How Fund Managers Think: A Guide for LPs New To Private Equity

Pascal Wagner (00:00)
Hello, best ever listeners and welcome to another episode of the Passive Income Playbook here on the Best Ever CRE show. I'm your host, Pascal Wagner, and today I'm thrilled to welcome Sanjay Vora to the show. Sanjay is the CEO of Avestor an active fund manager for the Ariel Fund, an advisor to over 200 different funds and fund managers, and a former vice president at Intel. I've had the pleasure of knowing Sanjay for over a year now.

We first connected in person at his fund manager retreat in Seattle. And in this episode, we're gonna dive into the evolving role of private funds in today's market, explore kind of trends and challenges that fund managers face, and then also just learn from Sanjay's lessons of investing as an LP, including his approach to underwriting, spotting red flags and navigating.

you know, different funds. So stay tuned. This is an episode packed with actionable insights for anyone looking to elevate their passive income strategy. Welcome Sanjay.

Sanjay Vora (00:58)
Thank you, Pascal. Great to be here. Super excited.

Pascal Wagner (01:01)
Yeah,

I'm excited to have you on here. So first, just to kind of get us started, can you please give a little bit of context to Avestor, how it came to be, and generally customizable funds?

Sanjay Vora (01:13)
Sure.

It's kind of a long history back. So what happened was is when I was at Intel, I was pretty much 100 % in the stock market. And I'm not sure why, but at one point I'm like, man, this is just really not smart. I really need to diversify out of the stock market. So I started looking at alternative investment options. And this was back around 2013, right when crowdfunding was taking off. And so a lot of press around crowdfunding and all of the new legislation out there. And so I'm like, hey, this is a great

opportunity, let me go ahead and start diving into everything that's kind of crowdfunding, passive investments, real estate investments, etc. So I kind of got my feet, jumped right in, probably faster and harder than I should have gone in and went right for the deep end of the pool, threw a lot of money at it, tried a lot of different platforms and lot of different investments and stuff and learned quite a bit along the way. And so as I went down that journey, five, six years down the road, I realized

is that it's a pretty tough journey for anybody from an investor standpoint. And so we kind of said, hey, why don't we start our own, try to help others start our own private fund. And so that was kind of where Avestra was born.

you know, we thought, hey, there's probably a better way to do stuff, easier way to help investors, help managers. And we kicked off the company and, you know, we launched our own fund and just started running our own fund. And that was kind of how we, you know, started was, you know, went from kind of being an investor to being a manager, you know, in the early days. And then from there, you know, once, you know, we did that for a few years and we're like, hey, there's an opportunity here, not just to help investors, but to help others that want to

get into the space of fund management and that was kind of really how our, you know, how we really took off in terms of trying to build a company.

Pascal Wagner (03:02)
So I'd love to kind of start with, let's dig into first, like, why did you feel like you needed to switch away from the stock market?

Sanjay Vora (03:10)
I think it was pretty simple, right? mean, you see the ups and downs and everybody always first talks about, stock market. The swings were a little bit uncomfortable for me, number one. And some years you do amazing, other years you just go down. Number two, I just felt like it was all the same thing over and over in terms of asset classes. And I really wanted to...

get into different types of asset classes that I wasn't getting into. And then the returns, you talk about average of 8 % over the life, over a decade, two decades in the stock market. And I'm like, there's gotta be better ways to make money than 8%. So reading up on real estate and other things, you see the returns. And in general, if you pick your deals well and you do well, you'll do better than that 8 % in the stock market. So I figured it'd be a good way to diversify

passive investor and you know take a portion of my money and move it out and try something different.

Pascal Wagner (04:03)
Okay, so for context, know, before we've talked about this, that you've done a lot of different deals and you've seen this from a lot of different angles. You've done as an LP, you've done over 25 syndications. So equity investments, and then you've done over a hundred different debt deals. You've lost money on debt, preferred debt, mezzanine, you you've done them all.

Sanjay Vora (04:10)
Yeah.

Yeah. I've made money and lost money everywhere. I've lost money in a lot

of different ways too. So I've learned the hard way. You know, it's great to make money, but it's not so much fun when you lose money.

Pascal Wagner (04:39)
So, you know, I think one of the first things I think about is, is, you know, many people, especially after how the real estate market has performed recently, if they've invested in the 2021, 2022 vintage, a lot of those deals are not, you know, pausing distributions. They're, you know, asking there are more capital calls. And you've kept coming back after

losing, losing deals, whereas I heal a lot of people saying, you know, I'm done with these types of investments for good. I'm just going to go back to the stock market. What do you think has kept you investing in this space?

Sanjay Vora (05:20)
I think it's super simple. all about diversification. At the end of the day, how many of those investors have never lost money in a stock? The stock market's not guaranteed either. When you're picking individual stocks, unless you're just gonna stick it in a mutual fund, forget about it for a decade, and then come back and hope it's done well, you're gonna lose money in the stock market, just like you're gonna lose money in other investments. And the goal at the end of the day is to look at the whole portfolio and say, how is your portfolio performing? And it isn't a, yes,

you're gonna lose money in some places, you're gonna win in some places, and you might win big in some places, and hopefully the average is where you need it to be. So for me, I don't get too emotional about losing money in any one investment. It's painful, it's hard, but it's part of investing, right? You just have to do your best, you have to try to pick the best in terms of what you think will be the winners, who the winning sponsors will be, who the winning stocks will be, and then you...

keep an eye on it and make adjustments as you can. So for me, I don't get emotional about it. It's just, if you want to make money, you got to invest money and with investment comes risk. With risks comes the chance you may lose some of the money.

Pascal Wagner (06:30)
What do you think are those lessons learned that you might have learned from your first couple investments that are maybe different now to the lessons learned in this most recent cycle?

Sanjay Vora (06:43)
I would say when I did my original investments, probably the biggest mistake I made was taking sponsors for what they say. And not that people don't want to be accurate, but when you're in the, and I see it now as we're running the platform.

sponsors are raising capital, and sponsors raise capital, everybody has good intentions in mind, everybody has a good idea of what they think that end point's gonna look like for that specific offering they're doing. And they're super positive and they're gung ho, that's the only way you can raise money, right? You have to be excited about the project that you're raising capital for. So I don't think it's ill intent or bad intentions, but I think as an investor you have to dig deeper

to

truly understand the details of the deals. And that was probably some of early mistakes I made was I went with what the sponsor said without doing enough of my own due diligence and truly understanding the risks associated with a given deal. And the deals that I got burned on are probably the ones where that is exactly what happens. And I think it's a combination of, you understand the sponsor? Do you understand their background? Do you understand the investment? And do you understand the asset class you're getting into? And if you don't,

then you should really try to learn as much as you can about it. And maybe you start out small, right? Don't go in with 50,000, 100,000 investments. Go in, tell a sponsor, hey, look, this is the first deal I'm doing with you. I wanna see how you perform. I want 10,000. And they'll say, no, my minimum's 25. And you say, okay, thanks, I'll move on. And chances are they may come back and say, well, okay, I'll let you in because it's your first deal or something. So I think you have to...

decide, you know, what comfort zone you're in for any of these deals and you have to be willing to lose the money because at the end of the day, you know, you will lose money in some places and you will win in some places and you just don't know which ones are going to perform the best at the end of the day.

Pascal Wagner (08:38)
Yeah, what do you think you learned in this last cycle?

Sanjay Vora (08:41)
This last cycle was quite interesting. I, in Ariel Fund, we have done over 50 plus syndication investments and we've done hundreds of debt deals. One of the things I did as part of, you know, managing that fund is I really looked at interest rates and interest rates were always one of my biggest caveats. so truly understanding what happens to the cash flow on a deal when the interest rate rises is probably

something that has always been top of mind for me, especially after losing money on a couple deals. You really focus on, okay, what are the big risk factors that impact the P &L? And when you think about it, on any real estate deal, your largest expenses is gonna be the mortgage. And what drives the mortgage is the interest rates, especially on...

commercial properties where people are doing variable rate loans. And so, you know, I think, you know, probably the driver that you got most is, you know, people didn't put the caps on, know, sponsors didn't want to spend the money on caps, right? Sponsors didn't predict the rates going that high. None of us predict that the rates going that high. But the question becomes, you know, did you predict enough buffer in your cash flow and in your P &L that you could absorb the interest rate hikes even a little bit? Right?

still survive and now you're seeing the play out of those that you know took that into account versus those that ignored it and you know went for you know when shooting for the stars so

Pascal Wagner (10:07)
How do you think that's going to affect your investing strategy moving forward? What do you think about now?

Sanjay Vora (10:13)
I don't think it's changed much. I think I've been very much, know, mine, I'm kind of in what I would call stage three, right? Stage one was early investor, not knowing what the heck I was doing, getting burned on a few deals, learning, you know, what it feels like to lose money. Stage two was, okay, becoming a more sophisticated investor. And then more than that, becoming, you know, you know, kind of putting my own due diligence and underwriting models together. Stage three was, okay, running my own fund where I'm

responsible for other people's money and ensuring that I'm really looking at things as best as I can. That doesn't mean we're gonna hit it out of the park, but you know when you kind of progress through those three stages, I'm just you know, I'm a lot more, you know,

careful about the deals. We invest in the deals where you put your money and you spend a little bit more time doing the analysis and underwriting and understanding is it truly a good deal and what are the things that can go wrong.

Pascal Wagner (11:08)
What do you

think, so to dig into that, what do you think is a different aspect that you appreciate more putting together your own fund and managing others' capital that you've learned more than just you investing in deals as an LP?

Sanjay Vora (11:24)
I think when I invested in deals as an LP, I got excited over an offering and I invested in some, you know, a hotel that had a very high good brand name.

And I went after, ⁓ this this brand name. I want to go do that.

And I probably got more excited about the name of the brand and not as excited about doing my due diligence on the sponsor and, you know, and the property manager that would be managing that hotel and a lot of the things like that. And I lost all my money. And so, you know, I think you started learning that, you know, you got to take the emotion out of it and focus on the data and probably as a fund manager, that's probably one of the things, you know, I don't get emotional about deals.

about

deals. I just look at the deals as data and I say okay does the data make sense? Does the analysis make sense? Does the business model make sense? Does the money they're requesting make sense? Does the you know what they're trying to do if it's a multifamily? You know I've seen multifamily deals where people are like saying they're gonna turn you know 40 % of the units in a year but their income hasn't dropped. Okay help me understand how you're gonna turn 40 % of your units in a year which is ridiculously high and you don't have any

any

impact to your income when all those units are empty for multiple months as you're turning them. It just doesn't make logical sense to me. So, you know, those are kind of the kind of things you look for in terms of red flags and business model and saying, okay, what is the business model? Whether it's a multifamily, a self storage, you know, new construction versus value add. What is the business model? And then look at the financials, look at the, you know, T12 for the last 12 months, look at all the data and start saying, okay,

does it make sense? And the last thing I ever really look at is the PowerPoint, right? Because the PowerPoint is the spin. you start with, I always try to start with the spreadsheet. If the spreadsheet's not there, that's the first thing I ask for. Let me see the underwriting spreadsheet. If they don't wanna give it to me, I say thanks, I'll move on. So it's super simple, right? If you're a passive investor and you don't take the time or energy to review the underwriting spreadsheet,

That is a failure on yourself because you should be reviewing it. You should be trying to understand what is it that they're doing? How are they assuming the numbers are going to change? What costs are they going to cut? How much is the revenue going to go up by? Why is it going up by? What are the rent assumptions, for example, they're making? And are they realistic? mean, yes, you can't do everything and you can't figure it all out, but there's a lot of basic stuff you can do as an investor to get you comfortable with the data set. And it definitely doesn't come from the power.

point. you know if I was an investor you know that's the one thing I've learned is you know don't spend any time on the power point.

Pascal Wagner (14:05)
So there's a lot of, you know, I think a lot of people get into being a passive investor because they frankly just don't have the time to, you know, do the due diligence and finding a deal, managing a deal, but to also do the type of due diligence that you're talking about takes a lot of time and effort. And especially if you don't know what you're doing, you know, don't know what to look for. Maybe you don't have that, you know, wherewithal to understand.

Sanjay Vora (14:23)
it does.

Pascal Wagner (14:33)
that, you're renovating 40 % of the units, why isn't the income dropping? It almost seems like you get into bigger trouble trying to invest in this space if you don't have that expertise. What would you say to that?

Sanjay Vora (14:45)
I would say there's multiple options there. It's just like anything else. If you don't have time to invest in individual stocks, what do you do?

Pascal Wagner (14:53)
You invest in the index.

Sanjay Vora (14:54)
or invest in an ETF. You invest in a fund, right? A mutual fund or a different type of fund or you invest and you're basically paying somebody a fee to invest on your behalf, your capital into deals you feel accurate. That's what a private fund is, right? It's the same thing. You are paying a manager to do the due diligence, do the work.

Pascal Wagner (14:57)
You're right.

Sanjay Vora (15:16)
that you don't want to do or you don't have the time to do or you don't have the expertise to do. your choices are very simple, right? You don't do the due diligence and you take the risk of losing your money or you take the time to do the due diligence and you can invest directly or if you don't want to, you know, take the time to do the due diligence, then you invest through a vehicle where somebody else is doing the due diligence for you and you're paying them to do it. So, I mean, those are your options or you bow out, right?

Pascal Wagner (15:43)
Right, or you just stuff your money in a safe. Yeah.

Sanjay Vora (15:45)
Exactly.

So I mean, that's just, you know, that's just the way it goes, right? mean, somebody's got to do the due diligence and make a decision on what to invest in. So it's either you or somebody you pay to do it for you.

Pascal Wagner (15:57)
You know, there have been many deals that have gone sideways, obviously many deals that have gone sideways in a cycle. you know, a lot of the chatter I see in these text threads, forums, groups are all about, wow, I trusted this manager to do the due diligence. And, you know, I lost my money. And, you know, it sounds like they didn't do any due diligence. And

You know, there's always that question of like, okay, well, I'm trusting someone to do due diligence. I think this person is doing due diligence. How do I verify? How do I know? How do you approach that?

Sanjay Vora (16:33)
You ask, right? It's simple as that.

Before you invest, ask and say, hey, what is your process? What do you use? How do you do it? How are you picking deals? How are you deciding what deals are good? What deals are bad? Walk me through it. Before I invest with you, I want to understand your investing criteria. want to understand what you've done. want to understand if you've, you know, and honestly, the guys that would scare me the most are the ones or sponsors that scare me the most are the ones that

say, I've never lost money. Because to me that...

in itself, maybe there's somebody out there that's absolutely phenomenal or they've been so crazy lucky that they've never lost money on a deal. But to me, that's rare. And when a sponsor only shows you all the great deals and they show you, you know, here's all the amazing deals I've done. The first thing you have to ask yourself is there's something wrong, you know, or isn't there something wrong? Why isn't there a bad deal? Why isn't there a low performing deal? Where have they lost money?

And are they hiding something? So my red flag, actually when I see like these sponsor sheets and performances they've done, my red flag instantly goes up when I see the IRR numbers and there's nothing low, right? Or there's nothing negative or there's no losses. Because my instant reaction is, okay, are they truly that lucky or are they just hiding stuff? And if they're hiding stuff, that in itself is a red flag.

So,

you know, as an investor, you know, ask the real questions you ask is not what deals have gone well. You ask what deals have gone bad. Where did you lose money or where did you not, you know, go where you predicted to go? And what was the result and what did you learn? Because everybody's going to lose money at some point. It's a question of did you learn from your mistakes? And I personally would rather find a sponsor that's been burned once or twice because I guarantee they've learned their mistakes.

and they're not going to get burned again and they stuck in the game versus somebody who tells you they've never lost that penny for their investors. I just don't buy it.

Pascal Wagner (18:36)
When you, you've now had a lot of different experience when it comes to advising other funds. You give a lot of training to new fund managers. What does that look like? I imagine a lot of this carries over.

Sanjay Vora (18:50)
Well, number one is the funniest thing I always get from fund managers is

You know, I'm just starting out my fund. I don't want to charge anything. I just want, I just want to give away. And to me, that's like the first thing I say is absolutely not. If you're getting into the business, it's like opening a restaurant and giving your food away from free. I just want to give all my food away for free for a couple of weeks or maybe a month so that people love my restaurant. but I don't want to charge any money for the food. You know, I mean, that's what it sounds like to me, right? Like, ⁓ I want to be a fund manager. I want to get in the business of managing people's money.

But I don't value my own time enough that I can defend that I should be paid for my value and so, you know That's like the first thing I did, you know see with a lot of managers, which is they're too scared to take compensation Well, if you're too scared to take compensation that itself You know You got to get yourselves pitched down because you got to be able to explain to people what your value is Because you're providing real value if an investor comes to you and says hey, you know, I don't want to pay you your management

fees. If somebody said that to me, I'd say, okay, good luck, have fun. Because I know how much energy and how much time it takes to do due diligence and evaluate 30 deals to find one deal you might invest in. And the 29 deals that you spent time on, your investors don't know about those 29. They know about the one you put in front of them, right? So I think if you're not willing to get paid for your time,

you know, that in itself is a problem, right? And it doesn't matter.

what you're doing. that's number one. Number two is around structuring of deals, which is you want to structure deals in a way that's a win-win, right? And you want to make sure that your investors get money when the returns go well, but you have to make sure it's a win for you too. Because again, if you want to run a nonprofit, then go run a nonprofit. If you want to run a business where you're going to get compensated for your time and energy, then set up the business model and set up the fund in a way that you're getting compensated. And if some investors

someone like that, tell them to go, you know, there's plenty of other places they can put their money. So you've to ensure that, you know, as a fund manager, you're doing a lot of work and you're getting fairly compensated for that work.

Pascal Wagner (20:57)
Okay, I mean, yeah, I think that's just like a clear, I mean, to me, that's a clear sign of someone who's a newbie versus not. And to me, that would just be a clear red flag of not someone who I want to work with. When, do you feel the same way? I mean,

Sanjay Vora (21:09)
I don't think it's a

clear red flag. think it's just, it's when you come into any new business as what fund management is, that doesn't mean the person's new. The person could have 20 years of experience in what they're doing. They just never started a fund. So they don't understand how it works, right? That doesn't mean, you know, it's like you could be a chef for, you know, 20 years and then you decide to start your own restaurant. That doesn't mean, you know, you just don't know the business side of, you know, what it takes to run the restaurant.

how

to cook the food, make amazing food. You may just not know the business side of things in terms of pricing and structure. So I don't view it as a super negative or a red flag. I just view it as in many cases people are, you know, under, you know, they've been doing deals, they've been doing them a certain way, and then they're transitioning into, you know, wanting to operate and raise capital through a fund. Or, you know, they're just doing it a different way. They may not know how to monetize it. So.

Pascal Wagner (22:04)
So I'd like to dig into that a little bit and I realize I'm gonna put you in potentially an awkward situation with this question, but I am very of the mindset that when I am investing, my number one priority is not to lose money. And with that in mind, I am not paying a new fund manager or a new syndicator

Sanjay Vora (22:05)
we help.

Pascal Wagner (22:25)
to learn with my capital. And I would much rather prefer to invest. First off, I'm a much larger proponent of investing in funds than syndications because I think if one deal goes sideways, that doesn't mean you've lost your entire investment. It's one out of many in a portfolio. So I think if you are a newer investor, the fund approach is a much smarter approach to take. And then also one that has consistently delivered

distributions and returns to investors. so, how do you think about that in terms of, yeah, a lot of new fund managers come onto your platform and they're raising and...

Sanjay Vora (23:02)
Yeah,

it's super simple. Have you ever invested in a startup?

Pascal Wagner (23:06)
I have.

Sanjay Vora (23:07)
Okay, so I mean, if in anything you invest in, know, you know, a lot of times you're investing in a startup where people have experience, but it's a brand new business. There's very high risk and you're taking a risk, but you're assuming that the person that's, you know, got the passion they've got the, you know, and they're smart and they'll figure it out. So sometimes it isn't always about, you have to evaluate the person that's, you know, the

versus evaluating the level of experience because it's a combination. I'm not saying you're not right and you could be one of these guys that, I only want to go into business with somebody who's been doing this for 20 years. But somebody who's been doing it for 20 years has been doing it probably the same way and it may or may not work in the future, right? Where somebody new may see something and a lot of the fund managers we're getting on our platform right now are investing in assets.

classes you would never think about before, right? We're doing things very differently because they're coming up with new innovative ways of wanting to do things. So, you know, there's pros and cons to it, right? Some people are willing to take a risk and, you know, try something new and they know that with that comes a set of risk and potentially high returns. And so I would say, you know, you have to as an investor, look at who you're investing in and see how well and how confident

Pascal Wagner (24:13)
Yeah.

Sanjay Vora (24:28)
and

you feel about that person. And it can be a combination of their personality, the go-getter. You know, got 20 year olds that get millions of dollars in VC funding and startup world. Why? Because these kids are working 24 hours a day. They don't sleep. They live, they breathe and they dream. you know, people like that because they think their chances of success is higher if you just, your brain never shuts down and you're at it all the time, right? So it just, it really varies. It just depends on your personality.

depends on the type of person you want to invest your money with. And we've got fund managers on our platform that have done phenomenal and raised millions of dollars very, very quickly. And they're brand new to the game. But they're super hardworking. They really go at it. And they're putting it all into the business. And so they're able to do it.

Pascal Wagner (25:19)
Yeah, where do you in your journey today invest? How do you, what types of opportunities are you looking into and what stage of, like are you also looking at new fun opportunities? Are you looking at, you know, institutional grade?

Sanjay Vora (25:34)
We don't invest into deals on our own platform just because of a conflict of interest. So, you know, I see an incredible amount of opportunities that I would love to do, but I also feel that it becomes kind of a conflict of interest if I am investing in funds that, you know, where I'm supposed to be responsible for taking care of our customers. So I see a lot of good choices, but, you know, we don't pull the trigger on any of those.

But at a personal level, invest across everything. Because again, me, diversity is key. you know, different asset classes, different types of things, everything from stocks to crypto to real estate. I do invest across the board. It's just diversity.

Pascal Wagner (26:18)
So you've been in the game for decades at this point. What have you seen the shift in the types of assets or the types of opportunities that LPs are gravitating towards over your career?

Sanjay Vora (26:31)
Well, I I think in commercial real estate, it's been pretty consistent. if you're, you know, most of the asset classes have been around forever, right? You do see some new things such as BTRs, you know.

Pascal Wagner (26:46)
Bill Terent.

Sanjay Vora (26:46)
They're

for rent. You're seeing a few new things like that in terms of a few asset classes around real estate. But most real estate, most asset classes have been around for decades, longer than I've been doing it. it kind of depends on the... Part of it depends on what your asset classes interest you. I some people love hotels and they'll only invest in hotels. Some people love multifamily, they'll all invest in multifamily. I kind of like the tip-toe across different asset classes just so can learn a little bit about them. And so I kind

to try to hit investments in various asset classes.

And then you get your quarterly reports, you get your webinars, you get all that stuff as an investor and you start learning about that asset class, RV campgrounds, Going from kind old school RV campgrounds to kind of luxury RV campgrounds these days, right? So there's lots of different change happening, hotel conversions into low family housing and affordable housing. So a lot of different projects and a lot of creative projects out there.

So you kind of have to look around and you know talk to different people and then see what are the things that interest you and where do you want to invest your money?

Pascal Wagner (27:51)
What do you think are the most interesting opportunities that have come around today?

Sanjay Vora (27:56)
.

interesting opportunities. I wouldn't, I don't think there's any one or two I would point to. It's usually projects or different types of projects or different things that people are doing that get exciting. I don't think it's a full asset class. Like, this asset class to me is super exciting and this one is boring. I think within any, any different asset class you take the projects, some projects are pretty cool and exciting and some projects are not so much right. So

So I think it's more just at the project level. I'll see different projects and I'll get excited over some of them just because I think they're just unique opportunities or doing something different.

Pascal Wagner (28:34)
Okay, good take. I like that. What would you say is the threshold that you look for when you're looking to invest in these in a project today?

Sanjay Vora (28:44)
I would probably say number one is it comes back down to the financial plan to me, right? That's always the most important thing. I've kind of, I personally, at a personal level, I've gravitated probably towards projects that are not high risk construction projects and moving more towards income generating projects, but that's maybe because of my age.

there's a little bit more of conservatism on a project that's already pre-existing. I mean, think there's, know, on our platform, some of our, you know, we're seeing some interesting funds getting, you know, coming together around, you know, new types of businesses and, you know, using the funds to raise businesses or purchase businesses that those get kind of, those are pretty exciting in terms of, you know, I won't name the fund or the managers, but we've got a set of guys that

that

are gonna be buying medical practices, right? Pretty interesting, know, it create a fund to raise capital to go buy medical practices. It's something different, that's not something traditional like buying multifamily, right? So lots of different things happening out there. you know, some of it's pretty interesting.

Pascal Wagner (29:53)
So if it's not a particular, you you mentioned that you're looking at these, maybe the decks or the pro forma, the financials over the deck first. Are you saying like, I need a deal to cashflow at least 8 % and then, you know, anything else on top is gravy or?

Sanjay Vora (30:10)
No, I would say I look at, when I analyze it, I look more at the data itself.

Whether it's cash flowing at 8 % or 6 % or 7 % isn't what I'm looking for. It's what is the data set that gets you to that 7 or 8%. So for example, you had, simple one's always multifamily. Let's say it's a 150 unit multifamily complex. When you look at the last 12 months of financials, which by the way, most sponsors don't like to share. So that's like the first thing I always ask a sponsor is can I see the last 12 months of financials?

give me the spreadsheet so can look at them because then I'll look at it and I go okay what does the last 12 months look like then what is the jump for your one post acquisition and does it make logical sense if it's if the income is jumping pretty significantly and the expenses are dropping radically I really start digging in then and saying okay what's going on here and you know why these

you know, what's driving this behavior or what's driving the spreadsheet. Because, you know, in the end, all of this is just Excel spreadsheets. So you can, if there's a number you want at the end, let's say 18 % IRR, oh, I'll just tweak the rent up $20 a month and hey, the 18 % IRR shows up at the end now, cool.

We're good. Okay, but it's great to say that now. How are you gonna actually be able to pull that off? Right? So I think it's important to look at kind of if it's an existing property or existing business, what do you always do when you want to buy? You look at how, what's the historical track record? Then off that historical track record, what is it that is gonna happen in the business plan that would drive the revenue to go up, drive the cost to go down, get the margin to go up?

that would increase the valuation of that asset. understanding that is key. Then you go into the next thing, which is risks. Which is, okay, what are the top risks? How many investment overview decks have you seen where the sponsor focuses on risk? Very few, I mean, maybe you've seen them, but I don't see, it's rare to ever see an investment overview deck where the sponsor says, here's my top five risks on my project.

Right? They never did. Okay, so why don't you ask them what are your top five risks? If they can't answer it, that should be red flag number one because either they don't know the answer, which is scary, or they do know the answer and they don't want to tell you, which is also a red flag.

Pascal Wagner (32:14)
Right.

Sanjay Vora (32:31)
The guy that's doing the best is the guy says, here's the, you know, yeah, it's a great question. Here's what we think are the biggest risks and here's what our mitigation strategies are against those risks. Okay. Now you've thought through it and you know, okay, that sponsor has at least a good answer, whether you believe it, whether you agree with it or not, that's difference. But does that sponsor have the confidence to tell you what those top risks are and what they think they're going to do to mitigate those risks. And if they can answer the question, that's great, right?

be a good sign because anybody who's going into a project, if they're not evaluating what the risks are or where their business model is going to break, as an investor, that's not good, right?

Pascal Wagner (33:12)
I've seen, yeah, I'm with you. think some of the best deals are ones, not the best deals, I think some of the decks are the ones where they do share all of those things and then exactly how they're tackling them. Do you have examples of maybe, in this episode already, you've talked about different things that you ask for. You ask for 12 month historical financials. You want the pro forma spreadsheet, not.

not likely a PDF, but the actual spreadsheets, so can see what the formulas are. For new LPs, what is the best way for someone to build confidence in their ability to assess the underwriting?

Sanjay Vora (33:53)
I...

You know, part of it is you just got to get in and get your feet wet, right? And you got to do it. But if you can't read the spreadsheets, that's scary. What are the loan terms from the bank? What's the number one risk of any asset purchase? 70 % is likely going to be coming from the bank from a capital perspective. So the bank has control, right? When anything goes wrong, the bank's going to start clamping

down on that sponsor and ensuring that they get paid first, way before the investors get paid, Okay, so what are the loan terms associated with the asset purchase? Most LPs won't even ask the question, right? That's kind of scary. If you don't know what the loan terms are, don't know, are there caps? Are they purchasing caps? They're not purchasing caps, right? Can they buy out? What are the penalties if they wanna refi early?

I mean, all of those basic questions on what is the financing.

Sometimes they don't even realize that there's two sets of financing. Okay, that's problem number two. You're coming in as an LP and you don't recognize there's a prefectly guy in front of you. So now you've got the bank in front of you and you've got a prefectly guy in front of you. And then you've got your standard equity. Okay, do you realize that? Do you understand the risks associated with that? Are you okay with that? Because if anything goes wrong, the prefectly guy is gonna get paid way before you're gonna get a penny. those are the

types of things you have to look at and understand the capital stack. As an LP, you have to know the capital stack and understand it, right? And be comfortable with the capital stack. How much is the manager putting in, right? How much is the sponsor putting in? Are they putting in 1%, 2%, 3%, 5%, 10 %? That tells you a little bit about skin in the game, right? So understand the stack. Are you comfortable with it? Understand the long-terms. Are you comfortable with the, you know,

You know with the debt and what the debt is giving if there's prefequity, what are the terms of the prefequity? Do you understand that if you're going to be sitting? Everybody that's in below you. What's the sponsor putting in what you know? When do they get paid versus when do you get paid? You know if you were going to get the fun documents Nobody likes to read sorry sponsoring offering documents fun documents anything, but if you're going to go jump into a syndication If you're going to read any one page out of that 30 40 50 page legal document read the distributions page

What is the order of distributions on how people are going to get paid? Who's getting paid first? What's that split going to look like? What are the caveats associated with the distribution payments? Really important to understand that stuff. Most of the legal language is written in a way to always favor the sponsor. So yeah, you can ask a bunch of questions on it, but 90 % of the doc is going to be written in a format that always

you know favors the sponsor but as an investor you want to look at that other 10 % in terms of what performance are they putting in what are you know what are the caveats they're putting in terms of risks and you know are there anything specific with the risk with the specific property you're participating in is it in a flood zone right is it a tornado risk you know do you have any one of the deals that went south on me look like an amazing multifamily deal really good revenue I thought

wow, this thing's a winner, right? Guess what? 65 % of the units were rented by a military base that happened to be a couple miles down the road. And guess what? There was a deployment. Boom, revenue just tanked. luckily I didn't lose all my money. I lost about half my money on

Why? I didn't realize that with a multifamily you always assume that there's no one big renter. Well, in this multifamily they never told us as part of the disclosure documents that most of the units were being rented by the government. So, you know, that was a risk that I just didn't see as an investor. So, you know, sometimes you don't realize it until you get burned on things to go look for or hate. And that's a great example, which is, you know, when you're doing

Pascal Wagner (37:51)
That's most of it.

Sanjay Vora (37:54)
If you're doing retail center, as an example, right? And you're gonna go and invest in somebody's retail center. Okay, what are the terms associated with each of the leases that are on that retail center? How much is the anchor lease taking? What happens if the anchor lease goes under? How much does the whole property not even have enough money to pay the bank at this point, if the anchor lease goes under? So, I mean, those are the types of things you have to think about.

Pascal Wagner (38:20)
So all of this is, so I'm with you, right? Like these are all questions that you should go through. I also think that to make it easier on myself, I've made myself a Google sheet where I literally have a hundred questions. And when I look at a deal, I make sure that I answer each question so that I know I've crossed every T and I've dotted every I, and every time I get burned on a deal or I find a new helpful hint from a podcast like this, I go add another question to the bottom of my questionnaire.

to just make sure that I don't miss it going forward. And that's a process that I teach people how to go through and I've started to use to cut down on the amount of time that it takes in order to vet a deal. What are the little maybe tips, tricks that you do? Maybe they're similar, maybe they're different, maybe there are more, maybe you hire a third party.

people, what are things that you do or what order do you do them in in order to help you not waste time on this? Because there could be so much, so much time. This is a full-time job on top of your already busy life with kids and family and job and whatever else you have going on.

Sanjay Vora (39:32)
I always have a two stage model, right? Stage one is what I would call the 10 minute review of a deal. And then if it passes my 10 minute review, then only will I spend more time on that deal.

get into the details of it. you know, I would recommend to any LP, kind of create your 10 minute review process, which is what are the things that you're gonna look for that will eliminate your desire to, you know, whatever that is, but eliminate your desire to invest with that deal.

It could be like what you say, know, ask all that. Hey, I don't want to invest with you guys. OK, so one of your initial deal questions would be I don't want to invest with anybody who hasn't done five deals at least. OK, boom. That's your investment question for stage one. I don't want to invest in anything that's over 65 percent LTV. Right. OK, boom. Stage two. I don't want to invest in anything that, you know, there isn't at least five percent sponsor equity investment themselves. I want that much skin in the game. Boom. That's number three.

You have to decide what are the you know, the criteria's that will allow you to cut a deal off the table so you don't spend time on it and Once you determine what are those three four five six things that you're gonna look for to cut a deal then you'll end up limiting 90 % of the deals and the 10 % that remain now go spend the time on them and go do the diligence so build the spreadsheet or build your model of questions on what

What are the things that will allow me to not find a good deal? What are the things that will cause me to eliminate all the bad deals? Then I'll spend the additional time to figure out which ones I want to actually go invest in.

Pascal Wagner (41:13)
love that. I love that. That's also a framework that we teach. You know, I think of it a lot about what is your investment thesis is kind of how I frame this question. Do I want, you know, what's the end goal I'm trying to get to? Am I trying to increase my cash flow? Okay, what kind of minimum cash on cash do I want on a deal? Do I want monthly or quarterly distributions? Does it matter? Do I want to invest in funds or syndications? Do I want to invest with new or institutional size? What are...

Do you think of your investing approach as somewhat of an investing thesis? How do you approach that process?

Sanjay Vora (41:48)
Well, mean, think everybody's process is different. Everybody's thesis is different, right? So yeah, you have to have a set of goals in terms of what you're trying to achieve.

When I was doing it at personal level, it's different than when I was doing it at the fund level. When we were doing it for our fund, we took an approach of debt plus equity together. The debt side would give us some of the cash flow and ongoing income. The equity side would give us long-term capital gains. And so you merge the two together and then you play with both of those and you have both levers to adjust on depending on how the market's doing, what the deal flow looks like.

Sometimes you find more good debt deals, sometimes you find more good equity deals. And then you can kind of decide on how you want to do it. I think everybody's different. I don't think there's one professed answer. I think you have to, as an investor, decide.

you know, where you're going to invest, what are your criteria's, and then look for things that match those criteria and write it down as an investor. Here's the things I want to do, here's what I want to achieve, here's how I want to go at it. And then you try to follow that path.

And then you checkpoint it, even like my portfolio. At the end of every year, I may pay a little bit of attention to my portfolio during the year, but at every end of the year, I do a thorough analysis of my portfolio, every aspect of my portfolio and say, okay, where are we on everything? How are these investments doing? What's exited? What's good? What's not good? Where's my money sitting? Is that where I want it to be? You kind of do that annual checkup, right?

an idea of, okay maybe I need to do this or do that and I did you know you know move some money here move some money there.

and you get those high level models into your head and then you start executing them. So I always do it in December and come January I start executing my changes. I've done it forever. It's just very simple. Take a few hours and have a master spreadsheet that tracks everything and then you review that spreadsheet and you say, okay, this is where I was last year. You duplicate, copy, paste into the same spreadsheet. This is this year's review. Look at what you're doing, what has changed.

from last year and then you set some new goals.

Pascal Wagner (43:55)
Yeah, yeah, it's having a complete system for how you manage your investments, right? Like an LP investment schedule is how I think about it. Just like in real estate, if you own real estate, you have a real estate investment schedule, you need to show the bank that shows what you bought the properties at, what's the leverage, what's the interest rate at. I do the same thing for my LP investments. So good tip there. What do you think are the biggest misconceptions?

that LPs have about fund managers.

Sanjay Vora (44:25)
Biggest Misconceptions.

I mean, I don't know. That's a tough one. I'm not sure I would know what a misconception would be. think sometimes people don't value the fund managers for the time and energy they put in, and they think that it's super easy work.

and don't realize how much energy it takes to go do all of this stuff and run the thing. So I don't know if I would call it a misconception. I would say they undervalue how difficult the job is and what it takes to actually find good deals, or find investment opportunities, and the energy and time it takes. And in the end of the day, time is money, right? And you have to value, you look

at yourself and you put a dollar amount on the value you have for yourself, know, assign a dollar amount to the fund manager because, you know, their time is money too at the end of the day.

So I wouldn't say it's a misconception, but I would say it's more just understanding, you know, when you go to a doctor, you don't debate with the doctor what the charges are. Maybe you do. But most people accept that the doctor has a set of expertise that they've gained over the years for what they're charging for. If you go to an attorney, you go to an accountant, you know, everybody has expertise. A fund manager over time has an expertise. And if you don't need the expertise, then go invest yourself. If you need the expertise, then

be open to pay for it.

Pascal Wagner (45:47)
Yeah, that's fair. mean, that kind of leads me into, I'd like your take on, you know, I think every time an investor loses money, man, you know, the amount of negativity that I think are in these chats where they call certain operators, fund managers, scams, like terrible people.

you know, scumbags and, you know, I'm sure there's a fair share of those that haven't disclosed all the proper things or they ran away, but, you know, I think there's this shift of moving the blame of like, ⁓ this fund manager lost my money. They should have done better instead of looking inward. Where do you think that responsibility sits?

Sanjay Vora (46:27)
It depends on the situation, right? I mean if the fund manager made investments Look The deals deals do go bad, right? I mean Or things happen, right? A tornado hits and all of a sudden you get hit with a multi-million dollar renovations Insurance takes six months to work through You can't get the property back up You know, okay, you can sit

and blame the sponsor or the fund manager all you want. But sometimes things are just out of your control. And so I think in the end as an investor, when you lose money in the stock market, do you go and scream up a storm? Maybe you do. mean, some people do, some people don't. Some people throw lawsuits out there. All kinds of stuff happens.

I think the best thing to do is diversify to a point where you're not so heavily emotionally attached to any one investment that you get that angry. If you had done properly, if you have $250,000 to invest and you go invest 100,000 into one project, well, I would say you've been pretty stupid. So look back at yourself and say, why did I invest 30, 40 % of my total

cash in one deal was that really smart on my part? Forget the fact that that person may have lost your money, but there was some stupidity internally that you should have looked at too, right? So, you know, if you're ever investing more than 5 % of your money in one place, well, you better put a mirror up to your face and say, okay, are you willing to lose more than 5 % of your money in one investment? Because why are you investing so much in any one particular

or investment. It's kind of like in stocks, again, I go back. What do you do at the end of the year? You look at your winners, you look at your losers, you kind of try to recategorize. If there's a big winner, you might sell some of them and then.

Take your gains off the table and go invest it somewhere else. Why because you're kind of rebalancing your portfolio Okay, so if you're doing an alternatives portfolio and you sticking a ton of money into any one deal Because quote that was the only way I could get in Well, maybe you shouldn't have gotten into the deal, right? Don't put 50,000 in if you only have 200 to invest because if it goes bad You are gonna be mad and you're gonna be unhappy because you lost 25 % of your money But you should have never put 25 % of your money

into a single deal in the first place.

Pascal Wagner (48:52)
Totally,

totally. I think it's fascinating how a deal goes bad in this space and then people are like, I'm gonna give this up. I'm gonna go back to the stock market only to realize that that happens anywhere you invest and it's not specific to any one niche.

Sanjay Vora (49:06)
It isn't. mean, if you put all your money in or 25 % if you went into the stock market and picked that took, let's say you had $100,000 to invest and you went into the stock market and you invested in only five companies, 20,000 each.

then I guarantee you'd be pissed when one of those goes bad and you lose the 20,000. It's the same thing. so I think, you know, if you're a smart investor, you will diversify and diversify. Also, you know, I see people getting excited over single sponsors where they keep investing in the same sponsor over and over and over and over. And I'm like, you're being stupid. I get mad at our fund managers when I see them investing into other sponsors too many

times. Why? Because what is it that you think that that sponsor is God? That they're not going to make a mistake? And then what happens when you've over invested in one sponsor or in one geography? Right? Don't go invest all your money in the southeast. Go buy some deals in northeast. Go buy some deals on the west. Right? The markets are different. know, spread your, spread out the risk. You know, if you're a fund manager,

That's why I'm a big proponent of multi-asset class, Spread across multiple asset classes because not all asset classes behave the same, right? And they all work differently. So it's always about diversification at the end of the day.

Pascal Wagner (50:27)
Yeah, you nailed it on the head. Sanjay, where can people learn more about you, what you're up to at Investor?

Sanjay Vora (50:34)
I'm not that proactive. The company, we're on Facebook, we're on LinkedIn. I'll have some posts. You can follow me on LinkedIn. I'm not one of those guys that posts every week. I post when I have something to say. But yeah, I'm on LinkedIn. You can follow me there.

Pascal Wagner (50:51)
Cool. Thanks Sanjay and thank you Best Ever listeners for joining me for the episode of the Passive Income Playbook here on the Best Ever CRE show. Join me next Thursday and every Thursday for more passive investing insights and strategies to help make you a better, more informed investor. If you found value in this episode, please subscribe and leave us a five star review. And until next time, I'm Pascal Wagner and see you next week for another episode of the Passive Income Playbook.

Creators and Guests

Pascal Wagner
Host
Pascal Wagner
I help accredited entrepreneurs & executives in the US replace their primary income through private investments.
Sanjay Vora
Guest
Sanjay Vora
CEO/Co-founder, Avestor Inc | Transforming capital raising with our platform and community. Follow me on Instagram @sanjayvora.
How Fund Managers Think: A Guide for LPs New To Private Equity
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