In the modern mobile universe and celebrity culture, it’s easy to hype up an image or facade to project something bigger than it is. A newly launched business can explode out of the gates with a few simple ingredients.
Start with an eccentric CEO, celebrity endorsements, social media and internet hype, a slick website, and a Bahamas headquarters, and before you know it, you have a $32B valuation. It can all be just a facade, but the facade can continue as long as the public plays along. However, the facade usually lasts for only so long.
Take FTX, for example…
FTX was supposed to be the next big thing in cryptocurrency. Headed by a 30-year-old golden boy, Sam Bankman-Fried, FTX was supposed to be the latest in a long line of Wall Street darlings headed by a young, eccentric nerd. Think Microsoft, Apple, Facebook, Twitter, and so on. However, instead of being the next Steve Jobs or Mark Zuckerberg, Sam Bankman-Fried turns out to be the next Bernie Madoff.
Without getting into too many technical details, FTX was supposed to be a cryptocurrency exchange designed to be accessible to the investing public where investors could trade crypto easily, conveniently, and securely. In a series of commercials, Tom Brady and Larry David endorsed it. What could go wrong? A lot.
The problem is Bankman Fried was diverting customer funds in FTX to prop up a sister hedge fund named Alameda. Once crypto tanked this year, the jig was up. No longer able to prop up Alameda with FTX client funds because of cratering crypto values, both Alameda and FTX tanked – leaving investors holding the bag with billions in losses.
In December, Bankman-Fried was indicted by the Justice Department on eight counts of fraud, money laundering, and campaign finance offenses. Instead of rubbing shoulders with the Zuckerbergs of the business world, it looks like Bankman-Fried could be on laundry duty with Bernie Madoff in federal prison.
The problem with FTX – and every other new “golden” investment opportunity that tanks – is that nobody stopped to ask the hard questions. Nobody asked what would happen if crypto tanked as it has this past year. The problem is that with these new shiny object investments, it’s hard to cut through the hype and facade to get to the meat and bones of a particular opportunity and its prospects for success and long-term viability. And it’s even harder when the CEO is 30 years old with a little track record.
Fortunately, there’s a class of investments where savvy investors can cut through the hype and get to the heart of an investment opportunity to assess the feasibility of an opportunity adequately. Instead of falling for the next golden boy, smart investors fall back on the tried and true “gray hairs” – investors who have been around the block and have a track record of success.
Sophisticated investors prefer to entrust their capital with experienced and seasoned gray hairs they can partner with to generate real returns and not returns dependent on a duped investing public.
For investing in experience, smart investors turn to the private markets in the multifamily segments to generate consistent and reliable cash flow and appreciation through syndications and passive investments with experienced and seasoned experts with a track record of success.
The great thing about investing in private syndications and private investments is the transparency offered by a fund to potential investors. Because much of the fundraising is done by the principals and managers of the fund, these “promoters” are out in front and make themselves readily available to answer questions and address concerns. This type of transparency allows potential investors to assess the viability of specific opportunities properly.
When confronted with a syndication or private investment opportunity, what questions should you ask the promoters/managers before investing? Here are the top five questions to ask:
What is your track record?
What experience do you have with commercial real estate overall? Have you invested in this type of asset class and segment before? If so, what were the properties’ sizes, conditions, and locations? Have you ever raised private money before? If so, describe the process and performance of your prior offerings and funds. What is your track record of success? Do you have financial statements, records, or investor reports you can share from prior deals to back up your claims and projections?
What is your personal and professional background?
What is your educational and professional background? How has this background helped you with deal acquisition, management, and disposition? Do you have certain team members designated for specific roles? Deal analysis? Legal? Financial? Fund management? Property management? Dispositions?
What is the Fund’s Investment Objective and Strategy?
Are you focused on cash flow, appreciation, and asset preservation? What property types will you be targeting? Class A, B, C, D? What about investment strategy? Core, Core-Plus, Value-Add, Opportunistic? What geographic locations and demographics will you be focused on?
What are your financial projects?
What are your financial projections, and do you have numbers and data to back up those projections? Do you have pro formas? What’s the acquisition cost? Total costs with cap-ex? Will it be leveraged? What’s the cap rate at acquisition? What’s the projected cap rate at the time of disposition? What’s the projected first-year cash-on-cash return? The average annual return? The IRR? How often can we expect distributions?
What are the compensation structure and exit strategy?
How are investors and management compensated? Do investors receive a preferred return? Is there a waterfall structure? How is management compensated? What type of fees, if any, will management receive before profits are distributed? What is management’s profit split from operations and dispositions? What is the fund’s exit strategy for returning investor capital? Refi? Sale?
For reliable, consistent, and recession-resistant returns, smart investors turn to experience in asset classes that have a long history of performance. That’s why gray always trumps gold for savvy investors who ignore shiny new investments attracting all the hype and buzz on the internet, social media, and cable news in favor of experience and a track record of success.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.