Boutique Fund Management #30
Bill Fairman (00:04):
Hi everyone. Bill Fairman, Carolina Capital Management along with Jonathan Davis. He is also with Carolina Capital Management. You may have met him in a previous recording. Wendy will be joining us for a later episode. She always likes to say that she is the one that does all the work. So apparently she is, because she is not here right now. Most of you who join us, you usually see this nice little brick wall behind us. Just so you will know that is fake. We have a green screen that is behind us. Sometimes it works, sometimes it does not. But this is really our conference room in our office. And we do have some fancy panels that are not just for looks, but there are also acoustic panels. So it sounds a little better in here. You do not hear much of an echo. So, by the way, make sure you share and like our podcast and our videos, please. You can contact us at www.CarolinaHardMoney.com again, CarolinaHardMoney.com. Now, we do talk a lot about investing.
Bill Fairman (01:13):
Yes. And if you are going to the website, there is a tab that says investors. If you want to find more information out about the investment side of things, click on the investor to admin and that will take you to where you can learn more about loaning your money or investing in our fund. Now, before I get started with anything, I have to do the disclaimer. We are not selling any type of security or any kind of a stock. This is strictly educational purposes only. You must read your PPM, which is also a word for the prospectus. There are risks with any investment. Consult your financial advisor, your mileage may vary.
Bill Fairman (01:59):
That said, so this is end of the year for us. A lot of companies like to just do, and we are a smaller fund. We are a boutique fund. You know, we do not have thousands of investors in our fund. As a matter of fact…
Jonathan Davis (02:14):
Nor do we want thousands of investors.
Bill Fairman (02:15):
That’s right. Our PPM, our fund documents actually state that we cannot have it. Puts a cap at 500 investors. I think our current number is right around 90.
Jonathan Davis (02:30):
Okay. Yeah, that sounds right.
Bill Fairman (02:32):
So here is what we like to do at the end of the year. Instead of doing a broadcast or sending out a letter, it says how we have done.
Jonathan Davis (02:40):
Charts and graphs, everyone loves charts and graphs.
Bill Fairman (02:43):
Yeah, pie charts. What we like to do is send out an invitation to all of our investors and schedule a 15-30 minute meeting with them and go over how we did for the year.
Jonathan Davis (02:56):
Bill Fairman (02:56):
What our expectations are for following year and then find out from them personally how we can better serve them, right?
Jonathan Davis (03:05):
Absolutely. And that fits into kind of what we talked about last time I was on here where we are not trying to build a machine that we have to feed and that is not just on the lending side. That is on the fund investor side.
Bill Fairman (03:18):
Jonathan Davis (03:18):
Like you want to, do you want to call 10,000 people and tell them what is going on and hear all their complaints.
Bill Fairman (03:25):
I would have to start before a long time before the year ended.
Jonathan Davis (03:29):
Yeah. So it’s not our goal to grow on the lending side, nor on the investment fund size to that amount. We like the personalized service that we can offer.
Bill Fairman (03:41):
Right. And while we do not talk about returns only shows, because again you have to read the prospectus. When you do have that large machine you have to feed and you are having to deploy lots of capital, what typically happens to the yield?
Jonathan Davis (03:58):
Well, you end up, so when you build something like that, you are sacrificing one of two things. It is always one or the other. And usually both. But you are sacrificing your personal relationship with those investors and then you are also sacrificing yield, right? And usually it’s both.
Bill Fairman (04:15):
Right. Yeah. What happens with a lot of the larger funds is you have capital that cannot be deployed in a timely manner. So the capital that is sitting there and not being deployed is a drag on the yield because it is not working money. At the same time, if you have too much capital working or not working, rather you have this tendency of perhaps making it work in a higher risk situation that you would like to because you need to get them anywhere.
Jonathan Davis (04:45):
Yeah. You make poor credit decisions based on a need to get the capital moving. Yeah.
Bill Fairman (04:50):
And then the only way to combat that is by having really low yields. So yeah. And you know, while that’s, it can be safer and it is safer, you might as well put your money in the bond market.
Jonathan Davis (05:06):
Yeah. For a lot of those returns. Yeah. That is very, very similar.
Bill Fairman (05:10):
Yeah. You are not going to get a ton there. So we are in the middle of our calls and it’s funny, the different investors and how they, all of them, by the way, really appreciate the fact that we are calling them and doing those personal touches.
Jonathan Davis (05:28):
Yeah. And several are, you know, raving and just shocked you all do this. You know, I have, because you know, the thing is Bill mentioned before, we do not want all of someone’s money. We want them to diversify. Just like we diversify. And the people who we talk to are, none of our other fund managers are calling us and, you know, having these conversations,
Bill Fairman (05:50):
Well, part of it is two-fold. I’m going to be honest with you. We are always looking for capital. So if you are calling people and talking about how well you did, you can always ask, do you have any friends that are accredited investors as a way of asking for more capital without taking all their capital. Again, we want them to be diversified. But you know, we are always asking for more capital because I would rather have our investors make the return than have these larger funds make the return. And when you are operating a smaller fund like ours, you are partnering a lot with institutional capital in order to constantly have enough money to deploy. See, in our case, because we are smaller and we are really entrenched in the investment community, investor community, we have lots of deal flow.
Jonathan Davis (06:53):
Bill Fairman (06:53):
And our problem always is we have more deal flow than we have a capital to deploy. So the only way we can do that is by, in a lot of cases, selling off loans that are in our portfolio to recapitalize so we have money to make new loans with. And then at the same time we also partner with other companies where maybe we have 20% of the loan or 25% of the loan or 50% of the loan. But that is the way we are able to make loans and utilize that capital, keep that capital working. And at the same time, because we are the people that find the deals, we are able to do what with these partners?
Jonathan Davis (07:40):
Yeah, we are able to arbitrage yield spread because they are seeking deal flow. Because I think we actually had a conversation earlier today with an investor just about this and they said, well that doesn’t make sense. Why would someone give you yield spread? You know on their side if they are bringing most of the money. Like because they are built to find money and aggregate that money, they are not built to find deals. So we are uniquely positioned. We were built to find deals.
Bill Fairman (08:09):
Sure. We are also getting paid because we have connections. And by the way, if you are doing loans on your own and you know lots of people that need loans and you are, you know, you have the wherewithal to underwriting of yourself, you know, you can find your own arbitrage yourself. You have people that have money that would like to deploy it. You have friends or people that you know that need it. You can put a little bit of your money with it and do the same thing. They make most of the money from somebody else. You essentially, and we’ll, let’s give them an example. So let’s say we make a loan at 10% and the other party who has most of the cash who isn’t out there and has the connections to find people that need the money, they’re happy to get 8% yeah. So you keep the 2% difference. So let’s say it’s a $100,000 loan. You’re putting up 25,000 you’re getting 10% on your $25,000 the person is putting up $75,000 they’re getting 8% and you’re getting the 2% difference on the other $75,000 right? Yeah. And then if you’re charging points on these loans, you get the majority of the points, if not all of the points on the total a hundred thousand dollar loan. So that takes your 10% yield way up. Probably 16, 17, 18 even higher.
Jonathan Davis (09:49):
Yeah, it’s high. I mean cause on the 75 you’re adding $15,000 of additional income to the $25,000 investment. Right. That’s significant.
Bill Fairman (09:59):
And don’t do this secretly, I mean there’s nothing wrong with you making money. Hey, you’re bringing the deal to the table. This other person would not have access to your deal otherwise. Right? Like why do brokers get paid?
Jonathan Davis (10:15):
Right. You know, they’re valuable. The relationship’s valuable when you bring something to the table that otherwise wouldn’t be there. You are valuable and you should be compensated for it.
Bill Fairman (10:25):
And we’re just doing it on a, you know, a larger scale. Right. So that’s part of how we’re the market currently, there were a wash in money. Now you said you saw a deal that was in the fives. Yeah, I just had one, an advertisement come in my email today where it was a fix and flip loans and it was 7.49% interest and they didn’t charge you any interest on the funds that were used for the rehab. So until you actually drew it out.
Jonathan Davis (11:02):
So it was non Dutch. So yeah.
Bill Fairman (11:06):
And, you know, it’s a smaller fund, we can’t do that and give our investors a decent return.
Jonathan Davis (11:12):
No. Cause then that’s lazy capital that’s not making yield. Yeah.
Bill Fairman (11:16):
So in order for us to compete with those kinds of rates and still be able to do that, we need to be able to arbitrage the difference in what we’re charging and what we’re selling some of these for or participating in ourselves. So yeah, as a fund, we are conservative in nature. We’re always trying to stay in the single family side of things. We’re trying to stay in the affordable housing market. Right. That said, we do the same thing in multifamily, but with the multifamily deals we’re going to participate with other investors, sometimes it’s insurance companies, sometimes it’s institutional capital. Yeah. But we’re able to take the single family loans where we’re not going to make that much money on them and then take the multifamily loans and make up that the yield difference that we’re not able to get with the single family, inside the fund and still be quite diversified because we’re in it at a smaller percentage.
Jonathan Davis (12:13):
Yeah. I mean the beauty of it is, you know, if we, if you get down in the weeds real quick, it’s the single family loans are highly liquid. We can sell those to anyone at any time. They are the most liquid of any security instrument that we have out there. You know, whether, you know, cause you know, commercials is more illiquid or a specialized assets is more illiquid just because there’s less buyers for it. So with the compressed rates that we’re seeing on the single family side, it’s not that we don’t want to do those because they are so liquid. We want to do those. And that’s what you churn, that’s what you keep turning over. Sure. You know, month after month, quarter after quarter, and then the longer term commercial loans that you are participating in or arbitraging, those are the 12 to 18 month longer terms. But they have that higher coupon rate that they’re creating. So with the two of those going together, the churning and the longterm, you create an ideal yield for an investor while utilizing multiple mechanisms, right? Yeah.
Bill Fairman (13:19):
And at the same time we’re able to offer competitive rates to the borrowers that are doing this single family fix and flip as well as the people that are fixing to hold property. And we actually, we’re starting to do some longterm rental programs too. And again, we’re not holding those in our fund, but we have other lenders that will take those from us, but we have access to them, right? Yes we do. And in the meantime, the funds don’t make money on those.
Jonathan Davis (13:50):
Well, we wouldn’t do it otherwise. Yeah.
Bill Fairman (13:52):
Yeah. And it’s funny, we were talking about getting into the weeds. We tend to do this, we forget that not everybody works in our business. We’ve been doing this a long time and it’s funny with our conversations with our investors, everybody has a different personality type and a different makeup. Some people are more passive than others. It’s funny, I, I’ll explain what it is we do and somebody will ask me 72 questions, which is fine. I’m happy to answer them. And then you’ll have some that’ll just say,
Jonathan Davis (14:26):
all right, here’s the check. Yeah. Are you a, are you, are you making money? Yes, we’re making money. Well, you’re communicating cause you, you’ve called me, I’m good. It’s like, okay, that’s all you’re interested in. All right. When you’re not making money, I want it back. Yeah, exactly.
Bill Fairman (14:46):
And again, that’s part of the beauty of having the smaller boutique funds that you’re able to communicate, you know, directly with the fund managers, the people that are running the deals. You know, you get into these, these larger funds and okay, good luck trying to talk to the managers.
Jonathan Davis (15:05):
And the, one of the beautiful things is we, we not only recap what we did the year before and not only do we tell them what our goals are for the coming year, it’s how we’re going to achieve those goals. So you’re running more or less a kind of secret sauce, if you will, by your investors and saying, Hey, does this make sense to you? Do you have questions about this? And you know, you have, we had some that had, you know, multiple questions, well how are you doing this? How’s this achieved? You know, and we answered those. And then some are just like, Oh yeah, that, that makes perfect sense. We love that. Sure. So it’s, it builds that interaction and it’s a, I think it’s a great tool that we can offer our investors.
Bill Fairman (15:51):
And a lot of you folks that invest in the stock market are asking, well, how is this any different from, you know, an earnings report coming up. And then the, the CEO is explaining how the earnings were derived and what their forecast is going forward. Well, you’re not in a room with a thousand people or on a conference call with a thousand people. You actually get that ask questions directly, not listening to someone else ask a question. And it’s a lot more personal. And again, you can ask individual questions about your investment, not specifically how they, how the company is doing. Now, you know, granted with what we do, there’s only one way you can invest, which is as an equity member. So, but you know, you can still throw some scenarios out there that it’s easy for us to answer versus you’re not going to be able to do that in these calls. It, the CEOs do for, you know, each quarter when they’re given out their, their reports. And by the way, most of the time it’s the big giant investor in those funds that get the call. Or it’s the business reporters that are asking to call. They’re, they’re not even investors in the fund. They’re just porters that are going to be on the business channels or are reading the wall street journal type of folks. Any last tips, comments?
Jonathan Davis (17:26):
I think the uncommon would be that we just don’t only explain what we’re doing to the investors, we take commentary from them and suggestions. We realize that we’re not always the smartest people in the room. And if we are we chin, we try to leave that room. So
Bill Fairman (17:45):
yeah, it’s not good to be in a room when you’re the smartest person in it. You’re not getting anything back from it.
Jonathan Davis (17:51):
And a lot of our investors are very, very savvy and offer a lot of good insights into things that you and I would never think of just because we’re too close to the situation.
Bill Fairman (18:02): Well the best thing as a fund manager you can have is an educated investor and we want to have the most educated investors in our fund. One reason is selfish. If I have an educated investor in our fund, I have to do less work explaining things. And while we don’t have a thousand fund investors, you know, we all have busy days and we’re constantly asking the, or answering the same questions. Um, you know, it gets a little tough. Yeah. Again, we want people to ask questions, but we also love the educated investor and we try to educate everyone best we can. So you want to find out more about our fund, Carolinahardmoney.com. Again, Carolinahardmoney.com. Go to the investor tab and click that on and you’ll be directed to a fund information where you can get started. Okay. Again, don’t forget to like and share us. Um, we also have some other videos that are available in archive, so please check those out as well. And we’ll see you guys on the next show.