If you were going to build a firm, would you rather build a Real Estate Private Equity Fund or a Micro PE fund?
If you were going to build a firm, would you rather build a Real Estate Private Equity Fund or a Micro PE fund?
Curious to hear the reasoning for your choice
Created my own small PE firm because it allowed me to utilize my core skill set to influence portfolio company performance dramatically.
IMO...real estate is way too slow. It's a nice place to park money once you have it but you certainly aren't going to get amazing IRR unless you get super lucky or you have a brilliant strategy. It's also way too reliant on macroeconomic conditions....
Totally agree.
Would definitely create a PE firm with several sub segments to cater to Infra, debt and VC. At the end, diversification will help you achieve consistent returns.
From my opinion and experience, for PE Real Estate, in order to make great returns (both capital appreciation and yield) you need direct management experience. I assume at the beginning you may not have enough resources.
May I ask you about your background to have a better idea?
Good luck,
Equity public markets + Startups.
Have always wanted to build a fund of some sort (Hedge Fund) earlier on but know my edge is in private markets and smaller businesses.
Essentially thinking of building a permanent equity firm but having a hard time deciding between RE and micro PE but I think it might make more sense to focus on micro PE instead of RE.
Yes, permanent capital makes so much more sense than flipping a company pre-maturely. The only time to sell equity is when you're offered a very stupid amount you can't say no to or when you stop wanting to work on the asset. Very few companies (IMO) are worth selling at a multiple below a 5x - 7x given what you can do with a divi recap...
Any advice on thinking about capital raising and actually starting a micro PE fund with a perm cap structure?
I have yet to hit any type of fundraising circuit at all and just have ideas + research marinating at this point.
I raise on a deal by deal basis, basically as an IS. This allows us to get the best investors for specific deals. IE retail heavy guys for a retail co.
Very easy to raise given you have a track record & a solid strategy.
Are you structured as a holding co and each deal/company is independent?
What do the terms for an independent sponsor look like for you out of curiosity?
Wondering if you can shed some light on what you define as strategy and resources to look at other strategies? I'm very familiar with styles and strategies in public markets (and a few PE) but wondering if i'm missing anything.
Curious if you're personally running the businesses you're acquiring or passing them off to a hired operator. Thinking of starting with businesses in my close proximity but also want to look at deals globally which would require hiring in management teams - maybe this is a little too ambitious at the moment.
Correct regarding the corp structure, a little more complex due to being Canadian and primarily picking up US deals but that's the gist of it.
RE: terms, closing fee + options if it's an acquisition. We can get quite aggressive for smaller deals.
Strategies/resources. This depends on your skill set and temperament. Kind of hard to tell anyone what kind of strategy to pursue if you don't know them very very well. Myself and my primary partner are both very into distressed/turnarounds and have no problem losing $20,000+ a day of our own money when doing deals like that because we know we can eventually fix it, but it's not something most people can really deal with mentally. With our latest acquisition we were bleeding a ton of cash every day, plus a local reporter called me due to the company's reputation issues...and then an investigator arrived that was hired by a payment processor to make sure the company wasn't fraudulent...all in the first 3 day of being there (lol).
On management/passing off. In minority equity deals we keep the founder around and help them build a real exec team. If they don't scale well then we replace them but have them stick to their strengths. I tell any founder we do a minority equity deal that they want to be replaced and that it will likely happen down the road...and we haven't really had issues because of that. In majority/buyout deals, we have to jump in and stabilize purely because I know we aren't going to find anyone more experienced than us in our space that we could pay less than $$$ a year. Then we work towards transitioning out and installing management. I think you are being unrealistic about hiring management teams if the acquisition is under $20M just given EBITDA won't support highly skilled management being dropped in immediately.
Definitely REPE. Jonathan gray for the inspiration
Care to expand a bit?
Everyone and their mother points to the return differential between the two asset classes but i'm genuinely really interested why you vote for REPE (Jonathan Gray aside)
Sure.
First off - hats off to your username (I like the drake reference)
To be honest with you, I am a real estate guy at heart. People point out (like the guy above me) that RE is cyclical yet I don’t believe that’s the case. There are many sectors in the field (self storage, medical office and affordable housing) that aren’t susceptible to a downturn.
Also - look at the returns that Blackstone has generated from their RE division (one of the highest in the fund). If you are starting your own firm, I believe investors are more willing to chase a hot deal you have tied up than any other vehicle. People understand real estate and therefore makes capital raising easier for your first deals.
I can write 10 pages on this.
What kind of deals would you hypothetically be chasing after in your micro PE fund?
I'd go for the private equity option. One big benefit of being part of a private equity fund is that you can make a private investment in public equity. This means you and other members of your equity fund, can purchase shares in a publicly-traded company outside of a public offering in a stock exchange, as mentioned in the DealRoom. It allows for very direct management and overall it gives you more ''backup'' for your company.
I wish you the best luck!
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