Episode 210: Why investing in private equity funds is better with Alan Donenfeld
In today’s show, Pancham interviews Alan Donenfeld – founder and General Partner of Paragon Capital, and founder of CityVest.
After working inside of Wall Street and investing in the stock market, he realized that the best investments are actually made outside of Wall Street! With his entrepreneurial spirit, Alan was able to start his own firm and created an online investment marketplace that has helped investors by providing access to those real estate private equity fund investments.
In this episode, learn from the best as he shares why he chose to start investing in real estate private equity fund investments, why it’s an attractive investment, the reason why he started CityVest, and why it’s a good time to invest right now.
Tune in to this show and enjoy!
- 0:41 – Pancham introduces Alan to the show
- 2:07 – From working on Wall Street to venturing out into private equity funds
- 5:17 – On providing access to the best funds and investments through CityVest
- 8:21 – Why investing in real estate private equity funds is better
- 13:51 – His thoughts on what the golden goose in the investing field is
- 18:56 – Investing amidst headwinds and why it’s a good hedge against inflation
- 28:48 – Taking the Leap Round
- 28:48 – Ground floor condominium as his first real estate investment
- 29:41 – Overcoming his fears and hurdles on his first acquisition
- 30:35 – How his residential condominium investment didn’t go as expected
- 32:10 – Why you should get into real estate investing right now
- 36:14 – How you can connect with Alan
3 Key Points:
- Even if it’s a long, slow growth, investing in real estate has steady growth and can help you build and increase the value of your portfolio.
- The golden goose in the investing field would be investing in real estate, in real estate private equity funds, and in real estate private equity funds on the residential housing side.
- If your goal for investing is diversification, a real estate private equity fund is a good investment strategy for you.
Get in Touch:
Welcome to The Gold Collar Investor Podcast, with your host Pancham Gupta. This podcast is dedicated to helping the high-paid professionals to break out of the Wall Street investments and create multiple income streams. Here’s your host, Pancham Gupta.
Hi. This is Tom Burns, author of Why Doctors Don’t Get Rich. You’re listening to The Gold Collar Investor Podcast with Pancham Gupta.
Welcome to The Gold Collar Investor Podcast. This is your host, Pancham. I really appreciate you for tuning in today. My guest is Alan Donenfeld on the podcast. He is the Founder of CityVest and oversees all investment, technology, and administration of the company. Alan has 35 years of experience as a Financial Services Entrepreneur having founded several investment and financing companies, as well as investing in and advising on multi-hundred million dollar deals at several large investment banking firms. Most recently, Alan was the Founder and general partner of Paragon Capital, a private investment fund focused on making structured debt and equity investments. For the last 20 years, Alan has been the President and the Founder of Bristol Investment Group, an SEC-registered FINRA broker-dealer. In the 1980s, he worked for Bear Stearns, Shearson Lehman Hutton, and Colvin, primarily in private equity, and mergers and acquisitions groups. He received his MBA from Fuqua School of Business at Duke University, and a BA from Tufts University.
Hey, Alan, welcome to the show.
Thanks, Pancham. Good to be here.
Thank you for your time. Before we get started, are you ready to fire up my listeners break out of Wall Street investments?
I’m ready to fire them up. Let’s talk.
Let’s do this. Alan, I know you’re into private equity funds. Can you talk about your background, your brief background on how you got to where you are today?
Sure. I live in New York City. I have worked on Wall Street for many years, starting in 1981 after business school. I worked for large investment banking firms doing private equity, and merger and acquisitions, tens of billions of dollars of very large transactions. I decided to start a firm on my own. That was about 1990. I have been doing deals ever since. Initially, they were in private equity deals. I formed a FINRA SEC broker-dealer. I did some small cap investing through a hedge fund that I started for about 12 years, and now focus all of my time on investing in real estate private equity funds.
Awesome. So, you have all this time that you spent in private equity, and then going and starting your own company now. Right? How was that transition like for you? Why did you start one? Was it something that was missing or more like entrepreneurial spirit in you? What was the reason?
Yeah, it was entrepreneurial. I ran a stock fund for about 12 years, and I wasn’t really enjoying investing in the stock market. I realized that there are numerous indicators from very wealthy investors that real estate is one of the best, least risky, least volatile investments. I made enough money for myself, so I started looking for real estate investments on my own. I made a couple of those investments. I made a couple of mistakes making those investments, and eventually found what I think is the golden goose in real estate investing.
For my brother — who’s a physician — and my money, and some other friends, we all started investing as a group. Then I created a online investment marketplace called CityVest, my company CityVest.com, in which we are able to screen, do the due diligence, and provide access to those real estate private equity fund investments.
Got it. So, this company, together with your brother and the third partner that you had, this is outside of that?
Yeah, it’s a company that I started. They’re all invested in the deals that we source vet, do the due diligence. They’re all continuing to invest with us. At this point, we’ve done 15 different investments into real estate private equity funds. It’s about 60 million in assets under management, and we continue to find very compelling real estate private equity fund investments.
Awesome. So, let’s talk about this. I know you touched on that a little bit. Why did you start CityVest?
The reason why is very simple. So, I started to look at and made some investments into some syndications, individual properties, some crowd-funded deals that I found online on various websites, and even a couple of REITs — which were nice that they were liquid, but they all underperformed. So, with all of those investments, what I realized after about two years of making those investments is they all underperformed. The crowdfunded deals did not live up to expectations. The sponsor deals were single assets. They didn’t live up to the publicized target return, until I started looking at some very large funds, hopefully to reduce my risk investing with a large institutional real estate private equity fund. What I found is that the very biggest of those funds have enormous minimum investment sizes, often 10 and 20 million.
As I started to look down size to funds that were 50 million to about 200 million in a capital raise of a private equity fund, I noticed that the returns were actually significantly better than the very large Blackstone and KKR colony type funds. So, the mid-size funds actually performed better. The problem was, when I tried to invest in those smaller funds, they still had 500,000- and million-dollar minimum investment sizes. For my money, I was not putting a million dollars into each real estate private equity fund.
So, that first deal was pretty simple. My brother put some money up. His doctor friends and I formed a feeder fund, which we call an access fund. We aggregated that capital into the feeder fund, and made that investment. We did that a couple of different times, actually. On the fourth one, word had spread what kinds of deals we were doing. I aggregated about $2 million in our feeder fund, which was well more than the minimum of that fund. I asked the fund manager rather nonchalantly, “Do you think we could get better terms because we’re at $2 million in aggregate?” They said, “Sure.” That was the lightbulb moment that convinced me maybe I could search for the best of these funds, aggregate a whole lot of investors, negotiate enhanced investment terms, and make those investments. That idea just continued to grow with a website that displays all the information that the investor needs, a dashboard so the investor can see what he’s invested in, what distributions he received. The K-1 report is available on the dashboard. That’s what CityVest is. It became an online investment marketplace for real estate private equity funds.
Got it. So, you had mentioned to me — just before the call, we were chatting — that you would absolutely not invest in syndications. You would prefer, without a doubt, investing in a private equity, large funds is better. Can you explain why that’s the case?
Yeah, so there’s a couple of key points that make a real estate private equity fund more attractive than a single asset deal syndication. One is, by investing in a variety of different funds, you get diversification right off the bat. If you talk to anybody in the stock market or any asset class — gold, crypto — it doesn’t matter. The number one rule is be diversified. You don’t want to be in one asset. Now, if you’re investing in 20 syndicates, I guess that’s okay. You get some diversification. You can invest in one manager in Miami, another in Dallas, Houston. That’s rather cumbersome. Then it might just be one property in Houston. If you remember a couple years ago, there were floods in Houston. You don’t want to find that you’re undiversified in Houston where you have the one property that might get flooded, or you pick South Florida. All of a sudden that one asset is the asset either in Sunrise, Florida or wherever a hurricane might hit. Whatever that market is, we’ve been investing in a lot of multifamily in the south. Typically, each one of our managers doesn’t just invest in Atlanta, or just in Houston, or just in Orlando, or Jacksonville. They’re investing in the south. They might have a couple of multifamilies in Charlotte, in Atlanta, in Memphis, in Tallahassee, et cetera.
Number one reason that I believe a fund is more attractive is, it’s diversified. Second, very importantly, the way that most sponsors and investment fund managers make money is off of a promote — a percentage of profits over a preferred return. It’s in virtually 99% of all sponsors, syndications, and real estate private equity fund. If you have one piece of property, then that promote is geared off of one property. So, if you would invest in five different properties of a given sponsor, five different limited partnerships, and he has one bad deal but four good ones, then your average return over the five deals will be less than if all of those deals had been in one fund. Because you want the loser netted against the winners. It might not be just one. Maybe in this market, it’s a little bit riskier. You might have 2 out of 10 properties that just have a single-digit return. So, you want those returns to be netted against the property that might be a 25% IRR. So, that’s another reason — a fair netting of the promote profits across a portfolio of properties.
In addition, sponsors don’t tend to be as opportunistic as a funder might be. By my investing in a real estate private equity fund, that investment fund manager now has, say, 50 million of equity capital. Compare his opportunistic behavior with cash in the bank. Compare it to a sponsor or syndicator that has to find a deal, attempt to lock it up, go look for the money, get the debt financing. He’s scrambling. He’s got timing issues. He’s got to decide, “Well, this is a soft lock on my deposit. When do I go hard?” Meanwhile, none of those issues are prevalent for real estate private equity funds. They have money in the bank, and they can be a lot more opportunistic. If you’re a seller, or the broker of the seller, you’re going to always prefer to go to a fund manager that has capital. Why would you want to go to a sponsor or a syndicator that doesn’t have the capital to close? They’ve got to go out and raise that capital.
Lastly, I tend to believe that a real estate fund manager that might be on fund 456 — that has maybe $500 million in realized investments — is a more experienced investment manager than a manager that’s still going deal by deal, sponsoring project by project without the opportunistic capital. For a variety of reasons, I have found that private equity fund managers are more experienced fair netting of profits, the opportunistic capital, the diversification of assets, all of which led to what I have found our higher returns of real estate private equity fund managers.
Got it. Some of those things that you mentioned, I agree with those. My question here, you mentioned in the beginning was that you had found the golden goose, right? Obviously, it’s related to real estate. Obviously, it’s through the fund. When you mentioned that, was it specific to being a fund, or was it specific to certain asset classes within real estate? What were you referring to?
Yeah, it really was a series of vetting process. So, in the stock market, there are lots of charts that show that large cap, small cap, international, they all have underperformed real estate for the long term. In addition, importantly, the standard deviation of real estate is less, so less volatility. If you can recall Warren Buffett’s two rules of investing, “Rule one is never lose money. Rule two is never forget rule one.” If you have a year, like this year, in the stock market where you might be down so far, to date, 20% — that was actually as of yesterday. Today, it’s down a little bit more.
For people who are listening — sorry to interrupt — today is September 13th of 2022. As I see, Dow is 1,100 points down as we’re recording it.
Warren Buffett would say, “You never want to have a down year.” Because that means the following year, in order for you just to break even with the year before it went down, you’re going to have to make a exponential amount of the loss. So, you want a long, slow, steady growth in the value of your portfolio. The way to achieve that is through real estate. There’s a famous quote by Will Rogers. It’s kind of funny. He said, “Don’t wait to buy real estate. Buy real estate, and wait.” Because if you look at trends in occupancy and rent, they have gone up every year systematically for, well, over 30 years. There are some small variations. But occupancy and rents going up steadily year by year means that, at least for residential real estate, prices will go up. We’ve seen that.
It’s true for a whole bunch of reasons. Population in the United States has risen steadily, year after year. Right now, we’re at about 350 million Americans. The Census Bureau forecasts that we’re going to have 440 million people by 2050. Now, we’re not investing for the next 30 years. But even over the next 5 to 10 years, we will have a steady increase of an additional 2 million Americans every year, combined with the fact that we have a housing shortage on the residential side. Year after year, it’s exacerbated, causing rents to go up every year and occupancy to get tighter and tighter. The golden goose would be, first, invest in real estate. Two, invest in real estate private equity funds. Three, invest in real estate private equity funds, on the residential housing side. My favorite little niche is multifamily.
It’s easy to do demographic research. Where are people moving to, at least this year, 2022? It’s easy to look at things, as simple as United Van Lines. Where are the pickups? Where are the drop offs? There’s lots of ways of determining where people are moving. As we know, people are moving out of California. They’re moving out of New York State. They’re moving out of the Upper Midwest. It’s easy to find their statistics. United Van Lines is easy to follow. The pickups are in those states: California, New York, and Upper Midwest. They’re dropping off, the moving trucks are getting out in Florida, and in Texas, and in Georgia, and in Arizona. Those are the statistics. So, why would you not want to be invested in multifamily in the southeast and into Texas, and Arizona? There are other pockets that are very good place — North Carolina, Charlotte, Durham — very good cities, growing population. Not just growing population, but growing population where companies like Apple are opening an office. When Apple moves into a city, the average income in that city goes up. So, now you have more people at a higher average income. A great place to invest in residential real estate.
Great. Thanks for that answer. Let me ask you this. Given — as we were talking earlier in on the podcast — that the market is down, inflation print came in high. There are a lot of headwinds right now for many sectors, including real estate. With the rates going up, and potentially cap rates expanding from here where we are, what is your take? To add to that, job losses might be coming. Given what Jeremy Powell said that there’s some pain, whatever that means, that’s coming where they’re raising rates. What are your thoughts right now in investing in multifamily given all these headwinds that we discussed?
It’s difficult to know where to invest. You’re right. There’s problems in every sector, but particularly the stock market and bond market. To the extent that you have any losses, just take those losses in stocks. Make some gains. You should have heard this podcast or video a day ago before the market dropped. Traditionally, real estate has been a hedge against inflation, mostly because, not office leases or retail leases but most residential leases, are a yearlong. Some are even month to month. In that sort of market, within a year, you can mark to market those leases.
With inflation, you get to increase rents. Rents have continued to go up. But the acquisition of real estate has gotten quite a bit trickier as cap rates have trickled up and interest rates have trickled up, adding even more reason why you need the most experienced investment fund manager who has the greatest capability of getting the lowest rate financing. So, if you’re a relatively unexperienced real estate investment manager, you may only know going to banks and getting bank mortgage financing. But that’s not the best place to get your financing. There are ways to get lower cost financing, and investment fund managers who have a capital market specialist on staff. All he does is arrange net financing. That’s all he knows. He knows when it’s the right time to get a floating rate, bridge financing, and how to swap out of that, and fix it, where he knows when to get agency debt, or he knows when to get private lenders, and he knows when to get bank financing. That’s all they do. So, just that will save as much as a point or point and a half in your debt financing rate, which may make a significant difference in your end of rate return. I believe that in growth markets, rents are still going up. So, it still is a very good investment to be investing in residential multifamily in the southeast Arizona, Texas areas.
Got it. Okay. I guess, we run short on time, but I would want to ask further on this question. Me and my partner, we invest in multifamily in the southeast. All of our properties that we have have excellent, excellent rent growth like you’re mentioning. The rents are not stopping there. They’re continuing to go up. But given the headwinds that we’re seeing, it feels like — again, I’m talking more from I don’t have a data point on this, but just extrapolating on what we are seeing and the kind of job losses that are getting announced. We’ve started to see that our property managers who have properties in tertiary or slightly smaller markets than where we are like suburbs of Raleigh, for example, or suburbs of Charlotte, which are, let’s say, 40 minutes from Raleigh and all that, they have started to see that the rents have peaked in a way. Their estimate is that, “Okay, you know what? This is not happening in Raleigh, or Charlotte, or Orlando, Tampa, in Phoenix. But this is a leading indicator that this will happen, coming down in six to eight months.”
So, that’s what my question was really. Do you see the similar thing? Do you see that, even though after micro-analyzing that sub location, that property that you find a really good one. But if the rent projections are not going to be achieved at the time of, after you buy, then the business plan falls through the cracks, in a way that you won’t be able to achieve those rents. Do you see that happening? What’s your opinion there? Do you see that can potentially happen in the next six to eight months, that we have to be extra careful on what you’re buying?
Again, if you have opportunistic capital, and you’re looking at properties in Raleigh, Durham — I actually went to Duke University’s Business School, so I used to live in Durham. So, I do follow that market. It has been a fantastic market. It is backed by a number of very large employers, including Research Triangle Park which has a lot of pharmaceutical companies. Pharmaceutical companies are not cutting back, for example. There might be a multifamily near that Research Triangle Park. That kind of asset is going to maintain its strength. People don’t want to drive an extra half hour to get to a B class property. They want to be in close proximity. It’s that investor that can buy assets on the bigger side and more institutional product, a $100 million acquisition.
So, now all of a sudden — no offense to you. But could you complete a $100 million acquisition? I’m just going to guess that that’s a big acquisition. So, it goes to show, you’re not going to have 30 people bidding on that asset for $100 million. You might have four people bidding on it. Now all of a sudden, the crazy pricing that might occur with smaller assets just doesn’t occur for a bigger asset. It’s that guy that has that opportunistic capital that’s willing to move on something that can get a well-priced deal.
There’s another saying, in addition to the others. They said that you make money in real estate on the buy, not on the sell. So, you can buy right in this market where a seller says, “Oh, my God. The value of my properties is declining as cap rates go up. I need to sell now. I need to lock something in now. I need to sell to somebody that has a fund, that has the capital to buy now. But they’re low balling me. But I’m still going to sell to that low baller because I want to get that price now.” So, a whole variety of reasons that funds outperform individual sponsors because they’ve got opportunistic capital.
Got it. Great. Thanks, Alan, for answering my questions. We’ll take a very short break, and we’ll be back after this message.
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Alan, let’s move on to the second part of the show which I call Taking the Leap Round. I asked these four questions to every guest on my show. My first question for you is, when was the first time you invested outside of Wall Street?
I invested in a ground floor condominium. It was a large space, 5,000 square feet, in Chelsea. It was before Chelsea, Manhattan became Chelsea, Manhattan. It was about almost 20 years ago. There were still a lot of warehouses in the neighborhood. There were some manufacturing businesses in Chelsea, all of which have been converted years ago to housing. I rented it out. Just year after year, as Chelsea got gentrified, the rents went up significantly. So, that was my first taste of real estate and I did really well with that.
Great. Did you have any fears that you had to overcome when you bought that?
Yeah, because I guaranteed a couple of million dollars of debt. So, yes, it was pretty scary. Then I had renovations to do to get the property. I cleaned up, putting in bathrooms, dealing with ADA compliance and other, specifically New York City construction rules and plans. Frankly, personally, I would not do that, again. I don’t enjoy the amount of work that goes into getting city approvals and picking out width of doorways for ADA compliance. So, that’s why I’ve gravitated towards passive real estate investing. But there were lots of hurdles in completing that first acquisition.
Got it. Okay. All right. My third question for you is, can you share with us one investment that did not go as expected?
They’ve all gone as expected, pretty much. There was another residential condo and a tall building. New York City is a somewhat unique market that it is virtually impossible to buy a condo, pay the condo charges, and then be able to charge a rent that covers your mortgage and your condo charges. Unlike a lot of areas where you have people doing buying a condo and putting it on Airbnb, and they make money. That does not happen in New York City. The numbers don’t work that way. To purchase a property, it’s too expensive. The condo HOA charges are too high, and the rent, basically, too low in order to make money.
There was one acquisition. The first year, I think I lost a little bit of money. I think the second year, I probably lost a little bit of money. But then as rents went up, I started to make some more money. I still own the property. It’s generating a fairly significant income — because I’ve owned it for quite a while — and rents, which is a theme of our conversation. Rents have continued going up as they do virtually every year. So, the rents have now bailed me out.
Got it. Well, you do these things, and you learn. Right? My last question for you is, what is one piece of advice would you give to people who are thinking of investing in Main Street that is outside of Wall Street,
Right. My focus is in real estate. As anybody in real estate will tell you, get in now. So, this year might not be the optimal year to figure out real estate. It might be a good time to keep a little extra money in cash, quite frankly. But there will be a turning point when later this week, it’s now September, we are likely to see a 75 basis point increase in the Fed funds rate. Goldman Sachs, even as recent as last week, was projecting only a 50 basis point increase. They’ve now, this week, increase that to 75 basis point. That is the reason for your 1,100 point drop in the Dow today. Then they also increased the November Fed Funds forecast, up from an increase of 25% of 50%. That may be the high point by November. Maybe there’s one more in January of next year. But at that point, it would be, I believe, an excellent time to get into real estate. Cap rates may be a little bit higher than they are today. That would provide, I think, a pretty good time to get into investing in real estate.
Great. One comment on the rate hike. Before today, everyone was saying 50 basis point hike, like 75% of the people. The 25% were saying 75 pips. After today, inflation print, everyone is saying, like 90% are saying 75 is given. But the 10% are saying maybe it’s 100 pips in September. So, I would be so curious to see what the Fed does next Wednesday.
One more comment. We may get bailed out by China in Europe, in a sense. Let’s just say it’s a 50 point increase in November, 50 basis point increase. Everything that I’ve heard that’s going on in Europe and Britain, with the cost of gas and oil skyrocketing, it’s clear that Europe is going to have a recession. It might not be an easy recession for them. It might go all the way through 2023, end of 2024. I don’t believe the US will because — that’s the same thing actually in China, where we know that the property owners in China are literally wiped out. Lots of other economic problems are happening in China.
If both of those two — China and Europe — have economic problems, then they’re buying less. Their struggles might just convince the Fed that they don’t need to increase interest rates anymore. Because the fire that’s fueling inflation, which is the reason for the higher rates, that fire will be extinguished by a somewhat worldwide mild recession — Europe and China. So, we don’t need to feel as much pain because there will be pain elsewhere. The Europeans and Chinese may be buying less US goods. Therefore, our economy will slow down naturally, without the continuing increase in our interest rates.
Yeah, the flight of foreign capital into US, it’s always been the case. But this thing will really accelerate that even further. Cool. Well, thank you, Alan, for your time. If people want to connect with you, want to reach out, how can they connect with you?
Sure. My website is CityVest.com. I’m at alan@CityVest.com.
Great. Thank you, Alan, for your time.
Thank you, Pancham.
Well, thank you for tuning in today and listening to Alan’s perspective on why it’s better to invest in just syndicated funds versus investing in syndications. If you have any questions, do not hesitate to reach out. My email is email@example.com. That’s P—as in Paul—@the gold collar investor.com. This is Pancham signing off. Until next time. Take care.
Thank you for listening to The Gold Collar Investor Podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollarinvestor.com and follow us on Facebook @thegoldcollarinvestor. The information on this podcast are opinions. As always, please consult your own financial team before investing.