital as part of your day-to-day work have a powerful cumulative effect. It takes time to make the transition from a single to pooled asset strategy,  but as the proverb hints at, a tree takes time to grow. If you want to someday enjoy the fruits it produces, we think it can be better for those who are prepared to plant now and start watering, fertilizing, and tending to its growth.

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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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