Creating Liquidity in Private Markets: Understanding Secondary Markets

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. Got a very fun episode for you today. This is an interview with Brian King of Lotus Markets and really, really fascinating. His background he shares, which he worked for the New York Stock Exchange in an automated trading system and has kind of been in market making for his whole career in Wall Street and has taken his skill sets and experience and brought it to the private market alternative space where there really has been a lack of liquidity. And so, doing some really cool things. It is really focused on secondaries. So if you've heard of secondaries, investing in secondaries, we dive into what that means, why right now is a really interesting time for secondaries, and how they're creating liquidity and making markets in illiquid assets and investments like real estate. So definitely want to check this episode out. I think you're going to really enjoy it. Brian's a super sharp individual, and I happen to know him very well personally, so it's going to be a great episode. Please enjoy. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Welcome back to another episode of the Invest Like a Billionaire podcast. I am your host, Ben Frazier, and I've got a very special guest today, a good friend of mine, Brian King. He is the CEO of Lotus Markets, which is a fully automated secondary market for alternative real estate investments. And Brian, has held senior roles at Bats Global Markets, now CBOE, and formerly the New York Stock Exchange. So Brian has very, very deep experience in the finance world and in alternatives. So super excited to bring him on. He's actually here in Kansas City where we are. We're in the same, same room right now, but it's been really fun. I've been meaning to have him on for so long, so we finally made this happen. Brian, thanks for coming on.

Thank you so much for having me. It's great to be a part of it.

Yeah. So give us a little background on you, on your kind of journey in the finance world. And, you know, don't skip over too much because it's pretty cool what you've been able to accomplish and then how that's kind of led you to, to what you're doing now.

Yeah. So my background, it started the early days. I was a financial advisor and then that, that led me up into about 2005. I sold my book of business. I started my career in Jacksonville, Florida, and then I moved to Kansas City. My best friend at the time moved from the Jaguars to the Chiefs. And so we got to know a lot of people here in Kansas City during that time. And an opportunity landed in my lap to be a part of this startup called BATS Exchange. And so actually it wasn't even an exchange at that time, it was just BATS. And so we were in ATS and looking to kind of change, change the world to be a competitor to the NASDAQ and to the New York Stock Exchange.

And it was exciting to be able to talk a little bit about what that was because that was the early stages of automated trading. So talk a little bit about what that was. It was just so interesting.

Yeah. So that was kind of the onset of, you know, what today is known as high-frequency trading. But around the end of, you know, late '90s, early 2000s, there was a new rule that was set out that basically allowed NASDAQ to be able to trade all NYSE listed symbols and NYSE to be able to trade all NASDAQ symbols. And so now it could, you know, a stock could trade on multiple exchanges. And so, so a lot of competitors were trying to pop up, but NASDAQ and New York Stock Exchange kept buying all of them and they were buying all the competition that was like trying to come up. So BATS was able to come in and get and create themselves and set themselves in a position where now we weren't a traditional New York company. We were based in Kansas City and we were— so therefore we could operate at a much lower cost. So therefore the fees that we charged the brokers, you know, the bulge bracket firms was dramatically less than what they were having to pay at Nasdaq or the New York Stock Exchange. So, and then on top of it, we were able, we had a unique opportunity to build technology from scratch. So, you know, when you do that, sometimes you remove a lot of the legacy issues that exchanges, you know, you patch over things. And so very clean line of code. We were the fastest exchange by a long shot and we were doing it at a much lower cost. And so we grew incredibly fast. It was really exciting to be a part of. I was able to then move over to London. I was the first person on the ground to build BATS Europe. And today that's actually the largest exchange in Europe, pan-European. So we were— we figured out how to be able to trade across borders, cross currencies, that type of thing. And so it was fantastic. And so came back to the US and we started some other marketplaces for options and other asset classes. I was able to spearhead the ETF listing business and so got really ingrained in ETFs for a long while. And then we were acquired by the Chicago Board of Options. And I believe still to this day, that was the biggest exit story in all of Kansas City. So I think it was a startup that ultimately exited for $3.4 billion. So great, great to be a part of that story. I then left and went to the New York Stock Exchange and awesome to be a part of such a rich history of markets. And so overseeing, you know, trading and market structure and ETFs, it was a lot of fun to be a part of that. But while I was at the New York Stock Exchange, it became very apparent to me that the biggest competitor that we had was not NASDAQ. It was the private markets. Companies are staying private.

Interesting.

Yeah, companies say private market.

What timeframe was this? Because was this pre-JOBS Act 2012 or kind of post?

No, this would have been— I was at NASDAQ. I mean, sorry, I was at the New York Stock Exchange from, let's say, 2015 to the end of 2019.

Okay. So the JOBS Act was in 2012 and that kind of started. But I know it had a kind of slower momentum build, but you started seeing its private market transactions. The private market is been huge anyway, but now you could market these and, you know, solicit. It kind of changed the game.

Yeah, that's exactly right. So I think to your point, as far as like the timing when we were seeing this, alternative investments have always been big amongst institutional investors and the highly affluent, right? But we started to see this pendulum swing into not just the super affluent, but also the accredited investors and then even on down to more, as we would say, retail investors. And so as you see that pendulum swing, again, people were, individual investors were now wanting to say, I want to invest like institutions do and have access to the private markets. And so that market was growing dramatically 'cause again, not only were companies staying private longer, but more investment dollars were wanting to be in the private markets versus the listed markets. And so seeing that kind of trajectory, my thought was whatever my next venture is, I want to be able to be a part of something that's in the private markets. And leaning on the fact that I had built so many, been a part of building so many marketplaces, it kind of made sense that, hey, you know, I've spent a lot of time making liquid things more liquid. What if we were to focus on making illiquid things more liquid? And so that's really what the genesis of Lotus was.

Yeah, I mean, it's such a cool concept. And, you know, the biggest knock on alternatives generally is lack of liquidity, right? I mean, that's kind of why, you know, institutions like it because you can get a premium in returns a lot of time because you're willing to take more liquidity risk. But it's also a downside. And if you're kind of newer into allocating into alternatives, that might be a big change, right? You can't just push the sell button on an exchange like your public portfolios and sell. So talk a little bit about how you saw the opportunity and obviously taking the idea from concept to reality, I'm sure is, you know, a whole story in and of itself. But talk a little bit about what Lotus does and kind of how you're playing in this, you know, secondaries market that's now becoming front and center of a lot of investors' minds.

Sure. So secondaries, technically, you know, you've been able to transact in a secondary you know, for, for years and years. The problem was that typically that process was you call a broker, that broker goes and tries to source the other side of the trade. And most of the time you're going to get a dramatic discount. 50% discount is, I would say, would probably be the average. And then on top of it, the broker typically is going to charge a 10% commission for finding the other side of that trade for you. So you're really going to have a massive depreciation in value if you need to get out. And again, SEC created lots of rules around alternative investments for retail because again, the more retail in nature you are, the more liquidity needs you're typically going to have. And so because of that, you know, again, if we can help unlock that, that liquidity, then it should be able to be open to, to many more investors. But, but yeah, so I think that's, that really has been the growth pattern for us is being able to see and help to unlock that for, for investors of all types. And the more you get people realizing that our market exists, we now actually have competing bids where you don't just have one buyer showing up, you have multiple buyers showing up. And the more buyers you have, people are competing for that flow, which helps to compress that spread. And so, yes, our marketplace is fully electronic, fully automated. But as I mentioned before, you know, when you called that broker, there was a lot of paperwork. It took a lot of time to settle and clear that trade. And so we really wanted to be able to focus on the operational side in addition to, you know, just finding the buyers and the sellers, right? So it's— yeah, right now somebody can open up an account in 5 minutes. And they can actually be able to place a buy or sell order very, very quickly.

Just for those that maybe are unfamiliar with the concept of the secondary, please break that down. You kind of did a little bit, but, you know, the idea is you've invested into some private investment, whether it's real estate, maybe it's a private REIT or it's a true, you know, private investment directly into a property or a fund. You need the liquidity, you're willing to take a discount to what you invested because of that. You need that liquidity for whatever reason. So then you try and go find a buyer to basically replace your capital in that investment. And then the broker-dealer in that scenario historically was the kind of market maker, the middleman kind of creating that transaction. Is that pretty accurate or kind of clarify that if, if it's a little more nuanced?

Yeah, that, that's exactly right. You know, so you differentiate in the alternatives world between a primary and a secondary market. So primary is that initial fundraise that a fund does to bring new capital on. And many times they kind of identify what is the exit strategy and maybe it's going to be 5 years or 7 years or maybe there really isn't an exit strategy. And so sometimes, you know, people get to the point of, you know, they've owned something for 5 years. Well, there is no exit in sight. And so they're saying, You know, I'd like to— there's opportunity in something else. And so I'm looking for liquidity. And again, we're not a buyer, we're not a seller. For us, we have a very large buyer network. And for the most part, the way that it initially started was almost all of our buyers were institutional in nature. We are starting to see that change, which actually is a good thing. And maybe in a minute we can explain why that's such a good thing. But most of our buyers initially were institutional and, and so they're already there. And so for the most part, when somebody says, I want to be able to sell something, if it's already on our marketplace, chances are we already have a buyer or buyers lined up making, making bids.

I mean, it seems like kind of a natural evolution of the marketplace too. I mean, I'm a little bit younger. Yeah, to remember the days of like the boiler room with the broker dealers on the phone, you know, calling and buying or selling stocks right in the— on the markets. But it was very transactional, very one-on-one, you know. And then the internet came along, kind of then automated trading has kind of created this efficiency and, and speed and closing the bid-ask spread on the market. I mean, it feels like it was the early days of, you know, back in the public markets.

Is that—

I mean, you're kind of around during those times, or maybe at the kind of tail end of it. Is that kind of the evolution? And now you're kind of seeing the same thing in the private markets, or is that not a great comparison?

Yeah, I think it's a great comparison. In fact, you know, I think if you looked back to the '80s, which, you know, I wasn't in the markets at that time, I was in high school or you know, I was in college in the '90s, but in the '80s, my understanding was that, you know, you could, you know, sometimes drive a truck through the spreads in stocks that were trading on the floor of the exchange. Right. So the floor brokers were making a lot of money in that. But then when all of a sudden automated trading started to happen and then they changed the spreads to where now you can actually trade in pennies, it really compressed the amount that that market maker could make. How much money they could make. So then it turned into volume. So high-frequency trading is because now people are saying, well, maybe I'm— maybe I can't make this giant spread, but now I make that smaller spread, but just many, many, many times over and over. Right. And that's, that's how they were able to make their money. But in order to do, you know, millions of trades in a day, it has to be a computer doing it. Well, a lot of those institutional investors that are coming from the '80s and '90s, they're looking at this alternative investment market as kind of like a new place for them to be able to have those wider spreads, the next frontier of wider spreads, opportunity. So there's a lot of guys that are kind of moving into it. But my hope is that, you know, we're able to, you know, we've already seen dramatic changes from where people would have seen it 10 years ago, where it was 50% discounts, right? So now we see, you know, in some cases as little as 3%, but at most, usually somewhere around 15 or 15% discount. But yeah, so like there's, there's several products on our marketplace today that trade at a 3, 4% discount, which is fantastic. You know, that's, that's great for, for all involved.

So talk a little bit about why would someone invest in a secondary, right? It's like, well, it's not, not the new offering. It's kind of an old offering, you know, am I getting the bottom of the barrel here? You know, that might be a thought someone would have, you know, if they hear that word. Talk about why it, why it makes sense. Obviously the big, the big reason probably is discounts, but you know, explain a little bit of what, what makes this interesting. And then we kind of talked offline before, like it's been getting a lot of headline press, right? A lot of advisors and a lot of, institutional investors are kind of sight set on, on these types of offerings and explain some of the reasons why.

I'd say one reason why is in many cases a sponsor might create a fund and that, that vintage, that fund could be very desirable and they could have actually really good outcomes from it. And so some people are like, oh, I wish I could have been a part of that vintage to that fund. Well, all of a sudden an opportunity comes along and it's a closed offering, but now you've got an opportunity to get into it. And so not only can you get into it, but maybe you can even get into it at a discount, which is a big win. It's a mature fund. It's proven that it's, that it's working, you know, that type of thing. And so there's a, there's a lot of interest just to be a part of something that you couldn't be a part of. We also have a lot of financial advisors, and this is an area of real growth for us where we now have not just institutional buyers, but RAAs that are saying, hey, we have already— our clients have already owned some of this, but I have this client over here that has no exposure to this particular fund. If I could get them in, it'd be fantastic. You know, we just made a press release today about a reduction in our fees for Blackstone's B-REIT, right? So B-REIT is an open REIT right now. It's a $70 billion fund, so it's really, really large. But we have a whole world of REAs that are coming to us saying, listen, I'm buying this on a monthly basis. Every single month we're buying into B-REITs for our clients. If I can give them a 3 or 4% discount to NAV for all the people that are looking to exit, if I could do that for my clients, I'm a, I'm a winner. Like I'm a hero to them.

Yeah.

So, so yeah, that's another reason why we see, see a lot of pickup in activity there.

And, you know, this might not be the right Blackstone product, but I remember reading a few months ago, maybe earlier this year, there was a lot of redemption requests or liquidity requests in the fund. And maybe, I don't know what the big reason was, whether investors are getting spooked or whatever. But, you know, whether you believe in the fund, whether the assets are still really good, might be a great time to get in. So there might be liquidity requests they have. And in real estate, it's hard to create liquidity because you have, you know, fixed assets that you're owning and improving. And holding for a long period of time. And so you're basically allowing capital to kind of replenish and to trade without impacting kind of the fundamental or property level kind of strategies and assets, right?

That's exactly right. And so, and I think your recollection of, of what happened earlier this year, it's actually still happening. You know, Blackstone put out another notice today to shareholders about the fact that they still have they still have an oversubscribed redemption queue and they're only able to meet X% of the redemptions that are in there. And so that's why we listed it on our marketplace to say, listen, there are people that can't get out that need or want to get out and they can get 100% of their transaction today, you know, if they trade on it. And yes, it's going to trade at a little bit of a discount. I think the last trade that we had was around a 4% discount, But, but yes, as an avenue for somebody that is looking for liquidity to be able to have it, you just made the point of the fact that with a, with real estate, you know, real estate is not innately liquid. Right. And so there's a lot of people that, you know, a lot of people that early on when we were building this said, you know, real estate's not designed to be liquid. And my counter to that is, well, neither is IBM, right? IBM is a company that is— the only reason why IBM is liquid is because there's a secondary market around it. You're sharing, you know, you're transacting your shares in the underlying company, and that's what ultimately enables it to be liquid. The exact same thing exists for real estate, whether it's shares or units or whatever the fund structure might be.

Yeah, no, that makes total sense. And you think about too, okay, one, if it's a closed-end fund, you're buying at a discount, which is desirable, but then also you're buying later into the fund. And so your IRR from a time value of money and, you know, if you're adjusting for that, it's likely going to be even higher even with the discount, right? Because you're coming in to a more mature vintage. So there's, from my standpoint, a lot of, a lot of desirability around that, especially if it's like you said, a good vintage that was closed out, you couldn't get into. Talk a little bit about just what you're seeing just at a high level of the market right now. So we're seeing obviously the fastest interest rate increase here in the US that we've ever had. It's impacting real estate, you know, commercial real estate in lots of different ways, you know, probably most acutely office is probably strong the most, but from a capital markets standpoint, what are you seeing? Are you seeing like from our standpoint, we're kind of actively acquiring assets. Transaction volumes have gone way down just because interest rates are higher and the bid-ask spread between buyers and sellers is just still pretty wide, right? The sellers don't want to sell for, you know, lower values than they were getting a year or two ago. And buyers have very expensive debt they got to now kind of fold into the equation. So what do you kind of see on the capital markets side and even kind of the bigger institutional side of things? I mean, has it been active? Is it slow as well? Talk about some of what's happening, what you're seeing.

Yeah. So I think one, I'll say we're seeing dramatic increases in the secondary market, but in addition to just the flows from a traditional— how you would think of secondary markets, We're also seeing another trend start to evolve where some sponsors aren't able to refinance certain debts, right? And so given the current environment, or if they were able to, it might really hurt the underlying fundamentals of that particular asset. So there's a pretty decent-sized amount of people that right now are trying to say, well, maybe I can recapitalize that debt piece with equity. Um, and so we see a lot of people going back to the table of trying to raise additional equity, um, for, for, for the actual fund, which is interesting. Um, I, I would say that even before we saw this dramatic increase in interest rates, um, one of the bigger areas of where we were starting to see sponsors come to us to say you know, we have an interest in holding some of these assets for a longer period of time. You know, typically what a, you know, if somebody is a developer and they go out and they can raise investment dollars for people who are doing development deals, you know, typically the people who invest in development deals, once that asset is stabilized, they want to move on and, and go do the next development deal. They want to have their exit and that type of thing. So A lot of sponsors, you know, kind of build that into the equation. They have an exit after 2.5 years or 3 years whenever that asset is stabilized. But a lot of the sponsors are saying, what if I were able to continue holding that asset as the GP, let those underlying LPs that did the development deal, let them have their exit, but instead of selling the asset to some institutional fund, what if we were to recap it through the secondary market channel and allow the people who want that stable cash-flowing asset to be able to come in. And so it's kind of a— it's using a secondary market in a way I think that most people didn't originally intend to. But, but it's certainly something that we're seeing a lot more interest in now.

That makes so much sense. I mean, it's kind of so obvious really, because you're right, the investor base, like we do a lot of development projects as well. The investor base for the development projects is very different than the stabilized cash flow, long-term hold, you know, investors, right? They have different goals that you're trying to hit, different time periods. And so historically, if you are doing a development project to get the investors that want the higher return, shorter time periods, their money back, you got to sell, right? But now you're saying you can actually recapitalize, actually just replace with, you know, the capital stack with whether it's new debt or new equity or both. With new investors that actually have the appetite for the kind of go-forward pro forma of the property and you still retain ownership. I mean, that seems like too good to be true, right?

And meanwhile, the sponsor is able to kind of clip a coupon because they're still managing the asset. And for— in many cases, you have sponsors that they're known for a particular type of asset. Okay, we build hospitals or we build gas stations or we build whatever. And the more of those that you get to keep control of, the more you keep your thumbprint on knowing what the underlying metrics and dynamics are and that type of thing. So it's— there's a lot of benefits to doing that. And so we're seeing that start to become a trend.

Yeah, especially with the feast and famine of development, right? It's, it's really good when it's really good. It's really hard when it's, when it's not good. So it kind of can smooth out some of the cash flow curves for a sponsor, right? If you can have stabilized assets, you're just like you said, clipping coupons from management fees. Yeah, that makes a lot of sense. So what other, or you kind of mentioned earlier that you're seeing more retail investors moving into secondaries and you mentioned that's a good thing. Why would you say that?

Well, it's just, it's a bigger audience. So when you see this pendulum swinging, it's a whole untapped market of investment dollars, right? So the opportunity for the alternative investment market to grow, in my opinion, and, uh, you know, based on some of the, um, a lot of the different people that I talk to and listen to and, and, uh, respect in the industry, I think everybody's kind of nodding and echoing that same sentiment, is that there is a big untapped market, um, for investment dollars in this space. But again, the— in order for the more that pendulum swings to, you know, from highly affluent or super affluent to retail, meaning that maybe they don't even check the box of an accredited investor, you know, the further you get along that pendulum, the more important liquidity is going to become. And, and if you don't unlock liquidity, the SEC will never really allow, you know, the individual investor to be able to invest in most of these funds unless there's some specific liquidity valve. Associated with it.

Yeah, that makes sense. One question I want to go back to real quick, I forgot to ask this because I'm very curious on the deals that are kind of recapitalizing because they're needing new equity, you know, to either in the case of a refinance, they're short on the proceeds to pay off the senior lender or the senior plus mezz lender or whatever. We're seeing that a lot too, right? Because we're seeing interest rates are higher, putting pressure on cap rates. NOI is maybe struggling in the short term because we've had big operational cost increases like insurance, property taxes, labor. And then in some markets, we're actually seeing short-term rent decelerations. Like all these factors are just compressing margins and putting pressure on deals. What are you seeing? Is there— are you seeing appetite for these secondaries that are not replacing capital from a, you know, Investor A trading with Investor B, you know, in the kind of existing deal versus new money in to kind of replace another part of the capital stack, but to hopefully finish out the business plan or to kind of make it through the next kind of, you know, time. And then what are you kind of seeing those trade-offs? I would imagine when you're doing that, you have to kind of reset net asset value, right, which might negatively impact the primary offering investors. So talk a little bit about that because I meant to ask that and forgot.

Yeah. So I think across the board, you know, what we're seeing is there's, there's no one deal that looks the same as the other. I will also say that maybe take a quick step back is to say that on our, on the marketplace that we have today, that's fully automated, you're not going to see that nuance of a transact today. You're not going to see that nuance of a transaction happen on screen, fully automated. Typically what we're, what's most seen is something where you're, you're transitioning ownership from person A to person B. Very simple. You know, very similar to how you would think of an exchange, a stock, traditional stock exchange, you're trading ownership from person A to person B. When you're doing something that's a little more complicated, a little more nuanced, there's a lot more, you know, talking involved, right? You're making— so there's enough people that are coming to our marketplace where we're able to make introductions, facilitate meaningful relationships and that type of thing. And so that's a lot of that stuff happens off screen, so to speak. But, but if that— so that makes sense. So it's—

yeah, that makes sense.

But going back to what I said, like every deal is definitely going to be different and you have— there's certainly going to be some negotiations when you're, when you're trying to talk about, you know, replacing debt with equity or, or anything else that's, again, unique in nature because it does— it can impact the rest of the investor base.

Sure, sure. And kind of go into the more maybe vanilla or kind of traditional transactions you're seeing of just Investor A to Investor B and making that market. What— how does that spread kind of get determined? Right. Is it just demand for that particular, you know, unit of X fund is more desirable, so we're bidding out. Is it kind of like a, you know, a true bidding platform or is it kind of this is the price is being set and we'll see if there's offers there and if there's a lot, maybe we increase it or how does that work functionally on the back end of the platform?

Yeah. So for, for the vast majority of funds that we have in our marketplace, they're, they're larger, right? So I would say where we started, this is, you know, we have, we've expanded beyond this now, but where we started were mostly registered funds. So they're registered, they're filing Ks and Qs. They're not publicly listed, but they are, their information is made publicly available. And so what we do is we scrape all that data, make it completely available and transparent to buyers and sellers. And then what we do is in most cases we have a large network of buyers that will look at those funds and say, I have an interest in this particular one. And so they put out bids. So we have a, you know, again, we function much like a traditional stock exchange. We have limit orders. You're never going to see a market order, especially in an illiquid market. But that's not something we want to address. But you also see on our marketplace something called an IOI, which is an indication of interest. An RFQ, which is a request for quote. And so in the registered market, mostly what we see, I say 90+% of all transactions, the buyers have gone in, they've underwritten the fund, they've underwritten the deal, and they, and they say, this is where I'm willing to buy this particular fund. And they, they kind of name a price and they put in an IOI, an indication of interest that says, this is where I'm, I'm, I'm a buyer. And then another buyer comes in and does the exact same thing. We do see that they wind up being relatively tight, you know, tightly grouped. Sometimes you can get a wide range. But, but what happens is now the seller comes in and they see where the NAV is, they see the other data points, and then they see where the bids are. And then in most cases they say that's where the market— that's enough for them to realize that's where the market is. And they go and they hit the best bid, right? In some cases they say, well, that bid's at $10, I'd really like to be able to get $10.20. They can put in the limit price and be able to see if somebody will come in and hit that offer. And so the people who put in the IOIs, they get a notification that says person put in an offer at $10.20, they can choose to put in a limit order to take it out or not. But like I said, most of the time in the registered fund space, we see the sell orders hit the bid orders. And so you don't really have a bid-ask spread. What you might have is the way we might look at it is you have an NAV bid spread, right? And so whereas the NAV might be at a, at a premium to where the current bid is, And then but on the private fund side, if it's, if it's a smaller private deal, let's say $100 million or, you know, maybe even $500 million, certainly, certainly we can do have funds listed that are smaller than that. But if it was a $100 million deal, you probably don't have a tremendous amount of buyers that are actively bidding on it. Right. So what happens is a seller raises their hand and say, I want to be able to sell this particular fund. And they can do an RFQ, a request for quote, and that basically hits our buyer network and they can come in and look at the deal docs to see where they would make a bid. Now, that goes into an area where some funds have RFQs, some funds have ROFRs on them, or, you know, where you write a first refusal that prevents you from being able to trade it without the sponsor first looking at it. But In most cases, what the sponsor does is they work with us to be able to say, hey, we'll pre-approve that buyer network, and that allows them to be able to kind of get a look at the information that's been provided.

I would assume if these are Reg D offerings and they're doing like a 506, they have to verify accreditation or have to prove the investor's sophisticated or whatnot, right? But I'm assuming you're approving— we do front end, or how does that work?

Yeah, so we actually do all the accreditation stuff. We do KYC, AML, all those types of checks we're already doing on everybody anyway.

So to sign up for the platform, you have to go through the process and you kind of give that so people, the sellers know that these are qualified buyers.

Right.

Well, you know, one kind of nuanced question, but so back in my kind of fund life, I was working at a larger asset manager, publicly traded mutual funds. They had a closed-end fund and the fund traded on exchanges. A lot of times it would trade at a premium to NAV, right? Which is kind of the opposite of what we're talking about, where most of, you know, the, the transactions on your platform are traded at a discount to NAV. Why is that? Is that just purely a function of demand? Did you ever see certain deals trading at a premium to NAV, or what's kind of the thought there?

Yeah. So to date, we haven't really seen anything at a premium. We have had a lot of people talk about, hey, would you ever be interested in listing hedge funds on your marketplace? And the short answer is yes, we would be happy to list hedge funds on our marketplace. And I think in a in a hedge fund world that maybe has— it's closed to new investors, um, but performs really well, you know, you're going to get— there's going to be demand to get into that. We mentioned— we used the word vintage earlier, right? So if, if there's a certain vintage of an asset that's performing incredibly well, then there's probably going to be some competition to get in, to get into that particular fund. Um, so, right, so it, it, I I think it definitely can happen. I just think that for a lot of the real estate deals that we see, there's some innate built-in maybe risk or perceived risk inside of it. So in addition to wherever the NAV might currently be, I think sometimes people are baking in a little bit of a hedge for themselves in getting into that particular fund.

Got it. And then just right now, like what are the current, asset classes that you're focused on? I know real estate's the biggest portion, but you have a couple others that you're focused on right now. And what are you kind of looking at in the future?

Yeah, so right now our, our, um, our about 80% of what trades on our marketplace is, um, real estate related. Um, we have, uh, the other two primary areas are gonna be like private debt or BDCs. Um, and then the, the last one is we do trade some energy funds and The just a kind of high-level reason of why real estate is that, you know, a lot of people invest in the things that they know, right? So you invest in, if you grew up around art and you understand art, you invest in art. And so, but you don't find somebody that didn't grow up in art typically that says, I am now an art investor. But the asset class that everybody invests in just about, even if it's just a home, is real estate. Everybody invests in real estate, right? So it's, you know, the biggest asset class. And so that's a very natural audience. So as we're going out and finding buyers, a marketplace is always building both buyers and sellers. So it's super important for us to make sure that anything that we list on our marketplace, we want to make sure that we have the other side of the trade too. And so, you know, looking at energy, looking at real estate, and private debt is very, very in vogue right now. And so looking at those 3 asset classes is really easy. You know, certainly, yes, being able to look at other things like, like I said, hedge funds, you know, once you've created one asset class, it's really actually from an operational perspective, very easy to do other asset classes. Again, we just want to make sure that we're not, you know, too thin on the things that we look at and that we don't, we make sure that we have a buyer network for all the different assets that we trade.

Yeah, makes sense. What's the best way for folks if they're listening, hey, I want to go check out Lotus Markets and see if I qualify the platform and I'll look at what's going on. And just can you clarify, is it for accredited investors or qualified investors or, you know, who can kind of participate in this in this marketplace as of right now?

Yeah. So the first thing, if you're interested in learning more or checking out the products that are available to buy or sell, you would visit lotusmarkets.com. That's L-O-T-U-S markets.com. And then you can set up an account. It takes 5 minutes to set up an account. Technically, to get in behind the firewall, you just need a username and password, that username being your email. But, but yeah, it's very easy to be able to do that. You can also email us at info@lotusmarkets.com. Back to the other part of the question is like, who can do it? You do not need to be an accredited investor to sell, so you can sell on our platform if you already own something. Again, if you think about a REIT, a publicly registered REIT, you don't have to be a qualified investor to buy it either, but you do have to be suitable. And for us right now, we're not trying, we're trying to avoid having to worry about state suitability laws and stuff like that. So if you're an accredited investor, it kind of gets you, it gets us around that particular characteristic. But yeah, we do have a lot of institutions. We have a lot of family offices and then a lot of financial advisors that are signed up and buying things on behalf of their, their end clients as well.

Awesome. We'll put those links in the show notes so people can check it out. And Brian, thanks so much for coming on. This is really, really fun conversation and we'd love to have you back on down the road and hear how the platform's evolving.

Awesome. Thank you so much, Ben. It's great to be a part of it.