How To Start A Real Estate Fund – Bridger Pennington

 

A lot of people think that you need a lot of experience to start a fund. They assume that you need Ivy League and Wall Street experience to get started. That is all false. The guest today, Bridger Pennington, has done all that without being any of that. Now, Bridger is the Founder of Black Bridge Holdings and co-founder of Fund Launch, where he teaches people how to start their own funds. Join Ava Benesocky & August Biniaz as they talk to Bridger Pennington all about how funds work. Learn more about the many different types of funds and what they do. Find out where to find fund opportunities. Learn why it’s important to build your network. Discover more about carried interest and open-ended funds. Tune in to find out how to start your own fund so you can reach that millionaire status.

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How To Start A Real Estate Fund – Bridger Pennington

Welcome, Ava.

Thank you, August. Thank you so much for joining us. We are joined by Bridger Pennington, the Founder of Black Bridge Holdings. Before we start, I want to quickly let everybody know how awesome you are. Bridger is the Founder of an investment group that has done over 317 deals in 3.5 years. They started by helping others launch their own funds through Investment Fund Secrets, an online program to help people start investment funds out working on Wall Street or having an Ivy League degree like us. Bridger has spoken on stage to tens of thousands of people across the United States and is on a mission to help entrepreneurs scale their businesses by launching their own funds. Welcome our guest, Bridger.

Welcome, Bridger.

Thanks, Ava and August. You guys are awesome. Thanks for having me. It’s going to be fun. Let’s get down to the nitty-gritty of funds, how to launch them, and how to start some good stuff.

We want to quickly give a background of how we noticed you. You have a large exposure on YouTube. I was on YouTube as I am a lot and someone was talking about how to start a fund. I’m like “We have taken that approach of educating others. Someone else is there educating others on this concept of starting a fund.” Funds are historically for a selected few. They are super exclusive to be a part of. It’s amazing to watch you delving into it, especially since your father is or was a fund manager. You have firsthand information about how to manage or run a fund. That would be great.

 

 

Much respect for you to take an educational approach.

We’ve done both sides. I can dive in a little bit into how we started this thing and how I got in if you guys are alright with that. You guys can lead the discussion. Let me know. I got ADHD and I get off track. Keep me on focus. A brief background on me. I’m Bridger. You mentioned my dad. He still runs a deck of billion-dollar real estate funds and family funds. They have about 117 funds under them. He manages about $25 billion currently. That’s crazy what they do. My brother is a chief compliance officer. They went from $300 million to $800 million real estate fund in six months.

I’ve two funds. We’re launching the third one here pretty soon. It’s been pretty fun. I’ve done that for years, but it wasn’t always that way. Starting out, I grew up in a super regular household. You’re probably like, “Bridger, it’s easy for you. You have your dad and your brother. It’s easy, right?” Yes, I have amazing mentors and stuff to help me, but we grew up in a super average house. We’re super low-key and just normal. My dad had a crappy car. Like a lot of people here, I wanted to be an entrepreneur and start some businesses. I wanted to make some money.

I got into college and started six businesses in my first two years of college and got moving. I was doing real estate wholesaling. I did forex trading. I built websites for people. I did Chinese tutoring. I speak Mandarin Chinese. I did all this random stuff. Finally, my dad grabbed me and said, “You’re like a chicken running with your head cut off. You should go meet my business partner. He’s a successful guy. I think he can help you out.” I said okay and went and met with this guy. I remember driving to this dude’s house. I pulled up and it was this gorgeous white home in a gated community. It almost encompasses the entire cul-de-sac.

I parked my car. I’m like, “Who’s my dad’s business partner? This guy is legit.” I walk up and knock on the door. I’m a little bit nervous. I’m like, “This guy is rich. What do I do?” We sat down and we started to talk. We talked about business and life. I finally asked him, “How did you do this? How did you get all of this?” He laughed and said, “No one asked me that question.” I was a little embarrassed. I guess you don’t ask wealthy people that question. My burning question was, “How did you do this?” He goes, “We started funds. We started investment real estate funds, me and your dad.” At the time, there were about $8 billion that they managed.

To put that into perspective for people, Cardone Capital manage about $1.1 billion. I love Grant Cardone. He is great. At the time, they were at $8 billion, so seven times bigger. Now they’re up to about $25 billion. This scale is huge of a fund. I was blown away. I was like, “Talk to me about how funds work, how some of the most wealthy people on the planet run funds.” I was very intrigued and wanted to start this. I wanted to get into the fund space. I said, “Can you be my mentor? Can you coach me?” He said, “Bridger, go talk to your dad. Your dad knows way more about this than I do.” I was like, “No. My dad’s poor. You’re rich. Can you be my mentor? You’re the guy.” He goes, “I and your dad make about the same amount of money.”

My jaw hit the floor. I was like, “What?” He’s like, “Yeah, we’re pretty much equal business partners.” I remember I left his house. I drove straight to my dad’s house. I was like, “Dad, what the heck? What’s going on? Why have I not been able to order a soda at Chipotle for the past ten years because it’s too expensive and you run this huge fund.” He laughed and he was like, “I like to save and invest my money, and my partner likes to spend and show off his money but yeah, we run this big fund.” I’m getting long-winded here. Long story short, we sat down and my dad started to teach me and coached me about how funds worked. He taught me how they were structured, how to put them together, how to file with the SEC, and how to raise money from investors.

I got pretty excited. I thought it through and the next year, I found a great opportunity to start a fund. I remember taking this idea to my dad. I said, “Dad, I got this great idea. We’re going to do these microloans. They were like $5,000 to $15,000 a piece, short-term, fast-turn loans.” He loved the idea. We mapped it all out. The biggest piece for a fund is you need investors. You need money. For whatever reason, I didn’t think about that much. I remember I was like, “I need some money now.” I thought, “My dad is rich. He doesn’t spend his money. He likes to invest. He would love to invest in my fund.”

The biggest piece for starting a fund is you need investors. Click To Tweet

I remember it was a late Sunday night. I went and met with my dad. I sat down and talked with him. In my best pitch voice possible, I said, “Dad, how would you like to be our first investor in our fund?” He laughed. He goes, “Bridger, if I invest in your fund, I would ruin the experience of you raising money on your own. This will be a crutch that you can never recover from. Your first investor is your hardest investor. If I give you money, you will never recover from this.” It was a big tough love moment. He said no and kicked me out.

I’ve launched multiple funds and tons of deals and to this date, my dad has never invested in a single deal I’ve ever done, but he’s been the greatest mentor ever. He’s always there to answer questions to help me out, but he won’t do it for me. I respect him for that. He’s an incredible man. I went out and hit the streets. I talked to every person. I’m sure people have done this before. I talked to everybody, former boss, college professor, friend, family or anybody. After three weeks, I raised a whopping $49,000, which is teeny. It was the smallest fund ever, but it was enough to get started.

We were doing these small loans that are $5,000 apiece. We started to do these loans and our first investor group got a 64% return on their money. They were ecstatic. They loved it. It was a small amount but it was a good return. From then, we used that as our track record or our base. We’ve launched our second fund and now we’re launching our third fund. We’ve raised and deployed millions of dollars since then and grown a ton. That’s how I started or at least got going.

Since then, I’ve had a lot of people ask myself, my dad and my brother, “How did you guys do this?” My dad grew up in a ghetto in North Las Vegas. He has the total rags-to-riches story. He barely graduated college, the whole thing. My brother and I didn’t go to Ivy League schools. We’re not in the Vanderbilt family. We are not the Rothchild. We had to figure out a different way to do this, the anti-Wall Street or the anti-Ivy League route.

We had a lot of people ask us this. That’s why we started Investment Fund Secrets. It’s a way for us to share with other people how funds work. It’s complicated and hard, but it’s not as hard as you think. It’s not as crazy as you think. No one talks about it. For whatever reason, nobody talks about how private equity, hedge funds, and venture capital funds work and run. They give you the high level and the fluff. They don’t get into the guts of it. That’s what we try to get into and help people do. It has been pretty fun. I do both right now. I run multiple funds and we help teach people as well.

You’re speaking about your father and his frugality. That’s what you want from a fund manager. You want a fund manager to be frugal, not prodigal. That’s amazing for him. That speaks also volumes about your journey where you’re teaching others. Usually, you hear stories about kids that are children of people who are hedge fund managers or fund managers that you don’t see who’s out there educating others. We definitely have to give the accolades and applause that you deserve.

I have incredible parents and they were very smart about how they raised their kids.

Salute to your dad. I look forward to possibly having him on our show sometime in the future. In the world of private equity, there are a lot of terms that are used and at times it gets convoluted. Please describe to us what is the difference between private equity funds, real estate funds, and venture capital funds. People hear these terms all the time, but let’s talk about those three major ones.

I started to fund in Salt Lake City, Utah. If I could do it here, you can do it anywhere as well. Here are the difference between private equity hedge funds, venture capital debt funds, and real estate funds. You hear these terms. What does it all mean? It’s been very freeing for me to dive in, study, and dig this out. They’re all structured pretty much the same. I will go from basic to advance here. The basics of a fund in general is it’s a pool of money. Investors put money into that pool and as fund managers, we can draw from that pool and we can do whatever. We can buy real estate or trade cryptocurrency. I have guys in my group that buy and sell funeral homes out of their funds.

 

They’ll buy up mom-and-pop funeral homes for $500,000 a piece, and they can sell them for double on the public markets. Other guys do almond farm funds. Other people buy movie scripts from Hollywood and sell them to HBO or Netflix. That’s a fund. You have traditional buckets and categories, but with funds, you can do pretty much anything. It’s a bucket of money. That’s all it is. It’s money that you can use to try to turn into more money.

When you hear private equity hedge funds, what is that? What are those buckets? Private equity is a fund. They buy private companies. They buy private equity in private companies. A great example is Sycamore Partners. They’re a huge private equity firm on Wall Street. They own Nine West and Aeropostale. They were going to buy Victoria’s Secret but it fell through. They buy private companies and private brands. You see Blackstone buy the MGM Grand.

They buy these private companies. Usually, what they’ll do is a number of things. They’ll buy them, tear them apart, and sell them in pieces. They will take and IPO them. They’re small-cap private equity funds. My buddy that was buying funeral homes would technically be a private equity company. They’re buying private funeral homes and then selling them to a bigger private equity company that wants a group of homes. For private equity, that’s what you’re talking about there.

Hedge funds are the same thing. It’s the same pool of money, but hedge funds are trading on the public markets. Hedge funds are going to trade on the New York Stock Exchange or they’re going to trade forex or crypto. It’s more things on public exchanges. They’re going to trade bonds and stuff like that. It’s the same model and the same thing. They’re just trading different things.

Real estate funds trade real estate. They’re buying and selling real estate. It’s the same thing. Debt funds are usually issuing loans. My fund is a debt fund. We’re doing loans. That’s your category. Venture capital is similar to private equity. They’re early-stage seed companies. They’re investing in early-stage companies like Shark Tank, and they’ll usually bucket those as venture capital type of funds. When you get down to it, the actual structure and the filings of the SEC are all pretty much the same. That’s why we’ve been able to coach and mentor hundreds of students regardless if they’re doing a real estate fund or private equity or hedge fund because the structure of the filing is similar.

We are going to share Bridger’s contact information. You have a system where you assist entrepreneurs who want to start a fund with the whole process. I was watching one of your videos where you even have the right lawyers that are going to give a better price to people who come through your team. That’s incredible. I’m looking forward to that.

I’m wondering if you could explain the lifespan of a fund and what is common as far as a fund is open-ended or closed-ended.

You guys can find me on Instagram @Bridger_Pennington. We can start chatting. I don’t have a ton of followers so we can chat. I’m not like a million-follower person that’s not going to respond to you. I’ll respond to most people there. For the lifespan of funds, different funds will do different things, but the two main categories are open-ended versus close-ended. Before I get into this, the best thing about funds is there are two main documents of funds. They’re called your LPA and PPM. They’re Limited Partnership Agreement and Private Placement Memorandum. They are two thick legal documents. They’re about 100 to 200 pages each, and they cost you a lot of money, but we call them the bible in our terminology.

The limited partnership agreement and the private placement memorandum are the bibles of the fund industry. Click To Tweet

The best part about funds is you get to write the bible. For your fund, there’s a lot of leeway and decision-making on your end. You can decide exactly what you want to do. I’ll give you a few examples. Every fund is awesome because you can decide, “We want to charge this amount of fee and this amount of carried interest and this type of investment strategy and pieces.” You can put that in your documents and it’s ready to go.

Back to your original question about the lifespan of fund, the two main catalysts most people do is open-ended or close-ended funds. The first one is open-ended funds. This is with trading. Usually, hedge funds will use this. Open-ended means that there’s a start date. Once the money comes in from investors, they can come in and out of that account.

 

If you’re a hedge fund manager, you start with $10 million. You’re trading $10 million, and then more investors come in. Now you have $20 million, $50 million, $100 million and $200 million. You get bigger and bigger. Maybe an investor wants to leave and they can leave and they can come in and out. Typically, you’ll have some kind of period. My fund is an open-ended fund. Investors have to stay with me for at least one year. If they go out early, they have a penalty. After a year, they give a 60-day notice and they can work their money out. You see hedge funds doing that.

Quick one on that. Are they selling back their shares to you after that year if they wish to leave? Is there a secondary market they can trade it on? How does that work?

It depends on how you set up your funds. Some funds will allow a secondary market if you want to trade shares. The problem is you’re not a publicly traded company, so you have to facilitate that. You are under exempt from the SEC. At that point, they’re selling security and so then it becomes regulated. At least in the United States, it’s that way. They will sell their shares back to the company and you have your net asset value. You’ll trade that money out of the fund. That’s how it works.

In real estate funds, they do a close-ended model. You’ll see that in real estate and private equity. My dad’s funds are a great example. I’ll walk you through how their funds are structured. They put their funds on a ten-year timeline and they’re doing multifamily value-add. This is an example. This is not true for everything, but this is how they do it. They say, “In the first eighteen months, we’re going to raise money and start deploying capital. For eighteen months, we’re going to plan to raise $100 million.” They do different closes and stuff in the eighteen months and different marketing strategies to raise money.

As they’re raising money, they’re buying properties. Once that money’s in for eighteen months, investors cannot get in or out of that fund. It is a close-ended locked-up fund. Open-ended investors can come in and out. A close-ended fund, you are locked in because you’re going to start buying these big real estate properties. If an investor in year two and a half is like, “Bridger, I want out of my $20 million,” you’re like, “We have to sell an apartment complex to get your money back.” It hurts the entire fund.

With a trading fund, you sell shares of Apple and Google and you can liquidate your investments. With a real estate fund, it’s a little bit harder to liquidate. They’ll do close-ended funds. In the first eighteen months, they raise $100 million. In years 2, 3 and 4, they are acquiring properties and they do a value-add fund. Essentially, they’re flipping $100 million properties. That’s what they’re doing. They’ll put in dollars to renovate it. They’ll put in a new basketball court or renovate whatever apartment units they’re going to do.

They’ll try to sell at years 5, 6 and 7. They’ll say, “Depending on the market conditions, we can hold until year ten. If you have another 2008 happen, no worries. We’ll hold on until the market recovers and we’ll sell in years 8, 9 and 10.” They’ll say, “We guarantee your money will be back in ten years. Our goal is to have your money back to you in seven years.” Sorry, you can ask questions and we’ll go back over that. That’s called a closed-ended fund because there is a start and an end date.

You’re probably asking, “That’s a long time before I get paid. That’s 7 to 10 years. Why would I ever do that?” What a lot of funds do is they will stack funds on top of each other. For instance, they will do fund one. We have a multifamily real estate fund that we launched. In eighteen months, we raise money and we start deploying capital right after that first eighteen months. They’ll launch fund two right after. “We’re going to launch fund two. We’re still going to do multifamily. This time we’re going to raise $300 million,” and they’ll keep raising money on fund two.

Eighteen months later, we launch fund three and we have fund four. After you’re building your business, after five years, every about 6 or 18 months, you have an entire fund that’s finishing. Now you’re managing 8, 10 and 12 funds and they’re all spitting off cash. They’re closing and opening at different times. You have a consistent cashflow and a lot of money coming your way as a fund manager. You’ll see that inside the closed-ended fund model. Venture capital is another great example. You invest in a bunch of small startups early on and you have to wait a couple of years to succeed. You got to wait 4, 5 or 6 years for them to IPO, get sold or have some big liquidation event. That’s the open-ended versus close-ended model.

 

We had a question that came in here. It is a great question. It’s a little bit off-topic but that’s totally fine. It’s about how to recognize a fund opportunity. Is there a market for funds? If people are interested in investing in a real estate fund or venture capital or private equity, where do you look for such a thing?

They say, “Is there a process to follow?”

If you want to invest in funds and you’re an accredited investor that has a few million you want to put into funds, the thing with most funds in the United States at least is you cannot publicly advertise. That’s why you don’t see TV ads or billboards for funds because they can’t. It’s against the law. Right now, I cannot tell you about my funds or advertise them. It would be against the law for me to do that. What you can do is there are plenty of investor clubs you can join. There are even Facebook groups now. It’s crazy. You can join these groups and talk to registered investment advisors or brokers to find funds. They’re always looking for money. Once you stop at one, you’ll get 100 referrals to funds.

It is against the law in the United States to publicly advertise your fund. Click To Tweet

The other question is if I start a fund, how do I recognize a good opportunity? A fund, in the nature of it, is the perfect catalyst for extreme growth. We have a process called the Fund Launch Formula that we walk through. The first step of that formula is finding that incredible deal or that opportunity like you’re talking about so that you can bolt a fund onto it and scale to the moon. I’ll tell you what I am. I’m good at setting up funds. I’m good at teaching funds. I’m not an investor coach. I don’t teach people how to invest. I teach you how to set up funds. A few things, though. I still know about investing. I still know how to do it but I don’t teach it. There are people that do it better than me, but I see a fund opportunity.

 

 

Number one, a great example is an example my dad gave. Maybe we won’t get into that yet. We’ll talk about it later. That’s more of a money-raising fund capital, but a fund opportunity is something that you are confident enough to put all of your money in. Maybe not all but a good portion of your net worth. If you’re going to be asking investors to put money into you, you should probably be confident in it.

Number two is testing that concept out. We teach people that before you set up a fund, it’s probably smart to do a few syndications. In real estate, flip a few houses. If you’re going to do a house flipping fund, go flip a couple of houses or partner with somebody who already does it. That’s the other side of the coin. Either do it yourself. If you’re going to be a trader, go trade your own money first. Practice it and then what all fund does is it allows you to instead of trading $10,000, now you’re trading $10 million. Instead of flipping two houses a year, now you flip 85 houses a year. We have a guy that’s doing that right now. He went from two houses in one year and he’s already in the process of flipping 84 houses in a year.

If you are not that person, and I’m usually not that person, to be honest. I’m not an expert that can trade cryptocurrency in the middle of the night. That’s not me. I’m good at finding investors. I go find what I call broke geniuses. These guys aren’t broke. They’re making a couple of hundred thousand dollars a year flipping houses or doing whatever they’re doing, opportunity or whatever. You go to them and this is how my dad’s fund started. My dad found a couple of guys flipping real estate and said, “How would you guys like to run a fund and play with big boy money?” They’re like, “I’d love to. I just don’t know how to do a fund.”

He said, “I know how to do a fund. I have a partner who can raise money. Let’s partner up together.” They all partnered up together. My dad ran the internal workings of the fund and how a fund works. His other partner raised a great network. The other guys were good at real estate and they all needed each other. They took off like crazy.

It’s funny, my dad has a $25 billion real estate fund, but he doesn’t know a lot about real estate. I asked my dad about real estate questions. He’s like, “I don’t know. I have partners though. They know how to do it. I know how to set up funds and file the SEC and do all the structure of it.” That’s what I would say. If you’re not an expert investor, that’s okay. Partner with someone who already is doing it and already has a track record because they have no clue how to set up a fund. Very few people know how to set up funds, let alone do it.

When you say the word fund, when you talk to them about funds, their eyes light up. They want to talk to you more. It’s a weird thing. When you bring up, “I’m working private equity or I run a private equity fund or real estate fund,” people won’t let you stop talking at a dinner party. They’re like, “Tell me more.” They want to learn more, “How do you do that?” It’s such a secret world. It’s not as hard as you think to land those partners. Great question though.

That’s a great answer. We appreciate that. It opened a few questions in my own mind and comments I wanted to make. Our group has plans and inspiration to be a fund eventually. We’re looking into it. Starting a fund in Canada is a lot different than starting a fund in the US, especially a real estate fund. In the US, a real estate fund has an exemption where you don’t need a fund manager. In Canada, you do need a fund manager and cost. The eligibility to be a fund manager is very extensive. It’s very costly to manage a fund.

As you also mentioned, in marketing, it makes it difficult to advertise, market, and raise capital as well. Those are the constraints where we haven’t taken the step yet, but we are a syndicated investment. We find one deal. We raise capital for that deal. We raise the exemption in place to be able to raise the capital and we complete the deal. Essentially, we are a one-deal fund in a way. It’s called SEC syndication and that is what we do.

That’s one point I wanted to make. The other point was about this concept. I noticed a lot of fund managers who don’t have any experience in any business. For example, cryptocurrencies and Bitcoin are something that is in the news all the time. I’ve been involved in investing in cryptos for a long time. What I noticed is certain fund managers are now getting involved. I’m like, “This particular fund manager has no knowledge about cryptos. What is he doing?” You want to think that the misconception is that the fund manager needs to be an expert in what the investment is.

 

 

Just like my background as a builder and as a general contractor, when I build a house or when I build a multifamily, I would manage the project but I would bring on an expert. If I want to build a roof, I don’t know how to build a roof, but I’ll bring on a roofer. I know how to manage a roofer. I know how to make sure the job is done properly and how to pay the roofer. I bring on the expert to do the job. It’s the same idea for a fund manager. Depending on the business idea, you bring that expert. In your father’s case being in real estate, you bring on the experts to do the job needed for that particular process. That’s great to discuss.

No one does it alone. Everyone has partners and other people around them, and build teams.

There are some questions about an EMD or Exempt Market Dealers that are coming up here. The process of raising capital in Canada is a lot different than in the US. Also, the terminology used is a bit different. I have some questions for you in regard to international investing. I saw one of your videos and we’ll get into that in a minute. Talk to us about what you mentioned that you’re good at as far as raising capital. Talk to us about the process of raising capital in the US. Can a secondary broker of capital, I believe they’re called broker-dealers in the US, be used to help and assist the fund manager or a syndicate manager to raise funds and how that process works?

Syndicates are the best way to start, and you guys are doing that. That’s awesome. You can stay at syndicates and grow that way. Funds are another way to scale. That’s awesome. Kudos to you guys. In regards to raising capital, every country is going to have a little bit different laws and regulations around it and don’t let it scare you. I think too many people go, “It’s too complex. I don’t want to learn it. I’m going to stay out.”

Don't let your country's laws and regulations scare you from raising capital. Click To Tweet

I think that stops so many people that could have had amazing syndicates or funds from going forward and doing this. I can speak for the US, but I don’t know Canada’s specific laws on it. I can teach you the strategies for raising money. They are the same in Canada, the US, and all over the world, and the actual laws around it. In the United States, you can raise money through a broker-dealer or a registered investment advisor. They are the two main entities that’ll do it.

If you go to an investment specialist or investment advisor, they’re like, “You should invest in the stock market.” Those types of people have a license in the United States to recommend and sell securities for a fee or commission. In the United States, if you want to use one of those groups, they will take a fee or commission on the sale of the securities. Sometimes it’s around maybe 0.5% or 1% of the money raised for recommending their investors. They have to have a license in the United States to do that. They need usually a series 7 license or a series 63 or 65 license to do that.

Most first-time funds, though like my funds, I don’t use those guys at all because they don’t believe in me. They’re not going to trust me enough because they’re more institutionalized. They’re not going to invest in the first time or even 2nd or 3rd fund, maybe the 4th or 5th fund of a fund manager that’s run for ten years when they start looking to invest into those funds. My dad’s funds are established. They do well. They can go to a broker-dealer or investment advisor, and get some of their clients.

At my level and if you’re under $1 billion, most of the time they’re going to say, “Sorry, you don’t meet all of our due diligence checklists. We’re not going to work with you.” Money-raising for me is a personal network. You’re going to networking meetings and meeting people. You’re working on investors. You’re pitching and you’re asking about funds and getting investments.

We are launching our third fund right now. We’ve got about $15 million in soft commitments that we’ve raised in 30 days, all by personal network and word of mouth. We start pitching investors. That’s what we talk about. That’s what I teach students. Get out there and start pitching. I see a comment on here. “Where do you start first on?” You start the investor first or the deal first. I think you are both in tandem all the time.

You’re always talking to investors and you’re always looking at deals. When you find a great deal, you say, “Mrs. Investor or Mrs. Johnson, do you want to check this deal out?” You do the pitch, and 5 out of 10 times, they’re going to say no. Don’t burn that bridge. Just say, “I’m going to bring you a better one next time. What kind of deal do you want?” You’re working on relationships. With me, the new fund we’re launching of $15 million in 30 days has done pretty well. From my network, it’s probably been about $4 million of that.

I partnered with a good guy who has a great network. He’s a natural salesman. He’s networked for many years and has no idea what to do with his network. There are people like that everywhere. I met a guy, a good friend of mine. His name is Tyrone. He says, “Bridger, what’s up? I’ve got three billionaires that are good friends of mine that want invest into my deal and my fund.” He’s been traditionally the money-raiser. “I want to be a partner also. I don’t know what to do with these relationships.” I was like, “Come on over. I’ll take them. This is great. Let’s do it.”

There are people that already have these incredible relationships. They just don’t know what to do with them. It’s not the how. It’s the who. It’s not, “How do I raise money?” It’s, “Who can I find that can help me raise the money? Who can I find that can help build the fund? Who can I find that’s already good at trading cryptocurrency that I can partner up with?” You can learn stuff yourself, but that’s the faster route. The faster way from point A to point B is lending with your partners. That’s what we’ve seen with money raising. I can go deeper into how I can raise money from investors and build that fund.

We want everything on a high level for people and pick your mind.

Bridger, can you explain the duties and responsibilities of a fund manager and the team needed to manage a fund?

It’ll change a lot throughout the life cycle of a fund. At the beginning of my fund, it was me doing everything. I raised all the money, I did the deals, and I managed the fund. It’s a one-man pony show or whatever you want to call it, a one-man band. You guys are in Canada. I don’t know exactly how it works in Canada, but I’m guessing it’s the same in the United States. As your fund grows and hits certain thresholds, you’ll be required to have certain compliance, regulations, accounting, and audits that you have to do.

When you talk about managing the actual fund and how it works, that’s the stuff you got to start thinking about. The accounting firms that you hire or the name of the accounting firm means a lot to some investors. The type of auditor that comes in that will audit all your books and look through all your stuff, and having the right legal counsel and stuff like that internally. You’ll build that as you grow.

The other thing though that is nice and the best thing about funds is you control all the money. It’s the golden rule. You go, “That’s expensive. That’s a lot of overhead. I don’t want to pay for an auditor. I don’t want to pay for accountants and lawyers.” You’re good because you manage $100 million. All of that costs $200,000. That’s cool. You write a check. That’s 0.2% of your entire fund. It’s a write-off. It’s a business expense of the fund and you pay that there. That’s the thing about funds. You have all the money and so you can hire people. You can bring on consultants and different people because you’re the one with the gold.

 

Those things will come. There are great third-party administrators too that you can hire. There are companies that do this for a living. You pay them a yearly fee of maybe $30,000, $50,000 or $70,000. They will come in and manage all the interworkings of your fund, and make sure that all the numbers are right, the capital, costs, distributions, and equity percentage. They calculate your net asset value. It’s great and you don’t have to worry about that.

When running the fund, there are plenty of resources. Don’t let it scare you. You have the money. You have the gold so you can hire different people and build an incredible business. Elon Musk doesn’t build cars. He doesn’t build rockets. He doesn’t know how to do anything. All he knows how to do is set a great goal and build a team, and that’s what you’re doing. It’s the same thing. Because you have so much money around you, it makes it even easier to do.

What we noticed is what our company was missing was the assets. We have a great investment group that is investing with us. We have our thought leadership platform. The business model or the business plan is there. As far as these assets, assets will be managed by the property management team. How are we going to have this deal flow coming in and how are we going to have somebody who’s experienced to oversee the project?

We came up with the concept of regional asset managers. We looked at the areas we want to be in the US, Arizona, Texas, Georgia, and North Carolina. We’re like, “Let’s look at these areas and see who we want to be our boots on the ground who have decades of experience, who are active real estate investors, and who also run an investment company.” We brought on our regional asset managers in those regions.

These things might get a bit complex and confusing, but now imagine needing to do the process of raising capital and investing across borders. That brings a topic to international investments. I was watching one of your videos about international investors being able to invest in US funds. I’ll quickly talk about us and how we structure it, and then I’ll look forward to for you to discuss that a bit.

Luckily, there’s a treaty between Canada and the US which allow for certain tax exemptions for Canadian investors looking to invest in US real estate. This web of corporations and limited partnerships and the structure that needs to be created don’t make sense for a single investor. When you’re doing syndication buying a $50 million asset, it does make sense to spend $150,000. I’m just throwing out a number there.

It makes sense to spend that for your accountants and legal team, and your offering memorandums on this other border and your private placement memorandums on the US side. It makes sense to create the structure to allow Canadian investors to invest in US entities and also get relief from double taxation as long as they have a certain income in Canada. As long as they have taxes they pay in Canada, they can write off the taxes that have been withheld and have been paid in the US on their Canadian income. Bridger, please describe US funds. Can US funds raise capital from international investors and how that process works?

You described it great and I’ll go even broader. I’m not a tax expert, I’m not a financial advisor or tax advisor, but anytime you cross a border, you are now dealing with two countries’ tax laws and securities laws. You have plenty of funds to do. It’s fine. You have the gold you rule, so you can spend the money. Make sure it justifies the cost of the legal because now you’re just not hiring one account or one lawyer from one country. You probably need to hire accounts and lawyers from both countries to figure out how that works and how it’s going to be structured for that investor. You want to make sure it’s worth your time essentially to go out and do that if it’s a big enough investor from a certain country.

What a lot of funds do that are bigger in scale and raising money internationally is down the road for most funds. I’ve not gotten to this point yet because I don’t need to. There’s plenty of money in the United States for me, so I don’t need to yet, but for you raising a lot of money internationally, my dad’s funds are a great example. They raise money from all over the world, and they will do a number of different things. I’ll give you a few metaphors of what they’ll do to mitigate tax risk and securities risk.

This is not true but this is going to be a metaphor just so you guys know. Don’t go copy this. For example, they raise a lot of money from Asia, Hong Kong or South Korea. If it’s coming directly to the United States into the fund, that investor would get a K-1 and they would have to file US taxes. What they do instead is they will set up a Cayman Islands feeder/locker fund. The investors will invest in the Cayman Islands fund and that fund will invest in the United States.

I know every time you hear about Cayman Islands funds, you think of a scam and Bernie Madoff. Those are probably scams, but this is a legal and totally normal way to do this. It doesn’t mitigate taxes in this scenario. All it does is it allows those investors to not have to file a US tax return. What happens is the Cayman Islands fund pays all the tax in the United States, and then it issues a lesser distribution to its investors overseas. Those investors don’t have to pay taxes in the United States. That’s what it’s doing.

Not all international countries obey and are good with Cayman Island law. These are just metaphors. Let’s say you were investing in Spain. This is a metaphor again. Maybe Spain’s laws don’t work with the Cayman Islands. They’ll set up an Ireland tax entity. They wire their money into Ireland and then that goes into Alberta, Canada, which is a great tax haven. They’ll go to Alberta, Canada, and then they’ll invest in Delaware.

I have heard this from local funds. There are a lot of Alberta Canada feeder funds. These are called feeder funds that they have that flow in. If you’re in Canada, though, you can’t invest in the Alberta feeder fund because you get double-taxed. You have to invest in a Virgin Islands fund and then invest in the Delaware fund. For whatever reason, Canada’s tax law doesn’t allow that. This is a metaphor so don’t take it as tax law because I don’t know it exactly, and tax law changes all the time.

What that shows you is when you get to that level and you’re going to raise money from all over the world, you’ll have great accountants and great tax people that understand how every country’s tax laws work. They’ll set up these different feeder funds that all feed into your Canadian or US fund. That’s how those funds are charged. Parallel funds are the terminology. They have parallel funds that are next to each other for different tax purposes for different investors. Does that make sense?

We call them to flow through in our case. This question is directed to you. Talk to us about the fund that you currently manage, what stage is that and what kind of returns can investors expect? What are you guys focusing on? Touch on that, please.

Because of the law, I cannot pitch you my fund. I can’t get into the specifics. In the beginning, I mentioned our fund does short-term loans. We still do that. Inside our second fund, we do small microloans anywhere from $1,000 to about $35,000 to $40,000. They last about 5 to 6 weeks, and we make somewhere between 15% and 20% return in six weeks. We turn our loans fast. These are small microloans. It’s a niche industry. We have partner companies that send us clients. That’s what we’re in. We are the only one that does these types of loans, which is awesome. We have zero competition in this space, which is awesome.

We do these loans. I’ve done them for a few years. We also do hard money loans on real estate. You guys are probably familiar with that type of lending. We’ll do those as one-off deals. Every month, we’ll probably do 50 or 60 of these small micro loans and we’re turning our entire fund about every month almost. We are fast turn funds. In our first year for that first fund, we got a 64% return. The next year, we got a 49% return. The third year should be somewhere around 36%, somewhere in there. High yield and high return fund. Our investors are super happy. I’ve had to turn down investors because I can’t deploy their money fast enough. Our loans are so fast that we roll our entire funds every six weeks. That’s the one problem with my fund.

If somebody gave me $100 million, I couldn’t deploy it. There are only so many $5,000 loans you could do. That’s the reason we’re launching a third fund, a real estate fund, right now to go and buy. My business partners would be mad at me if I told you all the details of what we’re doing. We’re going to buy all these real estate assets value type of real estate fund. We’re going to use all the investors we have. We want to raise about $75 million for that fund.

For your short-term loan fund that you currently have, are you raising capital on that? What’s the minimum investment? Is there any cashflow? How does that work? Is there any distribution idea?

We’re not raising money for it. My investors are trying to always give more money. The minimum commitment for that was $50,000 per person. People have gone way above that. We payout on a monthly basis. Our loans are so quick to turn, so I give my investors a check every single month. We run an open-ended fund as I talked about earlier. Investors can come in and out. We’ve had no investors leave. They’re all like, “This is great. Keep me in. Give me more money.” We give a monthly check.

How we think about it is we have our base of money. Every time we make profits we scrape off for that month all the profits. We distribute those to our investment and we go back to our original principal, and then we work out from there. We scrape off the top and distribute, and that’s how our fund currently runs. It’s a cashflow type of fund. I would say fewer funds are like that. Most funds are you put money in and you wait for 1, 2 or 5 years before you get paid. You get paid these huge checks at the end. Our fund, we decide to do more of an open-ended fast turn just because we could.

Could you please describe how the fund’s management team gets compensated? Assuming this is done through fees, how are these fees structured?

I’m going to map it out. This would help us understand so much about how fund managers make money and how this all works. We’ll keep it simple. On here, 0% return. For this example, we use 20%. We’ll call it returns or IR. We can get complex on how that number is calculated. We can call this yield. If I got a 10% return this year, that would be right in the middle for our fund. This is how fund managers get so much money. You’ve probably a 2 and 20 fund. I’m sure a lot of people have heard of that. It’s a little more complex than that. I’ll dive into it.

I’ll walk you through how my fund runs. It does this. It’s some kind of pref. Mine does an 8% preferential rate of return. That’s a terminology, preferential rate of return. What this means is the first 8% of all returns goes to my investor. This all comes down to my limited partners or my investor. I tell my investor, “I don’t make any money unless you make 8% first.” In my funds, I then do a 2% catch-up. The 9th and 10th percentile both come to me, the fund manager.

If this year our fund got a 9% return, the first 8% would still go to the investor. I would only take 1% here. Above 10% in my fund, from 10% and 20%, we split 80/20, so 80% goes to the investor and 20% goes to the fund manager. In this example, if we got a 20% return this year, the first 8% would go to the investors. The next 2% would come to the fund, and then 80/20 from 20. Another 8% would go here and another 2% would go here.

I would effectively make 4%, and they would make 16%. If our fund is at 20%, investors made 16% cash on cash return for the year. I made a 4% return. You’re probably like, “Bridger, why are we doing this for a 4% return? That’s so small. What’s the deal?” You’re not making 4% on your money. These guys are making 16% of their money. You are making 4% on the entire fund. If you run a $1 billion fund, you just made $40 million. This term right here is called carried interest. This is a performance fee type of stuff. If you run a $20 billion fund, it starts to add up. If you’re Ray Dalio and you run a $250 billion fund, who wouldn’t want to earn 4% on that? That’s pretty darn good when you’re earning money on the whole fund.

 

This is where you get paid here. You guys are probably asking, “What about management fees?” A lot of funds will also charge over here somewhere around a 2% management fee. That’s taken off the top before anything else. The first 2% would go here and then here. When I started my first fund, I asked my dad about this. Over here, you have performance-based fees on the right. You’ll make 2% regardless. If your fund loses money, you’re still making 2%. My dad told me this though, and this is true in the United States. I don’t know if it’s true in Canada. If you don’t charge a management fee, you don’t have to have a license to run your fund.

If you don't charge a management fee, you don't have to have a license to run your fund in the United States. Click To Tweet

In the United States, you need a license to run a fund, but if you do not charge a management fee, you don’t have to have a license to set this thing up and to run it because you’re not advising the fund. I can dive into all the regulations, but that put a light bulb on. My dad said this, “When you’re starting the first fund and you tell an investor, ‘I don’t make any money until you make at least 8% first,’ that’s a pretty compelling pitch.” Investors like that. You put your money where your mouth is. I still have never charged a management fee in any of my funds. On my next fund, we’re going to charge management fees. This is our third fund. In my dad’s first fund, they didn’t charge management fees. This is a very easy way to attract investors.

 

The larger funds like the Blackstones and the KKRs of the world, do they have a pref return or are they just the 2% and an 80/20 split?

I haven’t seen Blackstones offering documents so I don’t know. For most funds I’ve seen, the industry standard is they have some type of pref, maybe 6%, 7%, 8% or somewhere around there that they have. I don’t know exactly what it is for those funds, but most large funds will have some type of pref.

That could also be separated between the class of shares in the case of people who invest X amount of dollars and get the pref, and the people who are below that, so institutional investors or what have you.

You can tweak this a lot. This is generic. For some funds, you can do a 70/30 split. My fund, once I hit 20% IR, we then start splitting 50/50. I personally make way more money if my fund gets over a 20% IR. That incentivizes me to get higher returns. My dad’s funds originally, on the timeline, did a 16% pref. They told the investors, “We don’t make any money unless you make at least 16% first.” They were like, “Are you serious?” “Yeah.” They were doing hard money loans. This is hard money. As you guys know, hard money has high-interest rates, high points, and stuff like that. This was calculated as APY, annual percentage yield yearly. If they did a loan and they made 20% in two months, or let’s say one month to keep the numbers around in one month, the APY on that isn’t 20%. That would be the yield.

This is the annual percentage yield. You would be at 240%. That would be your APY. Investors get the first 16%. What they did was investors would split with them 50/50 until they hit 18%. The fund managers would take 100% of anything above 18%. Investors were happy. They’re like, “We’re making 16%. This is our 18%. This is awesome.” They’re telling their friends. Little do they know, my dad and his partner are ripping 222% off of a deal. Investors were happy. They were happy. It can be very lucrative the way you structure this. Cardone Capital, to give you another example. I called in and got all their numbers from them. They do 6% pref and I believe a 65/35 split up here, which is pretty low.

They’re pretty fee-heavy as well.

They have a 2.5% or 3% fee or something like that.

We were having an executive meeting in regards to fees and what have you. We were planning to charge in our next deal offering that we have. We’re looking at another team that’s been in business for a while, and they’re extremely fee-heavy. The team is like, “Why aren’t we charging similar fees?” I said, “Guys, this team has the brand. When they have their offering, they have the brand and the track record. Even though our regional asset managers have over twenty years of experience, it’s going to be more difficult without the track record and without that brand to ask for those fees.” The other team is very fee heavy and they continuously charge fees where they don’t need to, for example, without getting into it. That brand is also a huge component of how funds charge fees and what have you.

I focus on people that are starting small. I love the zero management fee because it puts your money where your mouth is with investors. In the fund space, you’re not trying to become a billionaire on your first fund. It’s by fund 3 or 4 is when you start making it big, especially real estate fund. That is when you make the big money. Your first couple of funds or syndicates are all to build track records and relationships with investors. I’ve talked to plenty of managers. They’ll say investors on your first fund will give you a trial investment of $50,000, $100,000, or maybe $500,000. On their 2nd or 3rd investment, they will 10X to 20X their investment if you did a good job on their first investment.

When you go into the fund space, you're not trying to become a billionaire on your first fund. Click To Tweet

I’ve seen that with my investment and everybody else. If they give you $500,000 on the first, they’ll probably give you $5 million or more on the second check. By the third check, they’re going to open up their pocketbooks and write big checks. About the brand, Jim Simons is a great investor. He has the medallion funds. They charge I believe 5% management fee and 45% carried interest. He hasn’t taken new money in ten years. They manage $200 billion in private funds and they’re turning away investors. They don’t even take investors because they have the brand. Jim Simons has crushed the market every year for 30 years. I’ll give you my money. I don’t care what the fee is.

The great thing about investing in real estate funds or real estate syndicates is the risk amount is less because there is an actual physical asset in place. It’s not venture capital. It’s not some business idea. It’s not the unknown world of cryptocurrencies. There is an asset in place. You’re buying an underperforming asset and trying to make it perform better. At the end of the day, it is a pretty sale. There’s risk in every investment, but that was the point I wanted to bring up. We’re getting close to the end of our meeting here.

I want to touch on one last thing here. Bridger, we’re inspired by your online presence as it has a strong focus on education, which we touched on already. Can you please tell us what drives you and how you got motivated in educating others?

Back to my dad. I mentioned my dad in the beginning. He’s an incredible father, and I could talk about him for days, but he instilled in my mind since I was little a few different things that changed my life. The one thing he did over and over again to me was he would point out, and everyone knows these types of people, he would always point out people that moved here from South Korea or Mongolia or wherever, they barely speak English. They moved to the United States or to Canada or wherever they moved, and in 3 or 5 years, they’ve got a restaurant open, a laundromat, and two rental properties.

He would point them out. He’d go, “How does that guy do it? He can barely speak English and he’s doing better than 90% of Americans who grew up here. They went through no education system, no English or native or whatever. How do they do it?” My dad would always say to me, “If they can do that, you have no excuse not to be successful, not to be great, not to go out, and do something amazing.”

If people that can barely speak English can find success in the US, then you have no excuse not to be successful. Click To Tweet

The baseball analogy that always stuck with me is there are plenty of people on the sidelines that are in the peanut gallery, on Twitter, and making comments that love to make fun and poke and whatever, but very few people get in the game and swing the bat. If I get up to the plate and I keep swinging the bat, I’m going to fall on my face, I’m going to strike out, I’m going to whatever, but maybe I’ll hit a single. Maybe I’ll hit a double and maybe I’ll hit a home run. It took me seven business tries before I had one business that made $100,000 like nothing.

After that, our next business took off and got to the 7-figure to the 8-figure range. It scaled off. It was me swinging. I’m like, “I’m not going to wait anymore. I’m going to start doing.” People can laugh. They can make fun and they can joke, but I’m going to do it. I love the quote, “People overestimate what they can do in a year and underestimate what they can do in a decade.” In my life, I’ve kept my expenses low. I live in a crappy apartment. I don’t care to have all the nice things of life as long as it allows me to get up to the plate and keep swinging.

That is something my dad has drilled into my head. We live in the best time in the history of the world to be an entrepreneur. You have online training guys, people can hop on live and listen maybe not to me but to other speakers that are amazing. Hopefully, I shared a few nuggets that were valuable but we can learn so much. There’s so much opportunity. I would hate to be on my deathbed and look back and say, “In my twenties, I should have done that. In my thirties, I should have written that book. In my forties, I should have done that project, but I was too scared and I live with regret.” That’s the scariest thing in life.

That’s what motivates and drives me. We live in such a time of opportunity. It’s never been easier to make money and never easier to go from the rags to riches story. If you think about the history of the world about where we’re at, if you lived in the 1800s or 1500s, if you didn’t own land or weren’t in the right family or didn’t have the right, you didn’t have a shot. Now it’s anybody. It doesn’t matter where you come from. You hear stories over and over again of people being successful. Why not you? The same thing with funds. I’m like, “Screw it. I’m sick of the Wall Street elites running funds. Why not me?” I had a great father and mentor and other people to help me in that way. That’s why I’ve been passionate about doing it and I love it.

Quickly share how people can get in touch with you. What’s the best way for people to get in touch?

Our stuff is called Investment Fund Secrets. If you want to learn more about funds and how they’re structured, it’s InvestmentFundSecrets.com. I have a one-hour free training on there. You guys have seen our YouTube videos and stuff. You google that or Bridger Pennington. On Instagram it’s @Bridger_Pennington. You can DM on there. Our team or I respond to almost all comments on there. Investment Fund Secrets, we have a podcast as well and bring on guests and fund management and stuff. It’s been pretty fun. Those are the ways you find us.

Just to wrap it up here, we’ll end with the questions we always ask our guests. What is the main advice you would have for an investor looking to invest in a fund? What should they look for or what would be your number one advice? I’m going to ask you the reverse question for the fund manager. What would be your advice, even broadly speaking? It doesn’t have to be about investing in a fund, but for an investor, what would be your best advice to an investor?

Invest in a lot of different funds and different things as well. The thing that I look for is how does that investment fit into my overall strategy? I’m fairly young in this game. I am an active investor. I want to be involved and active. I want to have confidence in whatever I’m investing in. On the flip side, a lot of investors want to be very passive. They want to give some money and not even think about it. First off, I would determine where you’re at and what type of investor you want to be.

Secondly, you’ll hear this from most investors. It’s betting on the jockey, not the horse. Look at who’s running your investment. Who’s going to be doing that? A lot of times, I invest in my own stuff because I’m the jockey. I can trust myself but invest in other people. Bet on the jockey, not the horse. You’ll hear that over and over again from investors and having that competence, and deciding what type of investor you want to be in there for that. That’s from an investor’s point of view. It’s a broad question of where you’re exactly coming from. That’s how I look at things to be brief.

As far as someone wanting to start in the investment in the sponsorship and management of either fund or syndication, what would be your advice to somebody starting out and wanting to manage a fund or manage syndication?

I would say the first thing that we always tell people is to get moving. Get started. Start swinging the bat and start swinging with your own money if you can. You guys probably teach this a lot too. Start looking at properties, start getting in the game, get on the MLS or whatever it’s in your area where you can find real estate properties. Start trading or start learning the trading industry, and start looking for that incredible deal.

Once you find that incredible deal, and I call it a deal thesis or it could be an investment thesis, once you have that, everything else is easy. Raising money, getting the investors, legal and all that stuff follow behind an incredible deal. This is what my dad taught me about raising a fund. I was so worried when I started out. I don’t have the track record or the experience. I don’t have a college degree. No one’s going to invest in me.

He said, “Bridger, I want you to imagine this for a second. If we found a Lamborghini Aventador in Billings, Montana. Let’s say there’s a lady who needs to sell it on Saturday morning for $50,000. We’ve had a mechanic go through this Lamborghini. It’s legit. It’s not broken, it’s not fake or something. It’s a legit Lamborghini. We can buy it for $50,000 Saturday morning and we have a verified buyer on Monday morning that’ll buy the car for $200,000. You can make $150,000 this weekend. One rule though, you can’t use any of your own money. You have to raise the money from other people.”

The question to me was, “Could you raise the $50,000 by Saturday?” I thought about it and I was like, “I think I could do that in 3 or 4 days. I could find $50,000.” He goes, “What about $100,000?” I was like, “Maybe, yeah. I’m going to make $100,000 this weekend straight. I can find $100,000 by Saturday. I can do this.” He goes, “Why?” I go, “The deal is foolproof. You said it’s foolproof. It’s guaranteed.” He goes, “There it is.” I’m like, “What do you mean?”

He goes, “The deal was so good. A lot of the time, people in us can raise money, but we’re not that confident in the deal. We don’t truly believe that we’re going to 3X our money on this real estate property. We hope. We think, but we’re not 100% sold. The moment you had a guaranteed deal, all of a sudden, you didn’t care about your track record, your degree, or your network. You were going to find $100,000 in three days. You’re going to scrap tooth and nail for it.”

That’s what you need when you’re starting funds. You got to have a deal or a thesis or an idea so juicy and so guaranteed at least in your mind that you’re going to fight tooth and nail to the brim. That’s when sales become easy. That’s when raising money becomes easy. That’s when all the rest of the dominoes fall into place. It’s when you have that sweetheart golden egg type of thesis or deal lined up. That’s what I would tell someone that wants to get in this game, start shopping, start looking, and if it’s not you, partner with somebody who already has those deals and works with them together.

We had a lot of fun. We hope to have you back on to speak as well. We appreciate it. Thank you.

Thank you so much.

You guys are so great. Thank you so much.

 

Important Links

• Black Bridge Holdings
• Investment Fund Secrets
• YouTube – Bridger Pennington
• @Bridger_Pennington – Instagram
• Investment Fund Secrets – Podcast