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Today we have a fascinating episode with Daniel Brereton, Director at 
Equity Multiple, and a true expert in both traditional and alternative investments. Daniel’s journey is as impressive as it is educational—after serving as an Army officer, he translated his leadership and analytical skills to the world of private markets, first at UBS advising pensions and endowments, and now helping everyday investors unlock access to institutional-quality real estate deals.
Host Dave Wolcott explores Daniel’s evolution from the military to the cutting edge of wealth strategy, shining a light on how family offices and leading endowments invest beyond the stock market. Daniel shares his firsthand knowledge of asset allocation and explains why alternatives like private credit and real estate can be game-changers for building a diversified, resilient portfolio.
In this engaging conversation, Daniel breaks down what true financial freedom means, what he learned by working with some of the world’s most sophisticated investors, and how regular investors can benefit from private market opportunities—without needing to write million-dollar checks. Listeners will gain actionable advice on evaluating risk, choosing the right partners and sponsors, and building wealth with patience and intention.
In This Episode
- The fundamentals of asset allocation and diversification beyond traditional stocks and bonds
- Why private credit and real estate are especially attractive in today’s market cycle
- How to assess risk, sponsor quality, and market opportunities in private market deals
- Actionable tips for gaining access to institutional-quality investments and accelerating your wealth trajectory
There are people smart enough to say, you know, this specific deal is good for me, that specific deal I don’t like as much, and maybe get a higher return than the market. But I think having the patience to invest over time, and the biggest thing is finding a partner that you trust to bring you high-quality, well-vetted, and understandable deals.
Welcome to the Wealth Strategy Secrets of the Ultra Wealthy podcast, where we help entrepreneurs like you exponentially build wealth through passive income to live a life of freedom and prosperity. Are you tired of paying too much in taxes, gambling your future on the stock market, and want to learn about hidden strategies for making your money work for you? And now, your host, Dave Wolcott, serial entrepreneur and author of the bestselling book The Holistic Wealth Strategy.
How’s it going, everyone? And welcome back to another episode on Wealth Strategy Secrets of the Ultra Wealthy. In today’s episode, we’re digging into a topic that’s never been more relevant: how to escape the Wall Street roller coaster and invest like a family office with real diversification and access to high-performing alternatives. I’m joined by Daniel Brereton, Director at Equity Multiple. A former Army officer turned private markets expert with experience at UBS advising pensions and endowments, Daniel brings a rare insider’s perspective on both traditional and alternative asset allocations. We unpack how the world’s most sophisticated investors, from Harvard’s endowment to family offices, allocate capital, and why private credit and real estate are poised to outperform — and what the average investor can do to gain access to institutional-quality deals without writing seven-figure checks.
This episode is packed with practical advice on how to build a truly diversified portfolio, evaluate private market risk, and take control of your financial future. And now, on to today’s show. Daniel, welcome to the show.
Thanks so much for having me, Dave. I’m really happy to be on.
Yeah, you bet.
Great to have you on the show. And, you know, first of all, appreciate your service as an Army officer. I won’t hold too much of a grudge against you as a former Marine myself, but, you know, we both served, and it’s interesting, right, because we fought for our freedom. And freedom isn’t free. And this whole world of passive investing and alternative investments and financial freedom — it is all about freedom, right?
It’s creating that freedom in your life to spend the time with your family how you want to actually spend it. It’s about freedom of purpose — being excited and motivated about the work you do. Freedom of location.
To live anywhere, what to do. And I think we’re really looking for that freedom, right? Investors, the audience, we’re all searching for that freedom in our lives. And we believe that by investing smarter, and then creating passive income and outperforming, and not being on that stock market roller coaster, can really accelerate that freedom trajectory for us. So why don’t you just tell us a little bit about your origin story, how you got to where you are today with Equity Multiple. And, you know, let’s talk about that journey before we get into the meat and potatoes.
Yeah, you mentioned that freedom. And people often talk about financial independence, that FIRE mentality, and I think that’s what everyone’s after. So, you know, for me, I’ve had a fairly broad set of experiences. I started off in the military, like you just mentioned. I was an engineer, solving problems. And then I got out, went back to grad school, and linked up with the wealth management shop over at UBS, helping large pensions, large endowments, and high-net-worth individuals. What I found is that this was all in the era of passive investing, people allocating to stocks and bonds, ETFs. And what I was really seeing is that a lot of the excess returns the wealthy were getting were from alts — real estate, private equity, private credit — things that weren’t trading on exchanges.
So I packed up, I was living in California, and I moved back to the East Coast to try to find a startup or a company that was working on alts. I settled here at Equity Multiple about three years ago, working in the real estate side of the house, working with investors to learn more about real estate, learn more about how to access it, and seeing that excess return potential in portfolios for people to add it to their portfolio. And it really meshes with Equity Multiple’s origin story as well. Charles Clinton and Marius Scholson are co-founders. Charles was working as a busy lawyer, a busy professional, and he was working on large deals with Blackstone, KKR — these big real estate deals. And what he found is that he couldn’t invest in the types of deals he was working on. He could see all this wealth potential, see all this generation of capital, but he couldn’t get that access for himself. What’s really interesting is he turned around and just made a platform where he could do that.
And Marius and he got together and sourced a lot of deals. We’ve done a lot over the last close to 10 years that we’ve been in business to make the platform grow and really spread the word and spread the availability of alternative investments for investors.
Yeah, that’s awesome. I think it all really starts with that education and helping people understand that there are other asset classes you can get involved with outside of what your traditional advisor is really talking about, and really understanding that entire ecosystem. It’s folks like you and others that we’re trying to support in this mission of helping people understand how to see and understand what assets are actually available to invest in, and understand how they work.
Because we want to be knowledgeable about what we’re investing in. And then ultimately, we’re looking for less volatility and we’re looking for better diversification.
Because I think Wall Street’s version of diversification is just this old 60/40 type paradigm. Spread things across, let’s say, 100 different equities, and you’re just going to average out — and that’s how you diversify.
But for folks like us, it’s true diversification into other asset classes. And even as much as we love real estate, you don’t want to have all your eggs in that basket either. We want to be diversifying across all. So with that said, why don’t we talk a little bit about asset allocation, portfolio construction right now, and really help the audience gain some further perspective — especially from your background, coming from UBS. You’ve got great experience on the traditional side, and now you’ve got alts and real estate. So how do you see it all coming together, and what do you usually recommend for your clients?
True diversification isn’t just 60/40 stocks and bonds. It’s adding other asset classes that behave differently from public markets.
Yeah, of course. I think it’s very telling when I talk to investors that I’ll say, look, obviously it would benefit Equity Multiple or whoever you’re investing with to invest 100% of your money with the company. But I don’t think that’s the right answer. I think you look at your portfolio overall. Large pensions and large endowments — look at Harvard’s endowment — they’ve got a healthy allocation to alts. It’s not 100% in alts. It’s not even 50% necessarily in alternatives.
They’ve got a good ballast of stocks and bonds diversified across the market, cash instruments, but they’ve got 30–40% that is in alternative investments, and that includes things like private equity and private credit. But for the most part, a lot of people are going to get good access to alternatives with real estate. I think you have to have a good portion where you’re shaving off a little bit from your equity allocation, shaving off a little bit from your bond allocation, and really carving out a place in your portfolio for something that’s going to diversify, provide tangible property that has ties to the real economy like real estate, that has a different inflation hedge, has a different response to when rates move around, and just has a different effect on your portfolio.
That’s why I say 30–40% of your portfolio, and maybe starting off with about 5% total in real estate and seeing where that can go. And when we talk about 5%, some syndications require hundreds of thousands, sometimes millions of dollars to invest in a single real estate project. A lot of investors might not have been aware that there are ways to get access to commercial real estate opportunities — professional commercial real estate opportunities — at much lower price tags. It’s a lot easier to edge in or move into the market over time and really tailor your allocation for a smaller portfolio size.
Got it. So if I were to summarize that right, you said 30 to 40%, maybe alts, maybe 5, 10% real estate and the rest would be traditional, or how would you carve up the pie?
Yeah, I think it really depends on—obviously the advisor answer depends on where you’re at in your life. For a young person, we see this in our data as well. Younger people invest in longer term, higher upside equity investments because they’ve got more time and they’re not trying to retire on this money. And older people, closer to retirement or in retirement, are looking at more income generating vehicles—debt investments or high cash flowing equity investments. So the overall portfolio is typically going to be in some mixture of stocks and bonds with the public equities and that remaining 60 or 70% of your portfolio. But even within that 40% or 30% of alts, you’re typically going to look to break that up among equity and, or excuse me, growth and income-oriented investments. So the overall allocation should still be mixed towards your overall risk type of tailoring. Typically, we talk about the 60:40 portfolio, that mixture of growth of 60% and income being the 40%.
And within that alternatives portfolio, you can still try to allocate to income generating assets and equity assets or growth assets accordingly. But I would say that the large portion of the portfolio, about 60%, is going to be in public assets because they’re liquid, they trade easily, they’re well understood, and they are much better defined when it comes to the types of risk and return. But in that 40% of alternatives, you’re getting that differentiated, decorrelated exposure from public markets and the long-term capital appreciation. And if you’re not investing in a retirement account, you’re getting excellent tax benefits as well.
So let’s break down the alts. What asset classes are you favorable towards? And let’s also just talk about market cycles as it relates to that as well.
I think what we’re finding recently is that private credit in its various iterations—that can be real estate private credit, that can be private credit for public company debt, it can be differentiated types of collateral that you’re loaning against. And for us on the real estate side, we’re seeing a lot of opportunity when it comes to real estate private credit, mortgages on commercial real estate properties. That’s where we see a lot of the really great risk-adjusted returns coming. You’re able to get double-digit returns, equity-like returns where you’re only taking credit-type risk, and you’re higher in the capital stack.
When it comes to equity allocations for real estate, it really depends on the exact market that you’re looking at. And what we’re seeing is that you can get really high-quality markets, places like New York or high population centers in Florida where a lot of people have been moving, and you can get those properties for much cheaper than they were a few years ago. There’s a large reshaping of the markets currently going on and a lot of mismatches in terms of the value that you’re getting and the price that you’re paying.
When it comes to other alternatives, I don’t have as much to say on private equity or true private credit. But I know that there have been significantly difficult times for certain private equity sponsors to achieve the returns that they’ve been getting.
Just because valuations are pretty overbought right now, we’re seeing a lot of difficulties exiting because the cycles have drawn on much longer than a lot of private equity firms have been targeting. So they’re holding onto these longer. I remember seeing a lot of stories in the Wall Street Journal and even the New York Times about pensions and endowments, large investors in these private equity funds, that have been looking for alternative sources of liquidity for their holdings because private equity funds are just holding on for a lot longer. So it remains to be seen what types of deals those private equity funds are going to be getting into and whether it’s the right time to be in private equity.
But right now—and Charles Clinton, our CEO, and I were talking about this on our last Investor Insights webinar—if you’re looking at the range of asset classes, and this could be private markets, it could be public markets, but we’ll talk about private markets, right now when you’re looking at private equity returns or valuations versus current real estate valuations, it’s much better to be in a place where your dollar is going to go a lot further.
It’s maybe a bottoming market. I think that’s what we’re seeing in commercial real estate.
Yeah. Interesting. So let’s unpack the private credit first. I’ve noticed it’s interesting because we’ve been in private credit for many years, probably five years now. And it’s interesting because I’m seeing this emergence of a lot of deals coming and hitting the market. And I think a lot of that is stipulated by the challenges that the commercial real estate industry is having.
And trying to look for pref equity, private credit, other sources to really help them, as you mentioned, get through a challenging time. Because let’s face it, right, it was the interest rates. Deals that were underwritten in ’21, ’22—no one saw the rapid rise in interest rates that were coming through. That made a lot of these deals really, frankly, net negative based, even when their fundamentals were super strong with those assets. So there’s a lot of deals around private credit. But I think it’s important for investors to understand that you don’t want to necessarily look at that private credit or maybe even pref equity if it is truly a distressed asset, because it could be potentially almost like a capital call. Yes, you are lower in the stack, but if those assets don’t pan out properly…
I think they’re actually higher risk than they traditionally might have been. Our thesis around private credit—and there are so many different paths you can go with private credit—has been actually in merchant cash advances and essentially lending to smaller businesses that are growing and need capital to support that growth. And that industry has been scaling over 20% for the past 15 years. So small businesses that just can’t get traditional funding from banks, and banking regulations continue to tighten. So if those businesses want to keep expanding…
And they’re not necessarily credit worthy, they can go to this alternative source. And we’ve seen only about a 6.5% default rate on the fund that we’re managing. So quite low risk, especially when you look at the upside return profile as well. So I think it’s just important for people to know that there are many different areas within private credit that you can invest in. So make sure you understand exactly what that is and how it works with respect to any other dimensions of real estate.
How about industrial? How are you thinking around industrial, self storage, mobile home parks—some of these other asset classes these days?
Yeah, it’s a really excellent point. And one thing first to unpack about the private credit side too is the things that you’re seeing with current businesses looking to expand and just not able to get the capital—you see the same thing across real estate as well. Traditional lenders are not able to lend where we’re able to lend much more favorably. And it’s not predatory, but it certainly is in a way that is a much more attractive rate than you’re going to get with a CD or whatever it is. We’re seeing a similar story with businesses expanding with things like industrial. An industrial property is going to be really beneficial in times of expansion. And what we’re seeing with industrial properties specifically is it’s very resilient to times of stress. During the COVID-19 pandemic, we saw a lot of industrial buildings being built because places like Amazon and Walmart were doing a lot of business and they needed more distribution centers.
So we saw a lot of expansion there. And currently what we’re seeing is there’s a lot of new construction for massive super-mega deals when it comes to industrial—tens of thousands of square feet, hundreds of thousands of square feet of properties in these big boxes. But we’re not seeing as much new construction when it comes to small tailored spaces for smaller merchants or smaller businesses. And everyone needs a space. So for us in the middle markets—middle markets being deal sizes that are about $5 to $50 million—we’re seeing a lot of opportunities for either value add for currently small industrial spaces or repositioning larger spaces to become smaller industrial spaces or modular warehouse space. And that’s been a significant opportunity set for us because you can get a lot of significant rent premiums, whereas the tenants don’t really notice that significant premium.
We’re not talking 5 or 10% premium, we’re talking potentially 100% premium to market rent. Because when you get down to the tenant level, that only represents maybe a couple hundred dollars extra that they’re paying per month, whereas with a fully leased property it represents a 100% increase versus the market rent for the same space for modular warehouse space. So we’re seeing a lot of repositioning there. And then for traditional asset classes, I think a lot of investors have shied away—rightfully so—from office space, because office has been the pariah when it comes to commercial real estate. There have been a lot of public, very well-known, or notorious defaults or markdowns when it comes to office portfolios. But one, at a certain price, any property is going to be fairly attractive as long as it’s a well-positioned property. And two, there are office properties which kind of get dragged down with everyone else, whereas there are high-quality office properties or tenant mixes such that it’s not going to be affected by long-term work-from-home type forces.
So I think being selective and being much more methodical when it comes to selecting those properties has really paid off for us. In this current market environment, we’re able to get really high-quality assets for lower deals. And lastly, you mentioned mobile homes. We are seeing alternative types of housing properties. So it’s not just apartment buildings or apartment complexes or single-family or built-for-rent homes. We’re seeing mobile homes, other workforce housing—places where, especially with the current administration’s recently passed tax bill, the “One Big Beautiful Bill Act,” you’re seeing bonus depreciation, you’re seeing excess return potential because of the favorable tax regime. And all that combines to make a really attractive opportunity set in this current environment. And we’re excited to be bringing a mobile home investment to our platform within the next couple of weeks.
Yeah, that’s an interesting space for sure. It seems to have been consolidated really quite a bit. I know even Berkshire Hathaway was gobbling up all of them. There’s still lots of small mom-and-pop type operators out there, and people are doing kind of roll-up type strategies and everything. So that’s been kind of interesting. It seems as if there’s really less available in the market that are really good. I mean, still opportunities, but not as much as there were maybe five years ago or so. Tell us also the last one about self-storage. What are your thoughts around the self-storage market today?
Yeah, self-storage, I mentioned industrial being sort of resistant to cycles. I think self-storage too is the classic example of something that’s resistant to cycles or at least plays well in both sides of the cycle. Not just people putting their stuff in a space, but there’s moving company add-ons, there’s people buying boxes and moving supplies. Maybe they’re getting additional services from that self-storage place. And in either side of the economy, people are going to be consuming those moving supplies. You know, when people have to downsize their apartment because they need to pay less in rent or move for a different job, they’re going to put their stuff in storage or use a moving company. And when people are moving because they need to upgrade their space, or maybe they’re buying more stuff, or even if they’re running a small business on the side and want a small industrial-type space, they’re going to get a self-storage facility and spend more there. So on both sides you’re getting turnover when it comes to self-storage space and the rent.
And because of that, you’re benefiting in sort of a cyclical way versus boom-or-bust like office or retail. So it plays well in a lot of different areas. There are some areas that are overbuilt. I think we saw a lot of supply come online in a lot of big booming markets. But for us, looking at some more stable, highly important markets which have shown stable growth even throughout the period, which don’t have a lot of self-storage coming online, we’ve seen some opportunities there. And similarly, in this distressed period, you’ve got a lot of large funds that are rolling down, they need to fire-sale assets, partnership disputes because people need liquidity. That’s when we’ve been picking up a lot of attractive assets.
And we had a self-storage asset recently where a deal fell through. The merchant builder needed to sell it much faster. And we came with cash for a much faster deal, and we were able to get I think a million-dollar reduction on the price, which is a significant basis reduction for us, which kind of bakes in a bit of return potential when you’re looking at an asset that big.
How about in terms of geographical markets right now for self-storage? I mean, a lot of those assets in commercial real estate—is your thesis the same as it was a couple of years ago or has that changed?
Yeah, I think, to start off, we don’t necessarily have a strict house view on where exactly we’re looking. We’ve got, I think, a good sense both from our internal research subscription to research services and then our partnership with Marcus Millichap, which allows us to get a lot of broker feedback and boots-on-the-ground research for various areas. We’re able to get a good feel for whether a market is good or bad. But where we’re seeing opportunities come from is a lot of tier-one markets where we might have been priced out or not comfortable with the cap rate, or not been comfortable with how thin of a margin we’re getting. So, with New York, I remember just a few years ago, cap rates were in the low single digits, and now cap rates have come up to 5–6%, which is very, very different than the place that we were a few years ago. And what we’re seeing again is that mismatch between the value that you’re getting—a fully leased, middle-of-Manhattan, booming, college-adjacent, multifamily or mixed-use property—but you’re getting it for a much lower price. And that’s where again we’re seeing a lot of the opportunities come from: places like New York, some in Chicago, some in Central Florida, where again, you’re getting really good value for a much lower price. And that’s where I think we let it play out when it comes to selecting the locations or the geographical areas.
I’d be curious though, do you and your team look at more of a higher house view, or do you guys do bottom-up, or top-down meets bottom-up?
Yeah, I mean that’s a great question, right? And I really like to think about it around the fundamentals. We always want to be investing for at least like a 10-year horizon or more. So, there was a massive trend, especially after COVID, where people were transitioning. Everyone was leaving California, going to Arizona, Texas. That trend was happening. People were leaving New York and going down to Florida, the Carolinas.
So those Southeast and Southwest states, historically for the easily the past 10 years, have been really strong because that net population migration has been really good. So we’ve typically liked those states in the past. And another thing that’s quite interesting as well, based upon our experience, is typically operating in those states that are landlord-friendly. Some of those states and cities that are not landlord-friendly—you can get into some really ugly tenant issues where the government sides with the tenants and you’ve got a perfectly performing asset class, but your hands are completely tied. We’ve seen that before. So that really gives us serious pause in terms of investing in some of those cities. But real estate, just like residential, it’s all very local, and there are also a lot of tier-two type markets, like little submarkets that are great in certain areas. And some operators—we always like to also look for operators that have really strong competitive differentiation. So they might know a submarket inside and out, they’ve been there for 20 years, and they know everything that’s going on.
I think that’s really important to highlight actually. When you talk about the middle markets, I think playing in that area—it’s not a single-family residence, it’s not just a duplex, it’s not just a million dollars that you and a friend are cobbling together. But it’s also not like the massive Blackstone or KKR deals where obviously you want the megadeal in downtown Charlotte or whatever it’s going to be. For the deals that we’re talking about, it’s that middle market where it’s a very niche type of asset class, or it’s a niche market or a tertiary market where local knowledge matters because local connections, local contracting, local regulations, whatever it is—you can’t really know everything about every single locale. So you have to partner with a strong local presence, I think. And that allows you to get an edge over someone who’s trying to spread themselves too broad. But on the flip side of that, you have to build that trust with them.
And what we’ve seen over the last market cycle—coming out of that COVID-era boom, coming through some of those different market environments—the sponsor quality has really, really shown through.
And you really have to focus on sponsor quality. We’ve had some sponsors that have been better than others. It’s going to happen if you’re in business for 10 years like we have been, but really it’s focusing on: are they a good operator? Can they do the business? Have they shown success with the business plan in this market? But also, are they a good operational partner? Are they on time with their reporting? Are they on time with their payments and updates? Are they good communicators? Because anyone can get a deal in the door, but you’re going to be stuck with that operator for five or, in your case, 10 years. How do you guys approach it?
Yeah, no, that, I mean, you’re investing in the jockey, not the horse. I mean, that’s critical in terms of due diligence. And, you know, I was just going to kind of ask you about that.
I mean, you know, first of all, help the audience understand how do you actually quantify risk in the private markets with alt versus traditional markets?
How do you quantify that risk? Because I know a lot of people listening today are actually new to private markets or maybe have, let’s say, less than 10% of their portfolio in privates. So how are they supposed to really make some kind of apples-to-apples comparison? And does it really matter whether it’s multifamily or self-storage?
But just say privates versus traditional assets.
Yeah, I think it’s from two angles. One, it’s not volatility as risk. If you buy into Tesla, you know that Tesla is going to go up and down very erratically, and you’re kind of banking on it going more up than down over time. With private markets, because there’s a significant capital contribution, because they’re not marked to market—meaning that the price is reflective of the current price daily, quarterly, not even annually—it isn’t necessarily going to be marked to market. You’ve got to think about risk in a much more fundamental way, which is what can go wrong with the business plan, what can go right with the business plan, but then also where can this thing go haywire. And more importantly, how are you going to mitigate those risks? Which means either dampen them, eliminate them as much as you can, or put up blockers to make sure that the risk doesn’t get out of hand. And for us, that comes with assessing, I think, three major pillars.
There’s the sponsor quality, there’s the actual real estate, and then there’s the market. You know, a rising tide lifts all boats. So a good surging market means that even if the real estate’s not perfect, even if the business plan doesn’t get totally well executed, you’re going to see at least some lift because of the market. In some ways, that’s cap rate compression, which is a good thing, but you can’t bank on that. Then you’re just betting on a direction for a cap rate. Next, you look at the real estate and the business plan. Is it an old vintage asset that’s going to require a lot more repairs? Because you can’t know everything about an asset, you have to go in with the best assumption of what’s going to happen and plan for contingencies around that. So if it’s a newer vintage asset, maybe it just needs a new coat of paint.
Maybe it needs reorganization of the interior so it’s a much more efficient layout for tenants. But you mitigate that as well by saying, okay, we’ll put away some dollars for a new roof and if we don’t need it, great, we’ll distribute that once we stabilize. So you’re mitigating the business plan a little bit and seeing how the business plan makes sense. And how important are all the steps in that business plan to all go right at the same time? You know, if you have 10 different steps that all have to go right and you just have one line of business, it’s very risky. That’s why development properties tend to have more risk. It’s not necessarily that you’re going from zero to one, or it’s a long time to build something. It’s just that a lot of things have to go right, and there’s a lot of monkeys that can get thrown in your wrench along the way. That’s why we also like to see business plans that have what we often describe as multiple shots on goal. Is it monetizing? Is it raising rents? Is it also maybe being more efficient with expenses? Is it monetizing more stuff at the property? Is it using the space more efficiently or more creatively and monetizing it that way? Or is it repositioning a lot of these different areas to extract more value? Like in that industrial or modular warehouse example that I gave, you’re reimagining what that space can be.
So that’s the business plan side. And then last and certainly not least is the sponsor side. So with all that being said, is it a good market? Does the business plan make sense, either brain-dead simple or with a lot of shots on goal? And is the sponsor able to execute that plan? Have they done this before in this market, with this business plan, with this type of asset? Have they weathered through more than just fair weather periods? I think the sponsor value is not necessarily always in the positive side of the business plan, but also the negative side of the business plan. Can they bounce back, redirect, or cover themselves when something goes wrong? All three together make, for us, a good analysis of risk and help to understand what type of business you’re going to go into.
Volatility is not a risk, real risk si what can go wrong with the business plan, and how you mitigate it.
Yeah, no good points there. How would you actually like rack and stack? So you kind of talked about middle market being like a certain tier. So how would you actually quantify the market for people?
Because there’s a lot of operators out there that are, you know, putting deals together and things in the private side, but they may not necessarily have that experience that you were talking about.
They haven’t been around through multiple cycles, they haven’t done different things. So how is an investor supposed to really quantify where someone sits in the market and then do you have a preference to someone who’s, say, mid-market?
Yeah, I think, you know, for our investment sizes we are going to look in that mid-market $5 to $50 million of project size. When you’re talking about the sponsor quality and, you know, whether it’s someone who’s just been doing this for a couple of years and maybe looking to expand a little bit more and raise external capital, or it’s an operator who’s institutional quality but just not the institutional mega market size. And for us, you know, we do look at track record length. How long have they been in business? You know, it’s not a perfect indicator of future results, but if they’ve consistently raised money over several market cycles, it probably shows something to success. But I think what a lot of investors need to better understand when it comes to underwriting too is the risk premium that you have on the types of returns. I think a lot of investors index towards picking the highest IRR (internal rate of return, annualized return) number that they can because they think that they’re going to get more over a long time, that they’re going to get that because those are the best deals. And that’s not necessarily the case. With a higher IRR you’re going to have a wider dispersion of outcomes because there’s just more that can go wrong.
You know, if everyone picked the highest deals and they were the best, then there probably wouldn’t be high-paying deals. So you have to go in with that and you have to understand why some deals are lower IRRs than others. Right. You know, if I’ve got a Lincoln Property deal, Lincoln Property, a large manager investor, real estate company in general, and they’ve got, you know, a 13% IRR industrial deal with a single Class A tenant in Ohio. Well, that’s not a very sexy deal and it’s not a very high gangbusters IRR. But the quality of that sponsor, their size, their track record, their prestige makes it so we have a much higher confidence in their ability to weather bad market conditions, make sure that they are not overambitious when it comes to the business plan or the projections. And that allows us to get comfortable with a lower IRR even if it’s not going to be the same as a 30% distressed deal where if it goes really well, it goes really well. I think that really gets to our understanding and it is difficult, I think, for individual investors to do the math themselves, which is why I think for myself it’s very important to partner with a professional or a trusted third party.
That’s going to help you understand it over time and that’s building a relationship with business, you know, that can offer that type of real estate to you.
Yeah, that’s such a great point. I’d like to emphasize that for the audience out there is that while returns can be very attractive. In a particular pitch deck or something like that.
It is very key to understand that if you invest actually at the lower level, I mean most family offices, a 14 to 16% IRR, I mean they are totally happy.
That’s what their target actually is. And then it gives the operator an opportunity to actually overdeliver, right. Underpromise and actually overdeliver versus if the pro forma is so high, then it leaves less room for them to actually achieve, you know, that plan that they put out. And investors basically, once they see a pro forma in writing, that’s what they expect. But the markets really don’t work out like that. And frankly, it’s the same for all investments. It’s interesting how psychology really plays in here. You know, I’ve cited this example a few times before but even, you know, we had in the blue-chip stock, you know, we had Kodak right in our family and, you know, they went bankrupt, went to zero, you know, overnight, right.
As they got, they got basically handed to them with, you know, digital came out and everything like that. But that was as blue-chip safe as you could get in terms of an equity but just kind of went under, right. So regardless of what a particular pro forma or an expectation is, understand that there’s risk in everything. And as you pointed out, there is a risk premium.
For some of these higher return things, you know, there’s going to be a little bit more of a premium on that. So the way around that as the investor is, number one, don’t put all your eggs in one basket.
True.
If you really love the investment and you still think it’s going to be a home run, that’s great. But just don’t over-allocate to it, right? Make an allocation that you’re comfortable with, and you know, if it didn’t turn out right, you’re still good. This also brings up some other points around, you know, again, due diligence, portfolio allocation, which is, you know, we’re talking about the sponsors being really key. So one way you can manage also sponsor progress amongst your portfolio is to actually allocate with multiple sponsors.
So now you’re getting access to different operators, right? In different markets with different return profiles, with different business models.
And that way, you know, if, let’s say industrial tanks, or let’s say you were all in office, right? This is a perfect example.
And the pandemic, you know, now you’re only 5 or 10% down for your overall portfolio. You’re not 90% down.
Because you put all your eggs in that basket.
Yeah. And obviously, diversification is, as Mark Wood said, diversification is the only free lunch, which I see every day. The most diversified portfolios and the people on our platform who go in saying, okay, I accept real estate as an allocation, I understand that the average result is better equity multiples. Average results, your average whoever platform that they’re trusting with, average results look attractive. That 12, 13, 15% return, whatever it is, and I’ve got the time and the patience to allocate over a period and doing it in a methodical and planned-out way are the ones that really last in the market and that have, I think, the best results. Now, they’re not going to—you know, a lot of people want to have that feeling of allocating, and there are people smart enough to say, you know, this specific deal is good for me, that specific deal I don’t like as much, and maybe get a higher return than the market. But I think having the patience to invest over time, and the biggest thing is finding a partner that you trust to bring you high-quality, well-vetted, and understandable deals. Because, you know, I can talk very briefly about some of the competitive set, but there are some platforms which put up a lot of deals and, you know, they’re fine to showcase a lot. But I think that might get confused, that some platforms are also curating the deals.
And that curation, that initial screen that we do on sponsor quality, on believability of the pro forma or the underwriting, I think can provide a little bit more confidence to help filter out some of the noise when it comes to, you know, your cousin Jimmy’s syndication that he’s shopping around. So yeah, I think the best are the people that can allocate over time, that can diversify. And you do that through forming a good relationship with a trusted partner. It doesn’t have to be one trusted partner, but you know, you shouldn’t be picking up every deal just because real estate is hot right now. And I think that’s where a lot of people got burned in the last couple of years.
Daniel, if you could give just one piece of advice to the audience about how they could accelerate their wealth trajectory, what would it be?
Yeah, I think it’s very basic. But invest early and invest often. You know, get smart on investments, get smart on what it means so you don’t hurt yourself. But allocating now is better than waiting and not allocating. And the best way to wealth is just continuous and consistent allocation.
Awesome. Really appreciate your time today, Daniel, and sage advice. If people would like to connect with you or learn more, what is the best place?
Yeah, feel free to reach out to me on LinkedIn or reach out to my team at equitymultiple.com, or check out our website equitymultiple.com for more.
Awesome. Thanks again, Daniel.
Thanks, Dave.
Thanks for listening to this episode of Wealth Strategy Secrets. If you’d like to get a free copy of the book, go to holisticwealthstrategy.com—that’s holisticwealthstrategy.com. If you’d like to learn more about upcoming opportunities at Pantheon, please visit pantheoninvest.com—that’s pantheoninvest.com.