Syndication Framework - Bridger Pennington - Fund Launch Live

So the 3 topics I want to hit today. Number 1, I want to talk about how to do your first fund or syndication, how to put that together, the actual mechanics of doing a syndication or a fund. Number 2, how some of the best fund managers in the world approached their first fund and actually what they did, not what they say they did, what they actually did. I think it's important to watch what people do, not what they say. Their actions speak louder than words. You know what I'm talking about? And then number 3, I want to talk about how to actually build and apply the Fund Launch Formula in your fund. We're gonna talk about actually putting it together and building out the team for what you need for a Fund Launch Formula. Does that sound good? Yeah. If you're with me, say aye.

Aye.

Okay, so there's 3, I would call it distinct parts of this roadmap that we're on. We have almost put them up here, the test phase, the syndicate phase, and the fund phase. The test phase, I would call, so this is the world of, you know, I wanna manage other people's money, get into it. I would tell you the first area should be in the test phase. This is your own money and your own portfolio. Maybe you're a trader, you're day trading your own money, or paper trades, you're doing a test portfolio. A syndication in my vernacular is a deal-by-deal basis. You're syndicating for one deal at a time. Syndicators in the room, raise of hands, anybody syndicating currently? Okay, I love it. So you— hey, we found a great deal on 123 Main Street. We're gonna raise money for that deal. We're gonna buy this business. And then the third phase, fund, is, hey, instead of just buying one deal at a time, let's buy multiple deals and pool them together into a fund. Let's go buy 15 or 20 deals over the next 18 to 24 months. Does that make sense?

Yes.

Okay, so let's— what I want to do for the next few minutes is actually differentiate a little bit between syndications and and funds. Now I want to make this clear, we help people do both. What we're talking about, this mega framework applies to both people, okay? Then I— and I love— some people are like, Bridger, you hate syndications, you only like funds. I'm like, no, I love both. Both are good. Both have just different purposes. Does that make sense? Um, so to— we used this yesterday, but again, if you're investing in your first business, you'd be syndicating, like, but then eventually that'll become a private equity fund. Or if you're day trading, you're having a hedge fund incubator that'll eventually become a hedge fund. Does that make sense for each one of these categories? So I'll let you guys grab a picture of that, but this would be the beginning stages of a future fund. Now again, you can partner with people that already have maybe syndicated for a while. You don't have to— not every single person has to do this. You can bring partners in that have done the test phase, the syndicate phase, or the fund phase, but it helps you escalate to that point. Does that make sense? Okay, so what I want to do for the next few minutes is actually talk about the differences between funds and syndications. Is that cool?

Yeah.

Uh, I need a little help. Who currently— we're going to use real estate funds as it's a little bit— I think it's the easiest to apply. Who is currently, currently right now— so this is what we're gonna do. Let's talk syndicators currently syndicating a deal right now. Like you're actively, you've raised a couple of deals before and you're currently syndicating a deal right now. So you have to have done at least one deal prior and you're currently doing one deal. Let's go. Let me, like, can we get a mic and a runner down here? Let's go find, we gotta find the right people down here. I saw this hand first over here. Can we get a mic? Oh, there he comes. Adam's running right here. Stand up for us. Jason, hello. How you doing?

Doing great.

So quickly, tell us what you're doing.

So I'm doing multifamily development in Colorado Springs, Colorado.

A little bit closer. Say it one more time.

Doing multifamily development in Colorado Springs, Colorado.

Okay, great. And you're raising for a deal right now?

Yes.

How big is the deal? What are you guys doing?

24-unit, just a smaller multifamily.

Okay, 24-unit. And you've done some in the past?

Yes.

In Colorado?

Yeah.

Pretty cool. Jason, come to the stage.

Uh-oh.

Uh-oh.

Come on up. Keep that mic. Actually, maybe give me the microphone for a second. We'll get you a new microphone. Sound good?

Okay.

Clap it up for Jason, everybody. Jason, come on stage. Come right over here. All right. You're up on stage. Give me a second. We'll come back. Oh, sorry.

Get that out of there.

All right. I'm looking for someone who currently runs a real estate fund, not syndication. You actively run a real estate fund you're deploying into deals. I would come to you, but we're going to bring you on a little bit later. Let's go back here. Let's go here. Stand up for me. Let's get a mic. Oh, Adam's got a mic here. Okay. Tell us your name, a little bit about what you're doing.

My name is Mike from Chicago area, and the name of our company is Grand Vision.

Great. And then what kind of fund and how much are you guys doing?

Multifamily real estate. So it's an open fund, $25 million. We raised $5.5 million so far and bought 160 units.

I love it. So, already currently have 160 units?

Correct. Yeah. That was the first acquisition of the fund.

Yeah. I love it. Pretty cool, Michael. And where are you buying at? What market?

Within 3-hour transport of Chicago. So, this is Cedar Rapids, but kind of anywhere in the Midwest.

Okay. I love it. Michael, come to the stage.

Let's go.

Keep that mic. Okay. Let's have— you're the fund— Mike on this. Is it Mike or Michael?

Mike's fine.

Mike's fine. Okay, and then come over here, Jason. You're gonna represent our syndicators. Sound good? Mike, you're the fund, so you're gonna represent. Now we're gonna do audience poll. We're gonna talk through pros and cons of a fund or syndication, and I'm gonna have you guys vote. Okay, now what I want to say is there's no right or wrong answer. I'll give my opinion, but again, there's a lot of ways to do syndications, a lot of ways to do funds. Sound good? And then we're gonna have you explain. All right, let's just try the first one. You guys ready? So which— now you guys don't answer, just the audience, okay? Think through this and I'll call for the answer. Which one is easier to raise capital for, your first fund or let's call it your syndication? Okay, think about it for a second. Which one's easier to raise capital for? You ready? So make some noise for syndication.

Syndication!

Okay, make some noise for funds. Okay, a little bit louder, I would say. I think the vote was on syndication. So now, Jason, would you agree with that?

No.

No, you think it's easier raising a fund?

Well, that's why I'm here, to learn how to build a fund.

Okay, but easier to raise capital for?

Yes.

What do you think?

Uh, I would say at first it was easier to do a syndication, but once we did the syndications, I was able to explain the downfalls of the syndication to the investor and how they were missing out. Which made them desire the fund.

I like it. What would be your comment on this?

Well, my perception was it was easier for the syndication because we already have a property or project identified instead of just a thesis on what we're looking to buy.

Yeah.

Anybody agree with that? And again, I think both have good answers. If you already have a fund up and running, you have a track record, it is easy to raise money for multiple funds. But a first syndication is also easy as well because you have, hey, here's the deal, 123 Main Street, we're raising right here. So on my little score, I put syndication was a little bit easier, okay? And again, we like both, but that's at least how I scored it. Does that sound good? You guys get how this works? Making sense? All right, let's go to the next one. Which one has better interest rates? So you guys are both doing multifamily. Which one, a fund or a syndicator, is going to get better interest rates from a bank? You all ready? Got your answer? Okay, make some noise for syndications.

Oh, come on, guys.

That was tough. That was tough. Make some noise for funds. All right. Pretty obvious choice there. Give us a reason why funds have better interest rates than syndications.

I mean, we started the fund recently, so our interest rates are terrible compared to 3 years ago with syndications. But the bank likes the capital. They like multiple general partners, and they like seeing that track record, and they like seeing that other investors believe. So when you walk in and you just have $5 million cash ready to go into a deal, They have a little bit more risk tolerance because they realize that you have a little bit more capital than just your personal funds behind you.

I would 100% agree. Yeah. And you're a repeat client too. You're coming back for more and more deals versus syndication. Here's a one-off deal. You're coming again. So I think it was pretty unanimous there. Let's go to the next one. You guys cool? Yeah. All right. Which one? I put fund as well on my vote. All right. Next one. Which one? Oh, I already gave you my answer. I said both. I said both. So let's see what you guys think. Which one closes on deals faster? Okay, which one closes on a deal faster? If you found a deal today, which one could close faster?

You ready?

Make noise for syndications. Make noise for funds. Okay, a little bit closer there. That one I already gave away my answer, but in a fund, if the money's already raised, you can close a lot faster. Syndication, you're trying to call people up and get them And hope when the wire comes through before— Yeah, you're hoping wires arrive on Friday to close the deal. All right, let's hit the next one. Um, I'm not going to click it twice, let's just click it once here. Is that coming up? Did I do it wrong again?

Oh gosh.

Okay, this thing is different than up here. It's like frozen right here. Okay, which, which one's more diversified, syndications or funds? Hey, okay, there we go. All right, funds.

All right, the next one's going to be good.

Okay. I think that's pretty obvious. That's part of a fund is you're buying a lot of properties versus just buying one with syndication, okay? Okay, hold on. I'm watching this screen this time. All right, here we go. All right. Which— okay, here we go. Which one's more cost-effective to set up and run, syndications or funds? All right, got your vote? Okay, make some noise for syndications.

Come on.

Make some noise for funds. Okay, a little bit of both. Let's talk through each one. Give me a reason You're back in syndications. Why are syndications more cost-effective to run than a fund?

So we don't have all those management fees for the fund. We have direct sourcing for the project.

Talk a little bit louder, a little bit louder.

Yeah, we have— we don't have excessive management fees for the fund. We don't charge a lot of fees compared to a fund.

Yeah, so more cost-effective to the investor.

Yes.

Talk me through the deals, like setting up, like legal process.

Yeah, um, that can add up.

It can add up. Yeah, it can be somewhat costly. Okay.

We have different operating agreements for each syndication, obviously.

So you're re— you're having to set up new operating agreements, new everything for each syndication each time?

Yes.

So it can add up.

Okay. That's true.

Give us a reason around funds. Why is— why are funds more cost effective to run?

Um, same reason on the opposite side, just because you set it up once. You have the operating agreement, people that come in, you're not redoing an operating agreement each time, every time you have a property. They come in, they know what the fund's about, they know what you're going to be buying. So it's a one-time, once they subscribe, you know, you're set. You don't have to keep repeating that process. So more cost-effective and more efficient time-wise.

Yep. Yeah, I think, and you guys agree, I think there's good arguments for both sides. So I'm going to give, I think I put a check on syndications, but I think we could put a check on both.

Okay.

I like it.

All right.

Next one. Which one is more scalable, syndications or funds? 10x is easier than 2x. Syndications?

Funds?

All right, more scalable.

Why? I mean, the same reason we just said. It's kind of like rolling all the syndications into one time, over and done. You can scale quickly. You can raise a lot of money with a one-time setup.

Lots of deals. You can keep rolling deals.

I love it.

That one's pretty obvious. Okay, next one. Let's do— I'm going to look at this screen, make sure I don't do it wrong. Okay, minimized investor liability. Interesting. So which one has a more minimized investor liability? Meaning I'm an investor. If I'm going to invest into your deal or your deal, which one has the less risk for me, the investor? Interesting. Okay, right. Hold on. Syndications. Come on.

Oh man.

Funds.

Ooh, okay. Answer on this one. You got voted again.

Yeah, I mean, I don't know that there's necessarily a right or wrong. I think it's all in the structure and the legal documents of LP and GP and who's protected. I think it could be set up either way for either side, syndication or a fund.

Yeah, I think it's a great point. You can set up your syndication in a way that minimizes risk, but I would say in general, funds usually minimize more risk. You're more diversified. Additionally, the documents you set up with a fund usually protect investors against other investors. In syndications, depending on how you set it up, sometimes investors can put their elbows out and push people around, it can kind of get a little hairy. So, alright, let's do, I think we got one more on here. Let's do, okay, which one is more, let's say easier to do accounting and track what's going on? Does that make sense? So which one's easier to like run on the backend, do your accounting for? You got your choice? Alright, syndication.

Come on, yeah, it's way easier.

Funds. Oh, wow. We could have heard a pin drop on that one. Okay. So, give us a reason why it's easier in a syndication to account and track for things.

I'm not a fiduciary the way a fund is. So, there's a lot less paperwork. There's less regulations. You can move it quicker.

Yeah.

And you're working with just usually a smaller group of investors on one deal.

Right. Yeah. Maybe 10, 20 investors.

Now, I'll add this. I think that's awesome. Yeah. You're usually working with a smaller group, a little bit easier to account for. However, how many syndications do you have active right now?

Currently one.

Oh, one. Okay.

Yeah. I talked to some guys that have 15 that have been going on for the last 8 years. That can become a headache once you stack up a lot of syndications. And I go, wouldn't it be easy to just roll them all into one pool of money and they're all together? And they're like, yes, that would be a dream come true, because they've got all these side deals and stuff. So you can make an argument for both sides. I think a fund could be easier if you have a lot of syndications running as well. same time. Um, okay, and I think I voted for both on that, so you have items for both. Um, thank you all so much for coming up here on the spot. Jason and Mike, clap it up for Jason and Mike, everybody. Thank y'all. You guys can head down this way right here.

Thank you.

Thank you so much. Good to have you up here. And just hand your mics to, to Adam here. So, um, it's kind of useful to, to differentiate a little bit between syndications and funds. Now, there's 1,000 different ways to set up a syndication. I actually haven't Taught this before, talked about this for my syndicators. There's a lot of different ways to syndicate, and again, we like helping people syndicate. So, is it cool if I run through like a real-world example? Should we do this?

Okay.

So, let's say my private equity people. Let's say we're gonna go buy a business. Okay. So, here's our new business. Purple box right here. Someone yell out a business we're gonna buy. Laundromat. That's what I heard right here. Thank you. What's your name? Bianca. Thank you, Bianca. We're gonna buy a laundromat, okay? And Bianca, how much is the laundromat?

$150,000.

$150,000, wrong. Sorry, it's not in my slides. My slides say $500,000, so tough. That was tough. You were close, you were good, but— Buying in the wrong area. Buying in the wrong area, ooh, yeah. We're overpaying, I like it actually, that's good. No, that's wrong. The slides say $500,000, you should've known, okay? Okay, we're raising $500,000 to buy this new business. Now, this is how I would structure it. And you could— there's 1,000 different ways to do this. This is how I would do it. Does that sound good? Not legal advice, not financial advice. This is how Bridger would do it. Sound good?

Yeah.

Okay, what I would do is say we're gonna set up a new LLC. This is this gold box, and we're gonna go buy the new business, okay? Now, me and Bianca, we're business partners. Where you at? Right here. We're business partners, okay? We're putting a lot of sweat equity in this. We're gonna reserve 20% of this box for us as sweat equity partners, okay? 10% each. Does that sound good? We're going to raise additional capital of the $500,000. Our first investor comes to us and they're going to put in— excuse me, we're going to not have investors. We're going to have business partners. We'll talk about that differentiator in a minute. Again, that's how I would do it. I'm going to bring in business partners, not investors. They're going to partner with me on the deal. The first person's going to put in half of the money right here, this red box. Now, my math people, they're going to put in half the money and they're going to get half of the remaining equity. How much is that?

40%.

40%. Boom, you guys are smart, okay? So, they're going to get 40% because it's the remaining equity for half the money though, okay? They put in 50% of the money, but they're getting 40% of the equity and we're now business partners. We have an operating agreement, we all have voting rights and shares, we're all partners together. We truly are partners, okay? We raised from a couple other people. Here's our group. So, we raised money together.

Ta-da!

And we go and buy the laundry— what was it, a laundromat? For $500,000, and we're overpaying. Okay, our laundromat makes money. Money flows back to the LLC and gets distributed pro rata. Pro rata just means on a percentage basis. So even though we didn't put any money in, we put in a lot of time and we're just business partners. And we would get the 20% in the blue box. Our other partner in the red box would get the 40%, 10, 5, 15. Does that make sense? Now Bridger, why'd you structure it this way? Again, there's 1,000 different ways to do this. This is one way to do it. We're business partners in this deal. The reason for that is this bigger question. And I think a lot of us, I think we should talk about this. Bridger, what happens if I lose money?

That's a good question.

You know, we're talking about funds. Go, let's go kill it. Like what happens if things go south? It's a good thing to actually discuss. The reason I structure it as business partners is because we're all business partners together, and if everything makes money, the documents don't really mean that much. Legal documents and good compliance—you really need it when you lose money to make sure things are done the right way. Now I'm gonna break up. If we can go to the whiteboard here, hopefully we can put it on the big screen. There's 2, I would call it 2 camps of when you lose money and what happens. What happens when we actually, someone loses money in investment? I'm gonna put these out here. Here's our center, camp number 1. This is a very technical term, by the way. We lost money. We lost money. Oh, sorry, we lost money up here, excuse me. See that, I messed it up. We lost money, there we go, hold on. Technical term is we made a bad investment. There's our technical term. Okay, so we made a bad investment. The other side of this, and by the way, I'm an investor in a bunch of venture deals, so what happens when you lose money, people wanna know why we lost money. I'm an investor in a bunch of venture deals. Hey, sometimes you just make bad investments. That's just what happens and I'm okay with that. If we're gonna invest in venture, we invest in this technology startup, we had a competitor come in and for whatever reason it just didn't work. Okay, is that making sense? The other side is someone committed fraud. Regulators, SEC, when people come investigate why did you lose money, they wanna determine Which one was it? Was it just a bad investment? And if it is, investors can live with that. I can live with that. I'm in a bunch of venture deals. If we just lost money on a bad investment, we lost money. But if someone committed fraud, that's a bigger deal. It's a different deal. People are going to jail. It's a big difference. And they blatantly lied and defrauded investors. Does that make sense? Now what I wanna make clear today is If you have any, and me, any of us have any propensity to lie, not tell the truth in smaller matters, you should not get in this game. Don't get in the fund game. Don't do it. You'll end up— you can clap that up, yeah. Because it ends in a bad place. You're going to eventually end up in this camp. But on the other hand, If you're someone who is honest, can even tell a bad report, hey, we lost money, it's okay. People are— investors are— the reason you raise from accredited investors is because it's inherently risky. When you have your big documents, your LPA and PPM, those huge documents, 80% of the documents are explaining how to lose money. And so, and it's— it actually is okay. No one's gonna bat 1,000 in this room for the next 50 years. We're all gonna have bad investments. What we do over time is we make enough good investments that offset the bad investments. And if you're honest with investors and tell them straight up what's going on, it generally turns out actually pretty well. Does that make sense? So for this room, I want to make a pact with you all that we, when we're playing this game, we're going to do it with honesty and integrity together. Does that sound good? If you're with me, say aye.

Aye.

Okay. So back to the syndication. What happens if we lose money? The reason I would structure it that way is if we did lose money and they said, hey, Bridger and Bianca lost our money. I'd say, well, no, the other investors lost our money. They had more voting shares than us. They were actually voting partners. We were all business partners together in this deal. Does that make sense? If they were investors, like passive investors, we shouldn't have structured it this way. We should structure it like and file with the SEC because we're actually selling securities in that area. This way, we're just business partners coming together to buy a business together. Does that make sense? Differentiator. That's a little technical, but I wanted to get into it.