Alpha Investing has been around since 2014 and I've been partnering with them the last year or so, including meeting them in person at PIMDCON in October. They will be coming to WCICON20 too as a sponsor. A fair number of white coat investors have invested with them in the last year. They have been connecting investors and sponsors for the last 5 years and are now coming out with their first fund. Katie and I are looking at investing and are now doing our due diligence. I figured, why not bring you along for the ride?
In this post, I'll be talking about what we're looking for and then share some of the questions I like to see answered before I invest. Although this isn't a sponsored post (I retain all editorial control), I certainly do get paid advertising fees by Alpha Investing and in fact, serve on an advisory board for the company. I'm still going to shoot straight with you though, and so will Fark Tari, the CEO who provided the answers below to the questions I ask. At the end, I'll talk about our decision-making process.
What We're Looking For
As long-term readers know, our portfolio is 60% stocks, 20% bonds, and 20% real estate. The real estate allocation is divided up 10% equity, 5% debt, and 5% publicly-traded REITs via the Vanguard REIT Index Fund. Up until this year, we've thrown our WCI network blog investments into that real estate allocation because it seemed the best place to put them. But they're really not real estate and frankly they've grown so quickly that they now dominate this allocation. So this year we're removing them from the allocation, which of course leaves us short in the equity real estate department. So it's time to put some money to work in there.
As a general rule, Katie and I prefer funds to individual properties/syndications due to avoiding the hassle of choosing individual investments and the additional diversification. The main downside is a second layer of fees and usually, more complicated tax returns. The purpose of this 10% equity investment is high returns, preferably with any cash flow covered with depreciation. Aside from those returns and tax benefits, we're also trying to earn a premium for being willing to be illiquid for years. These properties tend to be smaller and less stable (i.e. more room for improvement) than the bigger, already stabilized investments you might find in a publicly-traded REIT. We find residential (residential, student housing, senior housing etc) properties to be easier to understand and frankly expect they will do better in an economic downturn since people are MORE likely to rent in a downturn and will need a place to live anyway. So to recap, we want the following:
- Diversified fund
- Depreciation pass through (unlike in a REIT structure)
- Residential
- Experienced managers/sponsors
- Long hold period
- Reasonable amount of leverage
The Questions
All right, let's get into our questions and see if this meets our criteria.
Fund vs Individual Syndications
WCI: You have been successfully connecting your network of sponsors with your network of accredited investors since Alpha Investing was founded, now with 43 different syndications. Why are you now changing your business model to a fund? What is the benefit to your sponsors, to your investors, and to you?
Fark Tari, CEO of Alpha Investing: We view Alpha Investing Fund I as an addition to our existing business model rather than just a change. The intention is for the fund to primarily invest alongside Alpha syndicates. We believe that the fund will lower risk for fund investors through diversification, while still allowing us to target similar returns relative to our existing parameters. All else being equal, we believe this generates a stronger risk-adjusted return. It also provides positive benefits to our existing syndication model as well. It is our expectation that the combination of the fund and individual syndications will, on average, allow us to secure larger capital allocations in the opportunities we invest in, which we believe will be beneficial to all parties. Over the course of time, we believe this will yield better investment terms for the entire network.
WCI: What are the downsides to sponsors, investors, and you of moving from the syndication model to the fund model?
Alpha: On balance, we expect the fund and the individual syndication model to be complementary. However, there are scenarios where there could be conflicts between the two. For example, if there is a project where there is a limited allocation, it may not be possible to invest through both avenues. This is the primary potential downside.
WCI: How will you decide if a deal goes into the fund or is offered separately as a syndication? Where will the best deals go? Do you expect to have fewer individual offerings on your platform?
Alpha: We expect the syndication and fund models to be very complementary. Generally speaking, the amount of equity we invest in transactions is only a fraction of the available equity. If we have multiple pools of capital to pull from and can offer certainty of execution to sponsors earlier in the process, we can secure larger capital allocations in these transactions. As such, we do not expect a decrease in the number of individual offerings on our platform. We generally target 8 – 10 equity transactions a year for the individual syndication model. Subject to market conditions, this will not change. There could be scenarios where there is a conflict between individual syndications and the fund. We will manage these scenarios on a case-by-case basis.
Nuts and Bolts and Aligning Incentives
WCI: How large of a fund are you aiming for, i.e. how much money and how many deals? How will you decide when to close the fund and what is your best guess for when that will occur?
Alpha: We are targeting ~$10 million and expect to allocate that capital across 10 – 12 assets. We are limited to 99 total investors and will close the fund when this limitation is reached. We expect that to occur in Q1 2020.
WCI: How much money will the five leaders of Alpha Investing be putting into this fund? What about the sponsors?
Alpha: All Alpha principals are substantially invested in the overall Alpha Investing platform, and also have a meaningful amount of capital invested in past Alpha transactions. Through our first ~20 transactions, at least one of the firm’s principals and/or our immediate family members were invested in each. But in transparency, this is not sustainable for us to maintain, particularly as we significantly increase the size of our platform and the number of investors that we work with, and as we continue to forgo short-term compensation in furtherance of building a long-term, sustainable real estate investment platform.
On this topic, it’s important to note that part of our evaluation of a sponsor is related to how much of their capital they put into deals. Typically, this falls in the 5% – 10% range. Sponsors having skin in the game is of significant importance to us given that they are the ones that are ultimately responsible for the execution of the business plan for any given investment.
[Editor's Note: I have committed $50K to this fund, but may increase that number depending on my own personal finances and opportunities over the next couple of months.]
WCI: What is the investment minimum? How did you decide on that number?
Alpha: The minimum is $50,000. Given that we expect to invest in 10 – 12 assets, an investment at the minimum will yield an average investment between $4,000 and $5,000 per asset. This is significantly lower than our current minimum of $10,000 for individual transactions, so investors will still benefit substantially from reduced minimums relative to the amount of diversification that the fund will provide. In short, we wanted to create a minimum that we believed was still accessible, but that also still made reasonable sense when considering the number of assets the capital would be allocated to.
The Investments
WCI: What types of investments will the fund invest in?
Alpha: Our representative asset classes are multifamily, senior housing, and student housing. ~90% of our existing equity portfolio has been invested in one of these three asset classes. The underlying rationale and strategy behind this is discussed in great detail in our fund materials. We expect at least 75% of the fund capital to be allocated to investments that reflect our existing investment strategy. We will reserve up to 25% of fund capital for more opportunistic transactions. This could include development deals, or opportunities in other asset classes such as office and retail.
WCI: What states will the fund invest in and how will location affect whether or not the fund invests in the deal? What are the tax consequences going to be for investors? What states are your current sponsors doing their deals in?
Alpha: Our sponsors collectively invest all across the country. To date, we have invested in 18 different states. States, where we have more than one investment, include Arizona, California, Georgia, Michigan, Missouri, North Carolina, Ohio, Texas, Virginia, and Washington. There isn’t a predetermined list of states the fund will invest in, but we would likely expect to see it make investments across 5 – 7 states. Because the fund is expected to invest in properties across multiple geographies, investors may also need to file state income taxes in the states where the properties are located. Investors should always consult their CPA or tax advisor on these topics.
Fees
WCI: I understand the fees on the fund are a 2% upfront fee, a 0.5% annual management fee, and an 80/20 split after the preferred return of 10%. What was the process for deciding how much to charge in fees and why did you choose this particular fee structure?
Alpha: This fee structure is the same as our individual syndications. The origination and management fees are used to cover our costs associated with legal, accounting, management, underwriting, and diligence, etc. In short, we try to structure our fees to allow us to make enough money on the front end to keep our lights on, then on the back end, we are only compensated if we can exceed a 10% average annual return threshold for investors. As such, we are incentivized to identify sponsors and transactions that we believe can perform well over the medium and long-term. We also believe that this fee structure is substantially less dilutive than the standard 2% management fee and 20% carry that still exists across many private equity asset classes.
WCI: How does the promote work exactly? Is there a catch-up? i.e. if the return is 20% on the fund, is the promote 2% or 4%?
Alpha: There is no catch-up, the 20% carried interest is only applied on returns in excess of the 10% average annual return.
WCI: I assume these fees are on top of what the sponsors will charge on each individual deal. What are their typical fees?
Alpha: Correct, because we are capital aggregators, we charge fees for providing access at reduced minimums, doing underwriting and diligence, forming and managing entities, etc. Sponsors do charge separate fees on each individual deal. When vetting a sponsor, we evaluate the economic structure of a sponsor’s deals to understand how the sponsor is paid. While these structures vary from deal to deal and sponsor to sponsor, we seek structures that align incentives (i.e. performance-based fee structures) and require all our sponsors to co-invest in every transaction to ensure better alignment with our investors. A typical structure from a sponsor may be a 70/30 split over an 8% preferred return, with a sponsor investing 5 – 10% of the total equity.
Returns
WCI: How much will investors be paid until deals are purchased and where will that money be invested? How safe is that investment? What happens on the back end as investments are liquidated? Does that go back into this investment or will it simply be returned to investors one deal at a time as they are liquidated?
Alpha: All capital will be called at the time the fund closes. During the capital allocation window, Alpha Investing will keep ~10% of the fund capital in cash, and park the remaining capital with Wedgewood Enterprises (“Wedgewood”) through a liquid promissory note. Founded in 1985, Wedgewood is a highly established and successful private real estate firm. As a leading acquirer of distressed residential real estate, Wedgewood has grown to a multi-billion dollar, vertically integrated real estate platform. Two of the founding partners of Wedgewood are investors in Alpha Investing, and originally incubated the firm in 2015. The aforementioned note will pay a fixed 4.5% interest rate. Given that Alpha Investing will keep some of the fund capital in cash, this will allow Alpha Investing to pay investors ~4% on unallocated capital during the fund’s ramp-up period while maintaining the necessary flexibility to reallocate fund capital to real estate assets as opportunities become available.
It is important to note that the Wedgewood promissory note is being created specifically for Alpha Investing Fund I due to our relationship with the firm’s leaders. We believe this allows us to structure the fund in a way that is ultimately more beneficial to investors, given that they will receive an economic return on their capital while waiting for it to be deployed.
WCI: Do you expect to facilitate an opportunity to 1031 exchange this investment into another when the fund is liquidated in 6-7 years?
Alpha: This fund will not be able to facilitate a 1031 exchange.
WCI: Let's talk about your track record. What returns have your investors seen, both IRR and cash on cash? How does that compare to the pro-forma projected returns? How many deals have matched or are matching or beating pro-forma and how many are underperforming pro-forma?
Alpha: There are 38 transactions that represent the 43 properties we have invested in (a few transactions have multiple properties). To date, 12 of the 38 transactions are partially or fully realized.
- Of those 12, seven currently are or have outperformed expectations. One of these seven sold at a 27.1% IRR, and the other six, if sold today at their appraised values, would all yield investor returns in excess of 25% IRR (in some cases, well in excess of even 30% IRR).
- Three of the 12 have been in line with expectations.
- Two of the 12 have underperformed. In the worst one, we returned capital to investors.
Of the 26 unrealized transactions, four of them closed recently enough to where there isn’t enough meaningful performance data to start drawing conclusions yet. For the rest, we evaluate monthly financials and keep a very strong pulse on current performance and future expected performance. With the information we have available now, there are four or five that are on track to significantly outperform expectations. Similarly, there are four or five that will significantly underperform expectations. The rest are on track to ultimately be in line with expectations.
There are two additional points worth making here. First, there absolutely is risk in all the investments we participate in. Everything does not always go according to plan. This is part of the reason we believe that a fund makes sense. Having exposure to a diversified portfolio of transactions can yield a more stabilized return with lower risk. For example, an investor with exposure to all our current investments would consistently be receiving a high single-digit cash-on-cash return, with significant further upside potential from capital events.
Second, these are long-term investments, and shouldn’t be evaluated on a quarter-by-quarter basis. For example, one of our investments made earlier in 2019 has yielded an annualized return of 1.4% thus far, compared to Y1 projections of 2.6%. At face value, this looks like underperformance, however, the investment is actually on track to significantly outperform expectations. The property in question is 488 units in Phoenix, AZ. Through 6 months, the sponsor renovated 84 units (~17% of the property), compared to 36 renovations projected in underwriting. 83 of the 84 units had been leased at 30% rent increases, compared to 27% increases in underwriting. In short, the sponsor has significantly accelerated the pace of renovations due to very high demand and is achieving higher rent increases than underwriting. If one looks only at the cash yield, it looks like the asset is underperforming, but we maintain a much deeper level of understanding as it relates to the performance of the assets in our portfolio, and have an open line of communication with all sponsors that we invest with.
WCI: Alpha Investing has been open since 2014 and has done deals on 43 different properties. But only 3 of those deals have fully gone round trip with another 9 being partially realized, and all of this in a relatively favorable real estate environment. While this isn't a bad track record, it isn't a very long one. Why should investors invest with you instead of somebody with a 10-20 year plus track record?
Alpha: It’s certainly a fair critique to say that Alpha Investing has only been around for five or so years. However, this is why the sponsor partners that we invest with are so important. We are investing with sponsors and principals that have decades of experience and have acquired and managed hundreds of millions to billions of dollars of real estate. With that said, the underlying product that Alpha Investing provides is our investment opportunities, and the firms that are responsible for executing on these opportunities have long-term track records.
WCI: What returns do you expect investors in this fund to get? What is the best-case scenario? What is the worst-case scenario, both with regards to liquidity and returns?
Alpha: We are targeting a 14% – 17% investor IRR, with an initial cash-on-cash return in the 5% – 6% range, and average cash-on-cash returns over the life of the project in the 7% – 9% range. While it is possible that we could outperform these targets, we are focused on providing a set of return parameters that we believe is realistic given where we are in the market cycle.
While we believe the likelihood of a loss of capital is very small, it is, of course, possible that an investor could lose all their money. As with any investment, losing all of your investment capital is the worst-case scenario. Of course, investors cannot lose more money than they invest (i.e., they are limited liability investors). With that said, an investor should not invest with funds that they cannot afford to go without.
The Market Cycle and Alternatives
WCI: You guys, like many other real estate companies I have heard from recently, seem somewhat cautious about where we are at in the real estate cycle. You say, “We are now in a more mature stage of the market cycle where rent growth and real estate appreciation are expected to be more moderate compared to prior years. Furthermore, we are seeing numerous mixed signals related to the overall macroeconomic conditions.” Given this, why should we invest in real estate at all? Why not invest more in stocks and/or bonds?
Alpha: We are of course cognizant of the fact that we are in a much more mature stage of the market cycle. However, we still believe there is a positive foundation for commercial real estate investments. Our focus is to align ourselves with high-caliber sponsors and invest primarily in what we deem to be need-based asset classes. More comprehensive information on our investment strategy and the benefits of investing in private real estate can be found in our fund materials. With that said, it’s very important to note that we are never trying to convince anyone that they should invest in real estate as opposed to stocks, bonds, or other investment options. If someone isn’t already interested in investing in real estate, we likely are not a fit for them. It’s not our role to talk an uninterested party into investing. However, we have found that there are a lot of individuals proactively looking for a way to access private real estate opportunities. We are interested in forming new relationships with such individuals, sharing what we’re doing, and allowing them to decide whether the Alpha Investing approach makes sense within the context of their individual investment strategies.
There are many common themes from the conversations we have. People often feel that they have too much exposure to the public markets and are looking for ways to further diversify their portfolios. People are looking for more tax-efficient investments. People are often interested in getting passive exposure to private real estate investment opportunities, as opposed to actively managing real estate on their own. We also find that there are a lot of people that have a genuine interest in private real estate but are sometimes hesitant to put too much capital into just one deal because they don’t feel that they have enough of an understanding of the investments. Alpha Investing’s approach can be very beneficial to such investors, because we take the time to build individual relationships with our investors, and we are happy to walk through case studies, answer specific questions, and help someone develop a deeper understanding of the types of transactions we participate in. And now, we are developing a fund vehicle that will provide a greater level of diversification.
Alpha: Again, we don’t believe our role is to tell someone that make an investment with us in lieu of other options. Rather, we are interested in connecting with investors that already have a genuine interest in getting exposure to the types of opportunities we provide. Our goal is to build individual relationships with such prospective investors, them ultimately allow them to decide whether what we’re doing is a fit for them.
With that said, there are some factual differences that we can point out between a private real estate fund like Alpha Investing Fund I vs. the Vanguard REIT Index Fund. An index fund is a diversified, liquid investment. But it is also correlated with the public markets. In addition, a REIT does not have the same tax benefits that exist in private real estate. A private real estate fund like Alpha Investing Fund I is not liquid. However, it is also uncorrelated to the public markets, and can therefore provide a greater degree of diversification in one’s overall portfolio. The investment opportunities within the fund are also generally expected to receive preferential tax treatment due to the use of depreciation, which often allows current distributions from investments to be tax-deferred.
One other potential consideration relates to transparency of information. REITs are sometimes criticized for their lack of transparency and high fees. Informational transparency is critically important to our approach and investors will have access to a full diligence room along with quarterly reports and the financial performance for each investment. Our team is also available to answer questions about specific properties and their performance. This is typically not available through a public REIT.
Ultimately, it’s up to every individual investor to decide what investment opportunities make sense for them. Alpha Investing is simply interested in building relationships with individuals that have a preexisting interest in the types of offerings we provide.
[Editor's Note: REIT distributions are now eligible for the 199A deduction, but that only makes a very tax-inefficient investment slightly less tax-inefficient. I still generally recommend REIT investments be placed into a tax-protected account. Equity real estate, on the other hand, passes depreciation through to its investors, often shielding a significant portion or even all of the income from an investment from immediate taxation, especially with the new accelerated deprecation rules. Equity REITs also tend to invest in larger properties in a later stage of the development cycle. This generally means lower, but more stable returns.]
WCI: Where can investors learn more?
Alpha: Existing investors and members have access to the fund diligence materials through their account at www.alphai.com. For any non-member who is interested in learning more, please request access to schedule a call to speak with one of the firm’s principals. An introductory call is required before an investment can be accepted.
My Thoughts on Alpha Investing Fund I
So I've reviewed the fund materials and asked all the questions I was left with afterward. Now we get to the point where the rubber hits the road. Let's talk about what I like and what I don't like.
What I Like
- Good track record – I'll be plenty happy if they can produce their projected returns and exceedingly pleased if they get anywhere near their past returns. I like seeing track records that match or beat pro-formas.
- Appropriately aligned interests – Most of the manager's return will come from the carried interest. If they don't perform, they don't get paid very well.
- Invests in the asset classes I am interested in – Mostly multi-family and other residential property
- Annualized fund fee of ~0.75% – Much lower than many other funds and crowdfunding platforms.
- No catch-up on the preferred return. They get 20% only of the return above 10%.
- Relatively low minimum – only $50K for the fund, but if that's too much, the individual investments on the platform only require $10K.
- I like that my money is earning 4% while waiting to be deployed. The other acceptable alternative to me is to call capital only when you have an investment ready to be deployed, but that can result in some very long time periods when you have money committed but not invested.
- A fund I have a business relationship with. I try to get every company I invest with to invest in me and am pleased when they do. So far, Vanguard keeps turning me down.
What I Don't Like
- Going to require multiple state tax returns. Not unique to this fund, but could be avoided by picking individual syndications in Utah, the seven tax-free states, and other states where I am already filing returns.
- Two layers of fees. Another standard downside of a fund. At least they're lower than usual.
- Blind asset pool. You don't yet know the exact properties you will be investing in. Essentially you're buying the fund manager, not the properties.
- Short track record for fund managers. It would be nice to have a fund manager who has managed through an entire real estate cycle. This is becoming harder and harder to find each year as we get further away from the 2006-2010 debacle.
- Minimal fund manager capital invested in this particular investment. As a general rule, I think it aligns interests better when managers lose real money rather than just potential carried interest when an investment goes bad. I do agree with them that the sponsor co-investment probably matters more though and I understand that we all have limited capital.
Katie and I are going to invest at least $50K in this fund. If you'd like to invest alongside us, you know what to do. As always, you must be an accredited investor, there are no guarantees, and this is an introduction, not a recommendation. I had someone ask me recently, “Would the 2011 WCI invest in these sorts of investments?” The answer to that is no, because the 2011 WCI wasn't an accredited investor. It just takes a certain amount of money to be able to maintain appropriate diversification with investment minimums of $25K, $100K, or more. Consider someone with a 10% portfolio allocation to real estate. If minimums are $50-100K, you would need a portfolio of at least $2M in order to split that up into at least 3 different investments. It just isn't practical with a six-figure nest egg. Luckily, these investments are always optional. You do not need to invest in them in order to reach reasonable financial goals if you combine a physician income, a decent savings rate, and a reasonable portfolio of boring old index funds. But if you find the returns, lower correlation with stocks/bonds, and the tax benefits to be an attractive combination, take a look.
Learn more about Alpha Investing Fund I today!
What do you think? What questions do you ask before investing in a private real estate fund? What answers do you like to see? Have you invested with Alpha Investing yet? What was your experience like? Comment below!
Featured Real Estate Partners
I agree that risks are too high with everyone lately going towards the fund model. While I understand RE and the benefits and more so wrt syndication; I would rather just invest in VNQ and call it a day compared to all these mom and pop funds.
When RE crowdfunding started I invested in Realtyshares and a number of other platforms. Losing money in my Realtyshares deal made for an interesting blog post with lessons learned that I would have preferred to avoid.
The fact that I can’t chose the project and look at the underwriting in these funds makes me nervous. Fundrise has been doing well but obviously everything has done well in the last decade. Risk management and experience in bad times is what would be the real test.
The 4 percent on cash is nice, but what is the risk that the “promissory note” won’t get paid? I know the WCI asked that question, but I wanted to ask again. We advisors always tell clients that if they need the money for something (e.g. wedding, tuition payment, down payment, real estate deal) within a year or two, it should be in a risk free asset class—and hence a low return. It is better than the risk of losing money and not being able to make your desired purchase. Every business owner has the low yield cash investment problem. That said, when an investor diversifies her holdings as part of a well balanced portfolio (like this approach), it is ok. It is just that conservative management is admirable for an investment operation. The operator needs to be guaranteed that the money is available when the capital is due. Almost by definition, there must be a substantial risk at 4.5 percent for Alpha (and 4.0 percent to the investor). The 1 year risk free treasury rate is 1.53 percent. The one month T bill is yielding 1.59 percent. Why not use T bills rather than “reaching” for additional yield?
Money you need in a year or two shouldn’t be in this investment at all.
The 4% yield is a bit of a sweetheart deal provided by another real estate company. Yes, there’s risk there. I don’t know whether or not Fark will reply to you here on why he has chosen to take that risk over treasuries.
Thanks for allowing me the opportunity to respond Jim.
It’s important to note that the promissory note in question is being created specifically for Alpha Investing due to the relationship we have with the founding principals of Wedgewood Enterprises. They did not ask us to “lend” them capital, nor they do they need us to in any capacity given the scope of their operations. Rather, we asked them if they could structure a vehicle for us that would allow our investors to earn an economic return while waiting for their capital to be deployed. The promissory note is the result of that request.
I certainly cannot say that the promissory note has no risk, but what I can say is that Wedgewood Enterprises is a privately held, multi-billion dollar vertically integrated real estate firm with 35+ years of operations. The amount of capital in question here is a drop in the bucket relative to the access they have to the broader capital markets, so we don’t see a significant risk of a default scenario. All things considered, we believe the risk/reward calculus comes out well ahead in our favor here.
Good question. How safe is the loan to Wedgewood? What is its credit rating? Is there any security to the loan? Why put 90% of the money raised into this note? Why not simply wait until ready to spend and let investors hold their funds until then?
Even if there is a reason to collect cash before they are ready to put it into real estate, why invest it in this way? Why not in highly safe assets? Is the risk of the note low enough to justify the interest rate? Presumably, since it is willing to issue the note, this represents a lower rate than Wedgewood would pay to borrow the same amount elsewhere. What is the going rate for its borrowing?
Calling money over time also has downsides as I discussed in the post, but if you’re not comfortable with the 4% instrument, you’re unlikely to be comfortable with the fund. As discussed in the post, the reason is to earn a return on your money between the time it is funded and when it is deployed into equity real estate investments.
These are not low-risk investments. If I wanted something that yielded 1-2%, I certainly wouldn’t have it in this fund.
I’ve left a separate comment providing a bit of further insight on the promissory note with Wedgewood. But I would also like to directly respond to your comment regarding whether the 4.5% rate represents a lower rate than Wedgewood would pay to borrow funds elsewhere. Wedgewood does have other debt and preferred equity instruments that pay higher than 4.5%. But it’s important to keep in mind that the vehicle they have structured for us has a high degree of liquidity, whereas the other vehicles I’m referencing generally have longer terms. The liquidity that we are being offered is essential for this to make sense, because we need to have the flexibility to deploy capital in a timely manner when we identify opportunities for the fund. So in short, while there are other instruments that pay higher rates, one can’t make an apples to apples comparison given that they are less liquid. And all else being equal, we would expect a more liquid vehicle to pay a lower rate.
As mentioned in my previous comment on this topic, Wedgewood did not ask to borrow capital from us. Rather, they have structured this promissory note specifically for us, at our request, and have done so in a manner that will allow us to maintain the flexibility we need as it relates to identifying real estate opportunities and being able to quickly deploy capital as needed.
Quick question re: tax implications. When tax documents are prepared, will there be guidance as to the states that will require a separate return? Will it be a K-1, 1099-DIV, or some other form? Thanks!
K-1. Yes, you’ll know which states the fund is investing in and they’ll send you state K-1s where they are required to, but if this is like most similar investments, they’re not going to hold your hand and teach you how to file taxes. That’s up to you and your tax preparer (if any.)
Guess Im missing the appeal of this fund. Ive never seen a fund assess two levels of fees and waterfalls both at the fund level and at each individual deal. The extra 20% promote after 10% is particularly bad and something that only a retail unsophisticated investor would not question.
I would scrutinize the PPM for any other weird stuff that is not LP friendly. The fees related to multi state tax filing is not insignificant either on a 50k investment further reducing the return while locking your money up for a long time.
I would also question doing blind development deals at this time of the RE cycle or senior/student housing which was underperformed.
WCI: I assume these fees are on top of what the sponsors will charge on each individual deal. What are their typical fees?
alpha investing fund I Alpha: Correct, because we are capital aggregators, we charge fees for providing access at reduced minimums, doing underwriting and diligence, forming and managing entities, etc. Sponsors do charge separate fees on each individual deal. When vetting a sponsor, we evaluate the economic structure of a sponsor’s deals to understand how the sponsor is paid. While these structures vary from deal to deal and sponsor to sponsor, we seek structures that align incentives (i.e. performance-based fee structures) and require all our sponsors to co-invest in every transaction to ensure better alignment with our investors. A typical structure from a sponsor may be a 70/30 split over an 8% preferred return, with a sponsor investing 5 – 10% of the total equity.
I agree you should scrutinize a PPM.
I agree that it is often better to pay one layer of fees than two, but it really depends on the fees. Any time you go through a platform instead of directly to a syndicator you’re paying two layers of fees. Either that platform is providing you enough value that you’re willing to pay their fee or it isn’t. Sometimes those fees are flat (1% a year plus some origination fee is common) and sometimes they are more “water-fall like” as in this case. The benefit of a waterfall approach is it incentivizes the platform (Alpha in this case) to do a better job picking investments to put in the fund.
Ive never seen a crowdfounding platform deal assess a waterfall % to the LP investor for offering access to the deal/sponsor. in addition to all the layers of fees. I would call that atypical and out of the norm. If anything, those kind of fees are assessed to the GP/sponsor in flat fees or % of money raised.
Philosophically, the promote is for the people that put money at risk as LPs or for the deal sponsors/GP for putting together the deal, managing and disposing it. I dont see why “capital aggregators” should share in this and I dont know any experienced investor that would agree to that. If they believed that strongly in their fund and skill in picking sponsors/deals, they would invest as LPs without the inflated fees.
This fund structure seems suboptimal so I would caution people to have clear expectations of what they are signing up for.
Yes, it is a unique aspect of Alpha. I suppose it is up to the investor as to whether they view that as unique good or unique bad. Sounds like unique bad to you.
If you want to minimize fees as much as possible, I would recommend the Vanguard REIT index fund.
If you like crowdfunders who are paid primarily to aggregate assets, there are plenty that charge a flat 1% or similar.
If you want a more hybrid crowdfunder/private fund that is highly incentivized to only put up good investments on the site (or in the fund), take a look at Alpha, knowing it is going to cost you more in fees.
Either way, do your due diligence and if you don’t like what you find, skip it. There will be another deal coming across the plate next week and there are no called strikes.
First off, I fully agree that what we are doing isn’t for everyone, and we’ll never claim that it is. Generally speaking, investors’ willingness to pay fees is directly correlated to the value they place on reduced minimum investments, access to sponsor relationships, and having a layer of underwriting/diligence performed on their behalf. Not every investor values these things the same way, and that is OK. Our goal isn’t to convince every single person that they should value what we’re doing, rather, our goal is to build long-term relationships with individuals that do derive value from what we’re doing.
I however disagree that it is atypical for a crowdfunding platform to assess a waterfall % to their investors. Not all platforms do, but there a certainly others that assess similar waterfall structures. On a somewhat related note, the fund of funds model is an investment strategy that involves a double layer of fees that is often more dilutive than our fee structure, and many sophisticated investors participate in this strategy. So while any given investment vehicle may not be a fit for a specific investor, I don’t believe it’s fair to generalize that it’s not a fit for other sophisticated investors.
Ultimately, I am always happy to have an open conversation with anyone about the way our fees are structured, how we believe it aligns our incentives, and how it compares to other options. We feel that it is important to be transparent on this topic, and then to allow any individual investor to draw their own conclusion about whether they value what we are doing or not.
Hi. This is a good post still way over my head as Im a nubie but curious to how things are looking for the fund with Covid. Did it close in Q1 of 2020 or has been delayed? Since this is a long haul investment I would think it didnt get affected but just looking for an update and how are you aligning with the current uncertainty.
Thanks.
I believe it closed (check with them though) but it’s certainly being invested more slowly than anticipated due to COVID. First investment is lining up now, in Chicago I believe. So it’s just earning the 4% for now.