Should I Start My Own Fund?
For some reason, running a pooled investment fund seems to have a great deal of appeal to many a would-be manager. I am continually amazed at the number of people I meet who seem to at least contemplate starting their own fund. One recent evening, I ran into no less than four people who mentioned or inquired about the idea of starting a fund. It included an entrepreneur friend of mine who does all variety of business deals (and wants to do them in a fund) and a restauranteur who wanted to use it to acquire farms to procure the “farm-to-table” food supply he wants for himself and other chefs around Portland. While in theory these people could place a pooled fund capital structure around their idea or asset model, the reality is that they probably should not. There are lots of reasons why a fund will succeed or fail, launch or be stillborn, grow or stagnate. The vast majority of people do not understand these reasons very well, including many well-meaning people who have worked or do work in the institutional fund world and whose experiences simply do not translate to the world of small 506 Regulation D real estate based funds. I talk to potential new managers literally every day. One thing I know for certain is that uncertainty and folklores are widespread.
When is the right time to start a fund? Doesn’t the fund need to have a minimum size in order to make it worthwhile? What type of promote do investors want to see? What are other people doing? How broad or narrow does my investment strategy need to be? How do I match the capital to the deals? Can I raise institutional capital? Can I still do deals outside the fund if I don’t have enough capital? What fees should I charge? What is acceptable to investors and what is not? Do I need to have an audit? What expenses does the fund incur and what are the responsibility of the manager? How many assets do I need to have? How do I structure everything? These and dozens of other questions I have heard literally hundreds of times. While there are no hard and fast answers that apply to every situation and every manager, there are many that are highly consistent from one situation and manager to the next yet which are still are widely misunderstood. This is one of the most interesting and at the same time frustrating aspects of what we do. Sometimes people hesitate for the wrong reasons even when they are highly qualified and ready. Other times they want to proceed even when their chances of success are slim.
Whenever I meet and talk with people about their desire to start a pooled investment fund, I always ask the same basic set of qualifying questions. One of these questions is “Why do you want to start a fund?” I want to see how closely their perception of what it will be like to have and manage a fund matches the likely reality of doing so as I find there is often a big discrepancy between the two. The most common first answer I get when I ask my qualifying question of “why” goes something like this. “Well, right now when I get a deal quoted, I have to go hustle around and raise the capital to close the deal. If I had a fund, I would be able to move faster on the deal and get it tied up because I know I have the money.” I ask them how they believe the money will be sitting there just because they have a fund and mostly they really don’t know. People tend to either overestimate or underestimate their ability to raise capital in a blind pool fund. The psychology of it all is fascinating.
The reality is that raising capital in a discretionary fund is in many ways HARDER than raising money for one deal at a time. Raising capital in a fund is a full time job that someone needs to be devoted to doing if a manager is going to succeed at growing a fund. I get asked all the time about characteristics I think would make someone successful or not if they were to start a fund. Assuming adequate origination capacity and deal flow (which is no small assumption), my primary answer is breadth of leadership skills and talents and an appropriate and clear division of responsibilities. One-person shops rarely succeed at launching and growing a fund. In my experience, it is simply too much work for one person to originate and negotiate deals, manage assets, raise capital, and run all the day to day aspects of the operation. I find that it is extremely helpful if there are at least two principals and they clearly understand and accept that one of them is handling the deals and the other is raising the capital. If this is in place, the chances of success increase significantly.
The answer to “should I start my own fund or not?” is very personal to each manager. My goal is always to try to help a person accurately identify the factors that will influence and impact their success to help them make an educated decision. Part of this is understanding what actually constitutes success for any individual, which of course is different from one to the other, and thus asking good questions is paramount. At the end of the day, moving forward requires a leap of faith that is hard for many people to take. There is simply no way to fully appreciate all of the challenges and opportunities, fear and excitement, difficulties and rewards of running a fund unless and until one has done it. Going into it as prepared as possible is the best that one can ask.
Matt 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.