In this episode, we sit down with Aleksey Chernobelskiy, an expert advisor to Limited Partners (LPs) in the real estate investment space. As a former portfolio manager at Centrio Capital and a seasoned professional with a background in finance, mathematics, economics, and accounting, Aleksey has a unique perspective on the LP investment landscape. He shares his journey from running a $10 billion commercial real estate portfolio to advising LPs on existing and future investments. Join us as we dive into the world of LP investments, capital calls, and how Aleksey’s insights help LPs make informed decisions in their real estate portfolios.
Get in touch with Aleksey Chernobelskiy:
Website: https://www.centriocapital.com
LinkedIn: https://www.linkedin.com/in/chernobelskiy
If you are interested in learning more about passively investing in multifamily & Build-to-Rent properties, click here to schedule a call with the CPI Capital Team or contact us at info@cpicapital.ca. If you like to Co-Syndicate and close on larger deal as a General Partner, click here. You can read more about CPI Capital at https://www.cpicapital.ca.
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About Aleksey Chernobelskiy
Aleksey Chernobelskiy advises Limited Partners (“LPs”) on existing and future investments. He writes weekly to thousands of investors at LPlessons.co to explain how to properly vet and think about LP investments in the grand scheme of their portfolios. Aleksey also helps General Partners on matters relating to LPs, such as capital calls or feedback on investment decks.
Prior to advising LPs, Aleksey ran STORE Capital’s $10 billion commercial real estate portfolio and oversaw the firm’s underwriting team. Aleksey graduated from University of Arizona with a quadruple major – Finance, Mathematics, Economics, and Accounting.
LP Syndication Success: Aleksey Chernobelskiy’s Guide to Smarter Real Estate Investments
Welcome back to Real Estate Investing Demystified. There is some setting news in the real estate sector. The funds rate has finally dropped.
It’s been four years since they’ve dropped rates to 50 basis points. They weren’t even messing around. It wasn’t at 25 basis points that the markets were accounting for. It was 50 basis points. I guess they’re pretty comfortable with inflation, job numbers, and everything else. It is an election year. We got a quote on debt today at 4.7%. Times are good out there. Is it going to be a bull rush for investors to jump back into the market for everybody sitting the “dry powder” sitting on the sidelines? We shall see. Also, for a lot of syndicators who are in trouble, is this going to save them? On that topic, our guest is going to talk to us about syndicators, syndicators in trouble, LPs, GPs, and all this good stuff.
We had a rate cut in 2024, a few months before 2025.
Extend and forget or something, or however that rhyme goes. Tell our audience a little bit about our guest and we’ll start the show.
Aleksey’s Role And Services
We are joined by Aleksey Chernobelskiy. He advises Limited Partners or LPs on existing and future investments. He writes weekly to thousands of investors at LPLessons.co to explain how to properly vet and think about LP investments in the grand scheme of their portfolios. Aleksey also helps general partners on matters relating to LPs such as capital calls or feedback on investment decks. Prior to advising LPs, he ran STORE Capital’s $10 billion commercial real estate portfolio and oversaw the firm’s underwriting team. He graduated from the University of Arizona with a quadruple major in finance, mathematics, economics, and accounting.
This guy might be a bit of a nerd over here. I suspect that, but awesome. Welcome, Aleksey.
I wasn’t so social in college.
You’re busy studying away. Welcome to the show, Aleksey. It’s great to have you here.
Thank you so much for having me.
I heard a tinge of an accent prior to our show starting. What’s your background? How did you make your way to the US? Let’s start there.
I came when I was eleven from Moscow straight to Arizona and the rest is history.
I’ve been to Moscow. It’s a beautiful city.
It’s about as opposite as you can get.
Moscow to Phoenix or Arizona rather. I’m not sure if Phoenix or not, but interesting. Talk to us about your career. You got into finance at some point or asset management acquisitions. Talk to us about working for an investment firm. How did that all come about?
I held different types of investing roles out of college. I started on the algorithmic trading side. I did other types of buy-side stuff like distressed debt and strategy consulting. Eventually, I moved back to Arizona and that’s when I landed a job at STORE. As you guys noted, the job was pretty interesting. I got to oversee a pretty big team and portfolio. There were two roles that I had.
One was overseeing the existing portfolio, which by the time I left was pretty close to 3,000 properties. I think it was 2,900 give or take. Also, any new deals that came in came through my team to underwrite and understand the risk. Ultimately, I sat on an investment committee to make those decisions for the firm as well. That was the experience. That was fun and then I went on my own. Now, I advise LPs as you guys have noted too.
Talk to us about that transition. You’re working for this investment firm, and you move your way up the ladder getting to that position where you were there, but then you decide to go into the private sector or rather go on your own in your advising business. I know you’re pretty active on Twitter. I’ve heard about you on LinkedIn as well, but mainly on Twitter RETwit. Real estate Twitter is RETwit, right? I think that’s how it goes.
Yeah.
Was your involvement in RETwit and Twitter the impetus for you to look at possibly going on your own because of the following you were getting on there?
Not really. I wasn’t so active on LinkedIn or Twitter. Generally, it’s pretty hard to be so active on social when you’re employed by someone, especially if it’s a public company, etc. The goal was to go out on my own at some point and the time was right, so I did. As part of my entrepreneurial journey, there were no public company challenges of stating my own opinions so I decided to start sharing my thoughts. I did that for a few years pretty consistently and that’s how the following has started.
When I first heard about the services you provide like helping out LPs and GPs in some cases as well, I was like, “That is a service that’s needed in our space,” because a lot of LPs have to figure out themselves. Most times, they’re wealthy. They’re pretty savvy when it comes to investing and knowledge. That’s why they’re even in this alternative space looking to invest. A lot of times they have to be accredited so they must have done well in life and made smart decisions but there isn’t a support network for them except talking to others who’ve invested and being referred to an investment firm or a GP to invest with but your service is helpful.
LP Journey In Seeking Investment Feedback
Talk to us about a journey for someone, an LP who is looking for your services. They see you on Twitter or LinkedIn or they hear about you. Talk to us about that journey. What does it look like? They reach out to you about wanting to invest. Do you provide them with investment opportunities? Do they have to have the opportunity and then come to you? Talk to us about the journey they go through.
It’s the latter. I get this question a lot and maybe I can do a better job of marketing myself. I’m not the best, but as of right now, at least, I don’t connect LPs to opportunities. The only reason I’m engaged is they have found something that they want feedback on. They engage me and I give them my thoughts on the investment, questions to ask, and things like that. That’s usually the timeline if you will.
Talk to us about the compensation. How do you get compensated for helping advise limited partners?
For LPs, it depends on some things, but generally, it’s a flat fee. The result is I push out a report of questions to ask the GP and also, my thoughts on the three pillars that I authored. If you guys saw them on Substack, I’m happy to discuss them but that’s usually how it works. That’s on the new investor side. On the existing investor side, it’s a little bit more complicated because some capital calls are very intensive.
For some capital calls, you could make a decision within ten minutes. I also think a lot of it is dependent on how much money is at stake. It doesn’t necessarily make sense that many times people call me and they have $25,000 invested and they have a capital call. They want to hire me but I tell them that I don’t think that makes sense financially. You can either decide to do the capital call or not do the capital call, but the additional expense of hiring me doesn’t pencil with your potential returns and potential downside or whatever. On that side, I tend to go per hour but again, it varies. If there’s something fixed, then I do that.
You work both on the front end. When somebody has a deal that they’re looking at, they bring it to you and you assess that. We’ll get into detailed questions there, but then you also help them somewhat at the backend when there is an issue with capital calls or other concerns that might have you advise in that capacity.
That’s right. The idea is pretty similar. The whole business started on the premise that there are a lot of people out there who have money to invest and they believe in these types of investments, but they don’t know the right questions to ask. That’s true on the frontend and it’s also true when you get surprised by a capital call.
can’t tell you how many times I’ve gotten calls from LPs that go something like this. It’s a dentist right out of an operating room and he’s like, “I got an email. It says something about a capital call. I don’t even know what that means. I thought I invested in a deal and I already invested. Why are they asking me for money again? Can they even do that? Is that legal? Is that fraud?” Sometimes they say that and they don’t know.
Understanding Capital Calls And Their Implications For LPs
Can you define a capital call or what it means for our audience for the ones who might not understand it?
There are generally two types of capital calls. Generally speaking, it is a need for more money. That’s the easiest way to describe it. A need for more money at an investment property can arise for one of two reasons. One is it might have been expected. For example, funds typically will have capital calls where every month or every quarter you are obligated to send in a quarter of your investment that you committed to.
Those are not the types of capital calls that I advise on because those are expected. If you committed to $2 million, you’ll put in $250,000 every three months or whatever the number is. The capital calls we’re describing here are where you fully capitalized the deal and the expectation on the frontend was that would be enough to carry through the exit and then to get a return and return of capital and all that stuff. All of a sudden, you get a note from a GP that says, “We ran out of money.” Maybe there’s a cash-in refi. Maybe there is a rate cap that’s expiring and you need to buy something to mitigate that risk. Maybe it’s OpEx-related. There could be different reasons for it, but that’s the idea.
In the case of an LP not doing the equity injection that they’re requested to do, then they get diluted. Their original investment no longer stays. Are there other issues or concerns that could happen to an LP who doesn’t comply with a capital call?
That itself depends. I’ve seen many capital calls where the dilution does not occur. I’ve seen some capital calls that have very severe dilution where you get penalized a lot for not investing and in some sense, it’s stipulated in the docs. Many times it’s not and it’s up to the GP on how they go out on the capital call and how they market it with the rules.
In terms of risks, I don’t think there’s any other risk for not investing other than potentially getting diluted. The somewhat complicated aspect of this, which I wrote about at length, was there’s this concept of you’re throwing good money after bad potentially if it’s bad money. That’s a question in its own right to analyze that and understand it but the idea is it’s some cost.
In terms of risks, there's no other risk for not investing other than potentially getting diluted. Share on XThe money that you put in shouldn’t matter. Where it gets complicated, in my opinion, is if there’s a dilution, then it does matter. If you do think there’s a chance for you to get it back and you don’t get diluted, then your overall return might make a lot more sense with an investment, whereas without, you get diluted out and go to zero. The dilution aspect is pretty tricky in terms of thinking of the last investment as a surplus.
Motivating LPs To Inject More Capital
How can a GP motivate their LPs to inject more capital if there is no dilution? Why bother? LPs should all want to save the ship, but if there is no penalty, why bother?
First of all, that assumes that they need to motivate them and that’s maybe a topic in and of itself because if the capital call presents a good investment opportunity, then perhaps you don’t need as much motivation and you don’t need as much pressure. In other words, if you presented this capital call to an outside third party and they looked at this and said, “This is a good investment.” That’s where you want to be.
If you’re in a distressed scenario, then it gets more difficult and you can either pursue the path of dilution as the fear mechanism or however you want to call it or you could say, “Here are the two scenarios. We’re not going to dilute you for not participating, but if you don’t participate, this is what’s going to happen next.” In many cases, that’s enough. In many of these cases, if you don’t get enough cash, you will potentially get foreclosed on or whatever. For many people, that’s enough of a motivator in its own right. Sometimes installing a little bit too much fear can also backfire, in my opinion, but it’s a balance. Sometimes you need it.
Do you provide underwriting support? The reason why this is a pretty big question is because, on a property, underwriting is one of the key factors to showcase if it’s going to be a successful investment or not. We all know that people can plug in any numbers in underwriting and for a busy professional, a dentist, a lawyer, or an accountant, they don’t understand underwriting at all. It’s a very complicated and comprehensive spreadsheet. Also, it’s difficult to understand. I’m sure there are a lot of LPs that come to you saying, “Make sense of this for me.”
The Three Pillars
I do that partially in the report. The initial report is across three pillars. One of those pillars is the property, which might surprise you, but it comes last of the three. Part of the property pillar is what’s the business plan. Do the comps make sense? Do the sales comps, rent comps, and all that stuff. Also, the financials themselves and the underwriting. I go through whatever is presented in the deck and try to give feedback on that. In some cases, especially if the invested amounts or potential investment amount is high, the LP sometimes asks me to dig further, do a full audit of the model, give them feedback, and dig much deeper.
He’s going curious now because you mentioned this a couple of times, “What are the three pillars?” The third one is the property, right?
Yeah. I intentionally put them in this order. Some people are surprised because the third one is the property itself.
Is pillar one the most important?
Yeah. It means you’re investing and it’s weird. You’re investing in a property, but pillar three is for the property, that’s my opinion. Maybe I’m wrong, but that’s the way I think about it. The first one is execution, which is the GP’s ability to execute, which entails a lot of things like, “Have they been involved in lawsuits that potentially may present ethical challenges in terms of trusting them? Have they had experience with that same asset class? Have they run a deal on their own before? Have they had an exit and how did they look,” and all that stuff.
All of that sort of is within the execution pillar. The reason that’s important and number one is because at the end of the day, as soon as you sign that check, everything else essentially is up to the GP. You have to make sure that they know what they’re doing, they’ve done it before, and you can trust them. That’s what I’m checking for there.
The second pillar is the alignment of interests. In other words, someone might know what they’re doing and they’ve done it before, but if your alignment is off, especially in bad times, things start diverging. On the alignment of interest pillar, I check for three things in groupings, so to speak. It would be the fees that they charge, the co-invest of the GP that they’re putting in, and how that relates to the acquisition fee in terms of dollars. The third thing is the waterfall and the pref. What is the split and what’s the pref? It’s all of that together.
I’m guessing even in existence of a pref is a hurdle because in some cases there is no pref in a lot of deals I’ve seen.
This might surprise you, but I would say there are cases where it’s okay that there’s no pref. In other words, investments in general should and this is where some LPs have a hard time with me. Investments are all relative in a sense. You need to have a big enough framework for them to understand. For example, you said no pref, but what if I told you that the split was 95/5, for example.
Is that better than a 70/30 split with an 8% pref? They have pros and cons but it’s not an immediate no. However, what some LPs want to do sometimes is they look at a deck and sometimes they’ll get these calls. This guy’s charging the 5% acquisition fee, but they didn’t realize it’s 5% and $1 million. There are a lot of these things that are very relative and in a sense, that’s why I exist because they’re hard to piece together all in one place.
There’s a lot to each deal.
We have a lot of questions so I’m trying to bank through a few of these. You also advise GPs. Talk to us about what you do there as far as helping GPs. I know you look at the GP’s pitch deck. In your bio, you talk about advising them on capital calls. Talk to us about this briefly.
My main business is the LP side, but when there are no conflicts with that existing GP, and if they ask me to look at the deck, then I’ll provide them feedback. The idea of that is pretty simple. LPs are not the best at communicating what they wish they would’ve seen in the deck. Many times they pass and don’t express their reasons. They just say, “I changed my mind,” or “I’m a liquid,” or whatever but they didn’t mention the fact that the deck that they looked at was not so informative, there was a mistake, or whatever. That was the idea I understand the LP side of the business pretty well at this point so I can give them feedback on the deck.
On the capital calls, I don’t do a ton of those, but from time to time. Someone had a pretty big capital call and in confidence, they came to me and they’re like, “I’m not exactly sure how to communicate this.” To your point, “I’m not sure. Should there be a penalty? Should there not be a penalty that exists?” If you’re in a capital call to even ask for, “I believe in it but can you check my math?” There are a lot of questions surrounding that and with strategy, I’ve helped with it as well.
Verification Process For GPs
Before the show, I came up with an idea that I was going to share with you, but I want royalties before sharing this with you Aleksey. I was thinking about a verification process where GPs come to you to get verified and they get Aleksey verified GP. They’re able to take that logo and put it on their website because they’ve been verified. You put a stamp of approval on that GP. You’ve checked their background. You made sure they’ve never lost investor money or have been scrupulous or had any lawsuits and that they regularly get all their investments checked by you. They get verified. Joking aside, have you ever thought about this idea of Aleksey-verified?
Yeah, but I don’t know if I would call it that. A few years ago, I thought about that. The way that I think about it is it’s similar to S&P and Moody’s credit ratings. They rate corporate bonds and those types of instruments. As of right now, as far as I know, there’s no rating system for GPs. The reason why this is pretty complicated and I’ve given it some thought but I haven’t gone after it is because first of all, it requires pretty deep knowledge of the GP itself.
In other words, you could do good deals, but the GP entity itself is not in a good cash position and that could jeopardize their investments. The opposite is also true. You might have a very strong and credit-worthy GP in terms of that entity and its creditworthiness, but it’s doing deals that are not so good. In a sense, it’s almost like an ongoing rating. That’s where I struggle a little bit because you could probably put a credit rating on the GP entity, but the GP entity does not say a whole lot about the next deal that they’re doing.
Also, partnerships as well. Partnerships are fluid sometimes some. We’ve seen a lot of GPs, especially when the rates start going up and the distress starts coming, a lot of GPs, there was three of them and then one of them disappears. We’re like, “Where is he? The third guy disappeared. He’s not on their website anymore. What happens? Is it still the same team? Was there some hostility?”
That makes a whole lot of sense. You always have to do it on a deal-by-deal basis because it depends on how conservative they underwrote and on so many different factors.
As Aleksey said, it’s ongoing. Every year, they go through the process. The GP pays a fee. They get re-verified to make sure there are no criminal offenses, no lawsuits, no investor capital loss, and no huge complaints. Check out their Google rating. We saw a big well-known GP who’s lost some money and the Google rating was five. Now, it is sitting at 1.5 and the comments there are unbelievable. Again, we have a lot of stuff you want to discuss here. Do you want to go over this one briefly?
Aleksey’s LP Profile
Aleksey, what is your LP profile? Are you working with the newer investors? Are you working with sophisticated investors? Are you working with people who just learned about syndication and they’re good at the S&P 500? Talk to us a little bit about that, please.
The business started with a pretty specific target audience, which is your dentist, your software engineer, and your lawyer. Someone who’s not in this business now but wants to invest. Over time because I’ve developed a database of what’s happening in the marketplace, I’ve started to hear from the more institutional side like family offices. Part of that is because they might be interested in investing in a deal, but I have a lot of information on their existing deals that might not be public.
In other words, they’re still the owner of that property on CoStar, but CoStar doesn’t know the fact that distributions have stopped and they issued three capital calls. I’ve spoken to maybe 5 or 10 LPs over the past however months who have told me, “I have this information,” and that information I’ve put it all together. Overall, the premise is can I at least do some legwork in terms of the opaqueness in this GP/LP marketplace?
Do you have investors who keep coming back to you because the check size is $50,000 and $100,000? Do they say, “Aleksey, approve this investment for me,” or I guess you put your stamp of approval on it but don’t tell them to invest in it?
I don’t approve. The way that I see my role is to help them understand the risks and approvals almost don’t make sense. Just because an investment is good it does not mean it doesn’t carry risk. They could still lose money but my job is to make sure they understand the paths in which they get money and the paths in which they lose money. As long as they start going to the investment and they understand both of those fairly well, I consider that a success.
When we were prepping for this show, an idea came to mind for me. This is a juicy part of the show for sure and I was excited about it. When you get into this space, sometimes we have preconceived notions when we get into an industry or a service that we want to provide. Sometimes when we get in, the situation is much different. It shocks us. It surprises us. Sometimes it ends up being exactly how we thought.
Surprises In The Relationship Between GPs And LPs
When you got into the space and you started seeing LPs contacting you with situations they had with GPs and so on, what surprised you? Was there something super unscrupulous that you saw as borderline fraud? Was there the naivety of the LPs that you noticed, “How could this person go and invest $500,000, a fortune with a GP without even googling the guy’s name?” Were you surprised and shocked? If you can share some stories without having to give a detail, that would be great.
There has been a lot of surprises. It’s a good question. I don’t think anyone has asked me that before. I’ll try to go in order. I don’t know if it’ll be perfect, but the biggest surprise is fairly large and what I would consider to be pretty sophisticated sponsors or at least what I thought should be sophisticated using the word guaranteed returns and stuff.
When I saw that post from a very big syndicator, I made a comment on LinkedIn about it.
I wrote a whole article on it. People can look it up, but even if they’re personally guaranteeing something and even if they’re pretty wealthy, that’s not the same because then you have to underwrite their personal balance sheet and no one is giving you that. That was surprising. It’s less surprising if it’s someone that has one deal and it’s their first thing and they don’t understand.
Maybe it’s excusable, I’m not sure but like when it’s someone that is raising substantial amounts and has done it for years, it’s pretty surprising. Capital calls are another big one. I underestimated how misaligned the interest between the GP and the LP can get in distress. In other words, I’ve seen many situations where a capital call was issued and it’s all the same language. It’s like, “You have three days to make a decision. If you don’t contribute your money, we’re going to lose the property by next week. By the way, we have a plan, but we’ll send you something in two weeks. If you don’t invest, we’re going to cram you down.“
It’s the same template and that itself is not great but what I’m referring to here is once you do the math and you realize that the property is worth, in some cases, I’ve seen 50% of the debt balance so then you’re like, “What is the plan?” You’re sending this email out to a bunch of retail LPs who don’t understand how to make these decisions and you’re putting pressure on them. Also, you didn’t provide the analysis and then once you dig in, you realize that there’s no chance.
Even if rates dropped to zero again, there’s no chance that this property is coming back to returning a dollar in equity. You’re not even going to be able to pay the debt balance back. Those situations surprised me because it starts to border on ethics and misalignment of interest because you can have a situation where the GP isn’t being fully honest and they’re just trying to kick the can down the road.
Does that figure of speech kick the can down the road or is it incompetence?
I’ve seen both. I’ve seen cases where the GPs themselves don’t know if the capital call makes sense. You start asking questions and they didn’t even understand what they presented in the first place. I’ve also seen cases where they’re not being so ethical. In other words, they know that this is a 1% chance of happening, but the alternative is to get foreclosed on, “We have three deals that we’re raising for right now. We can’t have that press release go out and we can’t have that real deal article about us or whatever.” It’s hard for me to comment on how difficult that is. It is but at the end of the day, what happens is they put those investors and their fiduciary duty to them aside for their own benefit and that’s where the misalignment starts happening.
Talking about the real deal and what have you, I read somewhere that you say, “Send me anonymous emails.” Do you get information from anonymous sources where “ABC investment firm is in great trouble? They’re doing capital calls. They give the keys back.” Are you somewhat involved in that space as well when it comes to a reporter-type of work?
Yeah, I do get those. I don’t publicly share these things. I’m not a newspaper by any means and I don’t intend to become one but it’s the opposite. The reason why it’s important is if an LP is in a deal, let’s say with XYZ GP and they got a capital call. Let’s say they even got foreclosed on now and another LP reaches out and says, “What do you think about XYZ GP? They sent me this deck. Can you review it?” Without that tip from the first LP, I wouldn’t see in CoStar their existing properties and foreclosure. It’s this ecosystem of trying to the best of my ability to bridge the gap between real-time information and what LPs need to understand whether they’re going into deals.
Let me throw a hypothetical and sometimes hypotheticals are difficult to answer. An LP brings you a deal, you have a look at it, and no matter how you try to make sense of it, it smells like a scam. It seems like a fraud. It’s either a Ponzi. The returns are ridiculous. You do a search on the group. They don’t seem real. I know this is more probably in the crypto world than the real estate world, but what are the steps you would take if you did see a deal where you feel personally that it might be an actual scam or a Ponzi? It’s not incompetence, not somebody getting over their skis, which happens in real estate, but I’m talking about an actual Ponzi.
I don’t think I’ve had that happen. LPs like to assume things are Ponzi and frauds, but stopping distributions and issuing capital calls is not either of those. Many times it’s in the best interest of the LP. Not always, as we’ve discussed, but I don’t think I’ve encountered something at that level. I’ve been a part of many situations where there was a fiduciary duty that was very material or maybe misrepresentation but I wouldn’t bucket that into let’s call it SEC type of thing.
The Critical Role Of Debt In Real Estate Investment
Let’s talk about debt a bit here. Debt is in my opinion, very foundational to real estate. Real estate in some cases has beaten index funds, equities, and S&P because you can have this leverage, but also at the same time, it’s a double-edged sword where it helps you and it boosts your returns. It allows us, real estate investors, to scale and do business. At the same time, if you don’t put the right debt on the property or you find yourself with your pants down when the tides go out, it’s not a good circumstance. How big of a factor is debt and the way that the GP has structured their capital stack, mostly debt. How important is that when you’re advising a client?
Now that we talked about the three pillars, there are three pillars. Of those three pillars, the third one is the property and within the property, part of that is leverage. In particular, what debt are they using? What are the implications of that? Such as, is it floating and what happens if it floats up? As a risk factor, is there maturity coming up, etc.? It’s certainly important. It’s especially important if you’re thinking about trying to build a sensitivity table. In terms of sensitivity tables, it’s maybe a younger brother or sister.
Aleksey, I was talking about syndicators bringing debt all the way up to the neck of the deal. They have senior debt. They have supplemental and pref equity. Everything you can imagine on there to be able to financially engineer those types of LP economics. Is that an absolute red flag and an absolute X on the deal for your investors when you see such a thing, which seems to be somewhat common?
I don’t see that often. I’ve seen it and it depends on which part of the stack you’re participating in. It might make sense to be inside of the pref but not be inside of the regular equity. In terms of it being a red flag, all else equal, it just means you have less room for error. That would be very apparent once you run a sensitivity table on exit cap rates, interest, or NOI changing. That becomes pretty obvious in my analysis and to the LPs because if you only put 5% of equity in, if the property value drops by 5%, your equity is gone.
This is where people get confused. They assume, “It’s okay.” Single-family homes go down in value too all the time but if you hold on forever, it ends up being fine. That’s true except single-family homes have 30-year mortgages and that’s what you’re alluding to. What’s important inside of the stack is the fact that you have these staggered maturities. The pref is doing it here, then you have a senior. It’s like another cook in the kitchen and when they come to call you, it might be upside down. It might be bad timing for you to pay off that loan.
When it comes to the world of investing, I always define it this way. Always look at the most secure low-risk, almost no-risk investment, which is US government bonds, and treasuries. That’s where everything starts from. If that’s sitting at 5% or if you can’t get 5% on a government bond, now I think it is sitting at ten-year treasuries at 3.6% but that should be the base. You can get almost guaranteed money and a return on your investment at 3.5% or 4%. It’s 5% for a while. It should always be from there up and that goes by risk. The more risk you’re willing to take, the more return you should be able to take. That’s the basis but when it comes to the world of investing, aside from that, we also want to look at options. Index funds are one of those options.
If the S&P 500 is so great, why bother with syndications, in your opinion, Aleksey? Blackstone was able to raise for a $10 billion fund not too long ago. Let’s talk about that a little bit.
Why bother even with Blackstone, if you can put in S&P and make 8% compounded for the last a hundred years in the 500 top best companies in the US or at least on the exchange in the US, it might be, so why bother?
There can only be two answers to that. Either you’re just interested and you want to learn. It’s not a financial decision or it is a financial decision and you’re looking for risk premium over the S&P. In my opinion, those are the only two answers. Now, to answer your question more broadly, I pretty strongly believe that many people who participated in syndications over the past few years should not have. That’s not a statement based on you’ve invested in a bad deal, and in hindsight, you shouldn’t have.
However, my point is the return on hassle so to speak, unlike properly diligence a deal where you invest $10,000 and you get $5,000 in return but you spent fifteen hours trying to understand it and you have all these headaches in understanding the reporting and all this stuff is not worth it, in my opinion.
You might go back and say, “It’s not a financial decision to me. I just want to learn about investments and this is how I’m doing it,” but that’s not financial anymore. Vice versa, there are quite a few very wealthy people that should have exposure to syndications especially their tax benefits in many cases, and they don’t. My hunch is that both of those worlds or populations will adjust over time.
The second part of Ava’s question was about the $10 billion fund that that Blackstone put together focused on multifamily as well but there’s also these huge funds that are being put together now to come back into the market and they’re happening all the time. They’re putting these funds. When we look at the allocations of a lot of institutional investors, family offices, university endowments, funds, or sovereign wealth funds, they all have an allocation to these types of syndicated real estate deals.
The idea here is this is not just your retail who’s coming in, exploring, being adventurous, coming into the space, and putting some money into this syndication and they can get this intimate GP that talks to them that they can touch. It’s not like a REIT where you don’t know. There are so many different levels within that place that you have no idea who you’re talking to. You’re just a number.
Understanding The Attraction Of Alternative Investments In Large Funds
Whereas, it gives you that intimate feeling of investing and you trust in someone. You work together and you make a bunch of money. It is glamorous. It’s sexy in some ways, but the institutions are doing it as well. Why bother when they could have put it into an index fund? The question was more not only on retail but on the institutional level. Why is there such a large allocation into the alternatives for these large funds that have investment committees that are full of economists and smart people? They still allocate to these types of investments.
Maybe the premise of what you’re asking is there shouldn’t be. I would assume there should be. Maybe the question is how much it should be. In other words, that’s what a lot of people are struggling with. There’s no question that you should be diversified and at some level of wealth and experience in terms of diligence, sure you expect to have a broad range of different types of investments and one of those would presumably be real estate. I don’t see why not or real assets, in general.
There's no question that you should be diversified, at some level of wealth and experienced in terms of diligence. Share on XIn terms of comparing syndications to REITs, which you mentioned, that’s also a pretty intricate topic. It is true what you’re saying. I used to work at a public REIT. You don’t get to touch the assets and you don’t get to speak to the CEO, but at the same time, it takes a lot to become a public company. Generally, I would say all else equal, REITs are much better run than your average GP because it’s not a startup anymore. They have to get through a level of diligence to get to be listed.
They have way heavier fees too though, Aleksey. Their fees are much heavier than your run-of-the-mill syndication.
If you’re talking about private ones, that’s true. REIT fees are, in many cases, a fraction of what a regular GP would charge because they spread those fees across a much bigger portfolio.
How come they are yielding so much less than syndications?
Are you talking about dividend yield?
No. Just overall yield. If you’re investing in a public REIT, historically, they’re still in single digits. You are not in the teens. Whereas with syndications, if you’re not making 15% AAR, there’s no point in investing in it.
You would have to compare like to like. Personally, I haven’t seen a good study which would be very interesting. What you’re saying is I agree. Hypothetically, you should invest and if you’re not making low-teens or mid-teens, it doesn’t make sense but people I would say generally don’t invest in REITs for low-teens type of risk. The idea is it’s a low-risk type of investment. It’s diversified across a much larger pool of assets generally within a REIT. Also, I think this is important, it has liquidity. That’s worth something. Whereas in syndication, you give your money out and hopefully, you did your diligence. You gave it to the right person, but you don’t have control over it at that point. Even if you need it, you can’t get it until the exit occurs.
We appreciate all the advice, wisdom, transparency, and sharing all that with us. We learned a lot and enjoyed it. Let’s get to the next segment of the show here.
It’s The Ten Championship Rounds to Financial Freedom. Aleksey, are you ready for the questions?
I’m not sure.
Ready or not, here we go. First question, who’s been the most influential person in your life?
My dad, probably. I’m somewhere between my dad and my mom for different reasons.
The next question is what is the number one book you’d recommend?
I like Deep Work by Cal Newport.
If you had the opportunity to travel back in time, what advice would you give your younger self?
More internships and fewer majors.
The next question is what’s the best investment you’ve ever made?
Getting married, probably.
What’s the worst investment you’ve ever made and what lessons did you learn from it?
At some point, I got excited about putting my money in the stock market and I didn’t know how much. I put in all of my savings and then a month later, it dropped 15% and I freaked out. I wasn’t well-versed enough to understand that you should just keep it in, etc. That’s probably it.
The next question is how much would you need in the bank to retire today? What’s your number?
I’ve talked to my wife about this and she thinks I would never retire. I’m not sure that a number exists.
It’s something to think about now.
Yeah. Maybe I should.
The next question is if you could have dinner with someone dead or alive, who would it be?
My dad.
If you weren’t doing what you’re doing today, what would you be doing now?
Do you mean right now?
A race car driver or a tennis player. If there’s something else in the world that you could do.
Is it professionally?
Yeah. Is there something else you could have pursued in life?
I played table tennis professionally back in the day, but I decided to pursue college and stuff. It would be fun to go back and try the sports route.
You’re asking this from a quadruple-major guy.
I’m excited to hear your response to this one, Aleksey. Book smarts or street smarts?
In college, I would’ve told you book smarts but I’ve learned since that book smarts generally matter way less than street smarts if you’re optimizing for financial success.
The last question, Aleksey. If you had $1 million in cash and you had to make one investment today, what would it be?
I would put it into treasuries and then find a great investment.
There you go. Very risk averse.
Aleksey, let everybody know the best way that they can reach you.
My name is pretty easy to find. I tweet on Twitter or X and then I’m pretty active on LinkedIn. You can find my newsletters on LPLessons.co and can always reach out to me as well. My email is Aleksey@hey.com.
Thank you so much for being here. Thanks for your advice and wisdom. We appreciate you, Aleksey.
Thanks, Aleksey.
Thank you for your time.