The SBRE Investor Continuum

 
Matt Burk
November 20, 2015
The SBRE Investor Continuum

There are a large number of real estate asset based funds out there, the vast majority of which are small balance real estate (SBRE) funds, attempting to raise capital from investors. The mainstream media and most industry publications all focus on large, institutional funds such as Blackstone, Colony, and similar private equity hedge funds, and thus most of the press surrounding the types of investors who invest in these real estate funds is slanted towards these institutional funds. Unfortunately, this tends to distort the viewpoint of many SBRE fund managers and helps foster great misunderstanding about what works and what doesn’t in the small balance real estate fund space when it comes to raising capital.

Having launched and run 7 of our own SBRE funds over the years, and having now helped to architect, structure, and create dozens and dozens more for various clients over the past 3 years, I have the luxury of both direct experience in, and first hand observations of, the manner in which non-institutional SBRE fund managers go about raising capital for their funds and from which sources. While no one approach or belief system holds true for every SBRE fund, there are absolutely general principles at work that greatly influence success or failure in capital raising from any given type of investor. My overwhelming experience is that most fund managers, including a younger version of myself, do not clearly understand these principles and thus spend a great deal of time pursuing low probability paths and obtain suboptimal results.

To avoid this, it helps to understand what I call the “SBRE Investor Continuum” and how it works. There tends to be a point or points along this continuum that work better or worse for most SBRE entrepreneurs and fund managers, quite often the same points though not always, and the approaches a manager takes to raising capital should differ depending upon what those points are. What works well for one investor type along the continuum will often not work at all for another. Yet I continually see managers targeting a certain group along the continuum that has a low likelihood of investing in the first place with materials and approaches completely unsuited to that audience, thus further lowering the already small likelihood of an investment from them. There is a huge amount of shot gunning as well as a lot of guesswork (and wasted time) for many managers when it comes to raising capital.

The continuum of investors looks something like this:

  • Unaccredited investor
  • Accredited high net worth (HNW) investor
  • Ultra HNW investor
  • Single Family Office
  • Multi Family Office
  • Registered Investment Advisors/Wealth Managers
  • Broker-Dealer
  • Foundations
  • Endowments
  • Hedge Funds/Private Equity
  • Pension Funds

This list is not in perfect order, as there is no perfect order, and there is some overlap from one to another in some cases. But this continuum, from smallest and least sophisticated to largest and most institutional in nature, more or less represents the universe of potential investors who can theoretically capitalize the SBRE entrepreneur’s fund or syndications.

I am continually amazed at the number of new fund managers who think that merely by the act of creating and launching a pooled investment fund, they are somehow going to be able to advance deeply into the continuum and attract institutional capital. How one even defines “institutional capital” is open to question and interpretation, but by any definition that may gain reasonable consensus, obtaining institutional capital in the form of an investment in shares of an SBRE fund is extremely difficult and statistically highly unlikely. The statistical reality does not, however, prevent many of them from trying.

On the other end of the spectrum, many first time fund managers who are attempting to make the leap to a pooled investment fund from their one-deal-one-investor-at-a-time or fractional/syndication model typically already have a base of investors that are a combination of unaccredited and accredited HNW investors, and they often want to continue to be able to accepted capital from their unaccredited investors. There are a number of important issues to consider around accepting unaccredited investors in a 506 Regulation D fund and I highly encourage managers to engage competent legal counsel to advise on what can and cannot be done in this regard. For the purposes of this article, my contention is that the unaccredited investor does not represent a good long term solution to the capital raising challenges of the SBRE fund manager and should be avoided in a pooled fund format from the beginning. So if the top and the bottom of the continuum should be avoided, where does the smart SBRE fund manager focus his or her efforts? The answer lies in the middle.

In my experience and opinion, the highest likelihood of capital comes from HNW, Ultra HNW, RIAs, and, with a higher degree of difficulty in gaining traction, family offices, with the first two representing the backbone of the investor base. One of the chief characteristics of the SBRE industry is the lack of thorough statistics and data around SBRE funds, both on the investor side and the deal side. The tremendous fragmentation of the market makes it extremely difficult to get accurate information about the breakdown of investors in SBRE funds. Anecdotally, however, and I believe we have as good and comprehensive anecdotal data as anyone, I consider these statements to be quite accurate when spread across a large number of SBRE funds and fund managers around the country amongst all SBRE investment strategies (private lending, fix and flip, value add, discounted notes, etc.). This information has profound implications on the capital raising efforts of smart managers who desire to invest their time wisely with the highest probability of return on that investment of time and want to capitalize their funds successfully.

Each of the different investor types on the continuum have different characteristics, different likes and dislikes, and different forces influencing their investment process, their behavior and their decision making. Understanding what these are for each and how they differ is critical to better success and less wasted time for the SBRE entrepreneur attempting to raise capital from them. Some have much more similarities and overlap than others. The more types one attempts to target, the higher likelihood that their needs and decision making processes will be completely different and thus the less chance our SBRE entrepreneur will be able to effectively create strategies, approaches, and materials that will appeal to each. But again, this does not prevent many from trying, even though statistically it is virtually impossible they will meet with success across the whole continuum (especially the further they delve into the institutional side of the equation). Those managers with higher AUM, deeper experience, and larger teams and resources will typically have a better chance of obtaining institutional capital. New managers with little or no AUM will almost never do it and are far better off to focus elsewhere.

The JOBS Act has opened up a new era of possibilities for SBRE fund managers operating 506 Regulation D funds in terms of what strategies and tactics can be employed to systematically raise capital for those funds. It is beyond the scope of this article to get into all the specifics about which group or combination of groups to approach, how to approach them, and what strategies and tactics make the most sense. The point here is to simply understand and accept that there is in fact a continuum, that each type of investor along the continuum has its own characteristics, and that some are far more likely to be receptive and successful for SBRE funds than others. The statistics, however difficult to obtain and however anecdotal they are, do not lie, and managers seeking to spend their time and their capital raising budget wisely should focus on those with the highest probability of success.

If you’re interested in learning more about investing in Fairway America Fund VII, to visit our listing on SBREfunds.com where you can watch our Managing Director’s, Darris Cassidy, live presentation from the SBRE Investment Summit in Dallas last month.  

To learn more about Fairway America and SBREfunds.com and how they can help you grow your SBRE fund, .

Photo of Matt BurkMatt Burk is founder and CEO of Fairway America, LLC, and SBREfunds.com, and Chief Investment Officer of Fairway’s two proprietary nationwide small balance real estate (SBRE) asset based pooled investment funds, Fairway America Fund VI, LLC, and Fairway America Fund VII LP. Fairway is the nation’s premier consulting, advisory, and investment firm in the SBRE private pooled investment fund space, providing a full spectrum of practical, real world products and services (including capital) needed for true success for SBRE entrepreneurs all over the U.S. Matt is a highly regarded adviser, consultant, and mentor to dozens of SBRE fund managers and author of a widely read blog followed by serious SBRE entrepreneurs and investors. For over 20 years, Matt has led Fairway’s deal underwriting as well as capital raising efforts in Fairway’s seven proprietary funds and individual trust deed investments, resulting in more than $250,000,000 in capital raised from accredited investors through more than 1,000 SBRE deals. He is currently working on multiple SBRE fund consulting engagements nationwide, authoring a book on how to raise capital for and effectively manage pooled investment funds, and dedicating his efforts to create greater awareness and drive more capital to the many high caliber and deserving SBRE entrepreneurs around the U.S.