A Beginners Guide On Funds || VC, PE, Hedge Funds, Real Estate Funds, Etc.

Boom, people! Welcome back to the show. Today we're going to talk about venture capital, private equity, hedge funds, real estate funds, how they work together, what's the differences, and kind of a beginner's guide for all these funds and actually how to start one, how to launch one, and even how to scale a fund. I know it's a big ask, but we're going to dive into this for this entire video. Now, if you're new to this channel, my name is Bridger Pentium, the founder of 3 different investment funds and a company called Fund Launch. We've helped over 20,000 people get started in the fund world. We actually help them launch their funds. So yes, I've seen behind the curtains of all these different types of funds we're about to talk about. So first off, let's talk about— we got hedge funds, private equity, real estate funds, venture capital funds. You even have debt funds and other funds written down here that go down the list. Now, what's crazy is a lot of these funds operate the same way. So I'm actually going to give you the similarities between all these funds, and then we're going to talk about the few different nuances of each different type. Now, all of these have something in common. They're all right here, funds, okay? They'll have fund in their thing. So what is actually a fund? So when I talk about a fund, all I mean is it's a pool of money right here. You have investors. We'll talk about different types of investors in a second— qualified purchasers, qualified clients, accredited investors. But anyways, any type of investor with money puts money into these pools, and then inside of that pool, the fund manager, people like me and you, can draw from that pool And we can go make investments. When those investments make money, the money flows back to the pool and then gets split between the investors over here with the money signs and us as the manager. That's all a fund is. It's not that complex. We're just pooling money together and making investments. And when those investments make money, we make money with our investors. That's it. Okay. These people on Wall Street with finance degrees, it's so complex. Nobody can understand. That's all we're talking about here, okay? It's not that crazy. So then Bridger, what's the difference between a hedge fund, a private equity fund, a real estate fund? Now we'll hit more nuances in a second, but in general, the only difference between all these different fund types right here is what they invest into. So for example, a hedge fund right here is a pool of money that gets money from investors and they take that money and they invest into public securities or public even companies. So stocks, bonds, forex, crypto, anything publicly traded, hedge funds are in that space. So down below, private equity. What's the difference then? It's the same thing, pool of money. Instead of investing into public companies, they invest into— ta-da, you guessed it— private companies, private equity. So for example, a big private equity firm is Sycamore Partners. They invest into Staples, Aeropostale, Nine West. They were trying to buy Victoria's Secret last year. This year they were trying to buy Kohl's department store. That's a private equity fund. Actually, crazy enough, in our group, we have people that do this at a small level. They'll have like a restaurant and they go buy all the neighboring restaurants and consolidate them together. Or somebody that has a car wash and they buy up all their competitors. It's kind of a small micro private equity play, but that's still private equity. That's all we're talking about here. Down below, you might've guessed it, real estate funds. Again, a pool of money, they buy, ta-da, real estate. Okay, we have a lot of people in our group that are buying huge apartment complexes. We have one guy that He flipped 75 houses out of a fund because he had a pool of money to play with. Are you kind of getting the idea here of what these funds are? Down below, venture capital. This is like Shark Tank. Okay? You have a pool of money and you can invest into startup companies. Debt funds down here. Debt funds issue debt. So like mortgages or they issue loans, they issue loans and lending products through a debt fund. So ta-da! You're like, what, 2 minutes into this video and you've already learned something. You can go to dinner tomorrow night with whoever and impress people because you know all the differences now between hedge funds, private equity, real estate, venture, debt, and you're on your way to being a fund expert. All right. So let's go a layer deeper. I've redrawn right here the pool of money and investors. Let's actually talk in real terms what these are called and actually how everyone is paid. Now, for 99% of funds in the world, instead of calling it a pool of money, they call this a limited partnership or your fund. You have investors that put money in, but instead of calling them investors, you call them limited partners. And those limited partners put capital investment into the limited partnership. And instead of calling them a fund manager, you call them a general partner. So again, same as above, we have a general partner, your fund manager, that you and me that manage a limited partnership, a fund, and we have limited partners. I put them in green just because they have money. Money's green, and that money flows into the limited partnership, and it's managed by the general partner. So the general partner will issue a, what's called a capital call. They'll call the capital into the fund when they need it. And then the general partner will have discretion over the investments that are made out of this fund. They can go buy whatever fund they're doing. They buy real estate, they buy, they invest into startup companies. Whenever those investments make money, again, they flow back to the fund and then it gets split between the limited partners, the investors, And the general partner. And sometimes down here you have a management company as well. All right, you guys following along so far? Is this making sense? So let's talk about that split that happens between the general partner and the limited partners. A lot of funds you'll hear, they run what's called a 2 and 20 fund. Now let me explain what that means, 2 and 20. This describes how the general partner and the other managers of the company are paid on this fund. And by the way, this has resulted in some of the wealthiest people on planet Earth have made money From this structure. If you look at the Forbes 100 list, it is riddled with people that make money from a 2 and 20 model or something near a 2 and 20 model. So, what does 2 and 20 mean? 2 means you get a 2%, what they call management fee. So, every year, their 2% of the fund, the money that comes in the fund gets sent to the general partner or the management company as a fee. So, 2% fee and then also 20% of the profits of the investment. So if this investment generated $100 of profit, $80 would go to the limited partner and $20 would come to the general partner. So to put this in real terms, let's say we ran a $100 million fund that had zero debt on it. This is just a $100 million fund. At the full year, we had a full year run rate. We had a 2% management fee. So 2% of the $100 million goes to the general partner, the managers. And let's say after that year, we invested a lot, we did pretty well, and we made a $20 million return. So now our $100 million is now worth $120 million. Okay? At the end of the year, I'm just doing simple math here. We do a— remember the 2 and 20? We do an 80/20 split. So how do we split up that $20 million? Well, we do it with an 80/20. So how that math works out is $16 million would go to our investors, our limited partners. I put that in green for limited partners. The other $4 million, I'll put it in red, $4 million would come to the general partner. So ta-da, at the end of the year, you know, investors got a, using round numbers, around a 16% return. And then us as the fund managers, we made $2 million here. And then $4 million over here. So we made a total of $6 million. Now you might be saying, well, Bridger, hold on, that math doesn't add up because there was— I have $6 million and $16 million, that should be $22 million. But with the management fees, this takes this $100 million to $98 million. And then from there, we produced for the year net was a $20 million total. So it really is more like $22 million total that we had to produce to get this type of return. Is that kind of making sense though on a simple level? Now some funds don't do this. Some funds come in here and say, you know what, we're going to charge a 3% management fee. Some funds say we're not going to do 80/20, we're going to do 70/30. Okay, you can decide as a fund manager, you can come in and decide what you want to do with your fund. And all of that is consolidated down to 2 main documents that govern your fund. So remember up above when I talked about the general partner limited partnership, these 2 documents that govern this whole thing are called your LPA, which stands for your Limited Partnership Agreement, and your PPM stands for your Private Placement Memorandum. Both these documents are usually 100 pages each, and they are usually very expensive. At the minimum, you're spending around $30,000, usually even up to $100,000 for these documents sometimes. Now, inside of our group, we have all these different ways to get very huge discounts off of documents and make sure they're done from law firms. Anyways, we have all this cool stuff. You guys can get docs done for like $5,000 or $10,000. But if you're going to the street and just looking up on Google, $30,000 is kind of a usually a minimum price tag to start and launch your fund. Now what's also cool though is that $30,000 is a reimbursable expense from the fund. The actual fund, once it gets launched, can reimburse you back for that money. So you're really not putting a ton of money out of pocket. So you can see how much money can be made from From running a fund. So back to this with the fee structure right here, you know, I showed that you make $6 million a year running about a $100 million fund that's performing decently well. The cool thing about funds is they are scalable. This is why most people that are successful in finance or business, one way, shape, or form, end up in the fund world because of how scalable this is. Let's just say you add a zero. Instead of running a $100 million fund, you run a Okay. Instead of making $6 million this year, you just made $60 million this year. Okay. And this is actually a billion-dollar fund is, you know, that's a good-sized fund, but not a crazy-sized fund on Wall Street. A billion dollars is kind of still becoming an emerging fund, right? And you're making $60 million a year. Let's say you ran a $10 billion fund. Well, add another zero. That's a $600 million return to you. The top fund managers right now are making over $100 million a month net to them. Ken Griffin, Jim Rogers, to name a few, are making over $100 million a month to themselves cash. That's not net worth, that's returns to them from running this model through a fund. Now you might be asking, well, who, what type of person invests into these types of funds? Like, who are these people? Can I invest in them? What does it look like? Now there's 4 different types of investors that it's qualified by the SEC, and I've got them written out right here. Number 1 is a non-accredited investor. Number 2 is an accredited investor. Number 3 is a qualified client, and the next one is a qualified purchaser. And these are determined primarily by your net worth, with a few other exceptions. So starting at the bottom, a non-accredited investor is someone who doesn't fit any of these categories. Okay, you're just a regular Joe that just doesn't fit any categories. Okay. The next tier is an accredited investor. An accredited investor has a million-dollar net worth excluding their home, or they make $200,000 a year or $300,000 a year with their spouse. Additionally, they just recently changed this. If you have a license to sell securities, you can also fit into this category as well. But that's kind of the general rule is around a million-dollar net worth excluding your home. Most investments that you'll see with funds require you by the SEC to be an accredited investor. And the reason for that is that the SEC, way, way back when they started in the 1930s after the Great Financial Crash, was they wanted to protect the little guy. The SEC wanted to make sure that small investors that were investing small amounts of money, that maybe it was their life savings, weren't getting swindled by some fancy slick-talking Wall Street bro that's going to get their— all their money and savings. Okay, they said if You know what? If you have a million dollar net worth or above, you're you have a level of sophistication and you should understand the risks of investing. And you should like you should have known. And so that's why actually most funds like my fund included you have to be an accredited investor or above to invest in my fund. Now there are some new funds that have been coming out for non-accredited investors that are called Reg A, Regulation A, or Regulation. CF or regulation crowdfunding that have come out over the last decade, which are actually pretty cool and have allowed non-accredited investors to get into the space. Additionally though, just a side note, we have other videos on this you guys can go check out, but these require usually a lot more due diligence from you as the manager to run these. They take a lot of work to run. They can be good if you scale them. There's a lot of companies that have done this successfully, but just so you know, these funds that run above that line are a lot easier And I'm talking easier by money-wise. It's a lot more money per month to run these types of funds. We can talk about that on another video. All right, going down below, above an accredited investor, we have a qualified client. Qualified clients have a $2.2 million net worth, excluding their primary residence. And then finally, qualified purchasers have a $5 million net worth, excluding their home, or an entity with $25 million in assets. And there's actually a number of tiers within the SEC that will require you that, that you can only take qualified purchasers for certain investments in certain funds. Another constraint that the SEC has put on funds is a lot of funds are capped at a certain investor count. So for example, my fund right now, I'm capped at 99 investors as a private offering. I can only take 99 investors and all of them have to be accredited or above because of my certain filing. We have other videos on those filings. Big funds on Wall Street like Ray Dalio or Jim Simons, whoever it is, they can only take 1,999 investors, and all of those investors have to be qualified purchasers or above. You don't need to remember this, but if you want to, this is under a Regulation D 506 exemption 3 exemption. Now that sounds so complex. More money in the world flows through that little vehicle right there than anything else on planet Earth as far as private money goes. I mean, hundreds of billions of dollars flow through that exemption right there. And you're capped at 1,999 investors for that offering. So for example, Ray Dalio, when he was launching one of his first funds, this is back in 2005, to invest in their fund, 'cause he's like, I only have so many spots, you have to have, get this, a $4 billion net worth to even talk to them. Minimum investment was $100 million to in minimum investment to join their fund. They raised that fund and they've closed it for the last decade. No new investors can join for over a decade because they've already filled up the 1999 investors. Pretty crazy, right? Like these are exclusive funds just for the Wall Street elites or high net worth individuals because a lot of the reason is it's not because they're greedy rich. It's really because the SEC. The Securities and Exchange Commission has put these rules in place and don't allow more investors to come in. And what they essentially say, just you're wondering why, what they say is, you know, if you have over 2,000 people, it's not really a private offering anymore because these are private offerings. You're more of a public company. You need to file and register as a public investment company. And a lot of these groups don't want to do that because there's so much money, there's a lot of rules and regulations that go with that. And they're like, you know what, we'll just keep it private. and we'll just make our minimum commitments really high. And that's what most large funds do, which is kind of crazy. Okay, I know there's a lot of information, but hopefully that's useful for you guys. Now I want to talk for a second about these different types of funds. So I gave you actually those— all those rules I just shared are general rules for all of these funds. Now I want to share for a second different strategies that you'll see within these different types of fund types and hopefully get your wheels turning for different funds that maybe you could start. And I know that sounds crazy to start a fund, but we have helped Hundreds of people go out and launch funds. I mean, it's crazy. We actually have an award we give out to any fund that has over $10 million raised from our group. We have over 30 people that have done that in the last— I think we've done this for about 2 and a half years. 30 funds have launched over $10 million inside of our group. We have a couple over $100 million and one over a billion. It's pretty crazy. So we've seen a lot of fund types. So I want to share a few examples with these different fund types. So for example, let's start with hedge funds first. So hedge funds, again, I mentioned the beginning. They trade public securities. Now you can do hyperactive trading. Some traders, they trade like very quick all day, every day they're trading. And you can, you can go read stories about that. It's freaking crazy. Some people are day traders. Some people are swing traders, more like a Warren Buffett style where they invest in good companies. They hold them for a long time, grab dividends. There are 1,000 different strategies in here. Forex, crypto. You can do some Google searches and see the crazy strategies with hedge funds and actually some crazy stories. One book I'd recommend is More Money Than God, okay? More Money Than God is a book. It's pretty much a book just compiled, maybe throw it on the screen here, my editors can, compiling all the crazy hedge fund trades of all time. I mentioned earlier a few examples about private equity, right? I mentioned examples of a restaurant owner buying up their competitors. I have a friend who owns a gun store and his plan was, hey, I'm gonna start a fund, raise capital outside, and that fund will go buy out my competitors and roll them into my current company. This is the world of private equity. Private equity is pretty crazy. So that's small private equity. Some large private equity will come in and buy up— you saw Tai Lopez, right? Tai Lopez, an online marketer, turned into fund manager, raised hundreds of millions of dollars. They went out and bought Dressbarn, they bought RadioShack, they bought Pier 1 Imports. All of these failed companies over the last 5 years, they've bought them for pennies on the dollar and now they're taking them to online marketing and helping them grow. Kind of cool, right? Some private equity groups come in and they rip companies apart, okay? So they'll buy a company, they'll recapitalize the entire company with new debt structures, and then they will take pieces of that company and sell them off. Pretty interesting world. Venture capital, you'll hear about this a lot like Shark Tank. You have big groups like Sequoia or Andreessen Horowitz. They're in Silicon Valley. They try to find the next Facebook, the next Instagram, the next Uber, the next whatever company. And they're going to invest at early stages. A lot of these venture capitalists do like a seed round. They do then a Series A, Series B, Series C, and they try to grab that company early, scale it up and help it IPO eventually. And then they, that's when they exit out. So what's funny is when you start to see the transition of this, let me just kind of show you the full life cycle. So a lot of funds, like for example, let's just call it XYZ tech company, like Uber or something in Silicon Valley. Okay. Tech company. They'll come to venture capitalists. They will get a, you know, seed or Series A round. They raise some money, a couple million dollars. They keep raising money. They build this incredible tech product. It gets good enough where eventually they start shopping the company to private equity or public markets. Sometimes a big private equity firm will come in and say, hey, you know what? We're going to buy you for $500 million, right? And then what that private equity does, they buy this company and they restructure whatever in hopes that they're then going to go sell it to the public markets at maybe a $5 billion So these venture capitalists, they come in at a $50 million evaluation, they then sell to private equity for a $500 million evaluation, and then they sell it to the public markets and the hedge funds, the big buyers for $5 billion. Kind of interesting, right, how every piece of the economy gets fueled by funds. I mean, it's pretty wild. Real estate funds. A lot of you guys follow people online, Grant Cardone, these big real estate people, a lot of them run funds. They go out, they raise capital, and they go buy up huge apartment complexes, skyscrapers. If you've ever wondered like, man, how are people doing such big deals? They usually have a fund behind them to do all these deals. So, hopefully that gets your brain spinning on large deals, small deals. If you can just find a strategic edge, an advantage. I've seen a lot of our people in our group go after and do what I call micro funds where they are coming in and buying up a whole group in a certain area. In Salt Lake City, Utah, I'm gonna go buy up all of the concrete companies in one area and I'm going to consolidate them together and make a concrete empire in Salt Lake City, Utah, okay? Or whatever it is, whatever the strategic play is for that. And they can find what they, what we call alpha, right? That's what you're trying to find is the strategic advantage in one of these markets where you can find asymmetrical risk, where there is a high amount of return for a relatively low amount of risk. And the way you achieve that, and I'll close with this, is usually by you. Your expertise. So for example, you know, as a venture capitalist, all of us have heard like high risk, high reward, okay? Well, what if you were a venture capitalist and Elon Musk was your business partner, okay, and you guys were buying a company and yeah, you're gonna put money in just like somebody else but Elon Musk is your business partner. What's the odds? Do you think the odds of success go up or down with Elon Musk as your business partner? Probably go up, right? And so you put in the same amount of dollars maybe as somebody else But you have a strategic advantage where you have just as much return, but you have a lower risk profile because of your expertise of your team that you're going to come in and help out with. Does that kind of make sense? As a fund manager, you're trying to find, again, asymmetrical risk is what this is called. Now my whole channel is dedicated to this. If you guys like this video, please like it. It helps a ton. And finally, I'll leave you guys with this. You know, funds, you cannot ignore this world anymore. This is taking over every industry. If you look at the Las Vegas Strip, it is owned by funds. If you look at downtown metropolitan areas, they're owned by funds. If you look at most of your major brands, TV networks, they're all owned by the same company. You cannot ignore what is happening here with funds, and you can either, you know, hate them or you can join them or at least learn how this works. If you guys like this channel, please subscribe. We got tons of other videos below. Please like this video, comment. It helps push this out to— I think more people need to understand this. And go check out the videos. You guys are amazing, and I'll see you in the next one. Bye-bye.