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The Advantages Of Patient Capital, With Nick Parrish
Family offices are able to invest on a different scale, but also with a different time horizon than a typical individual investor. So what lessons can individual investors learn from family offices (and how can these lessons help enhance returns)?
Nick Parrish, managing director at Cresset Partners, joins the show to discuss Cresset’s philosophy of “patient capital”, and all of the advantages that come with it.
Watch On YouTube
- The origin of Cresset Partners, and what makes the firm unique.
- How family offices can employ a strategy of “patient capital,” which can enhance long term returns.
- The key advantages that family offices have compared to institutional investors.
- How Cresset Partners employs a strategy that leverages attractive underlying fundamentals (and why that has led them to the logistics and multifamily sectors).
- Why family offices tend to be cooperative, rather than competitive.
- An update on Cresset’s participation in the Opportunity Zones program.
- How the dynamics have recently shifted in the venture capital market, giving more leverage to LPs.
Featured On This Episode
- Our Story (Cresset Partners)
Today’s Guest: Nick Parrish, Cresset Partners
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
Andy: Welcome to the Alternative Investment Podcast. I am your host, Andy Hagans, and today, we’re talking about Family Offices, Logistics, Real Estate, Private Equity, all kinds of awesome topics. And with me, I have Nick Parish, who is managing director at Cresset Partners. Nick, welcome to the show.
Nick: Hey, Andy. Thanks for having me.
Andy: Yeah, and, you know, right before we hit the record button, we were talking about everything that Cresset is involved in, which I was fascinated by. But then I was like, “You know what? We got to shut up and click record, get this conversation recorded.” So, I want to start with the origin story of Cresset Partners, because I know that Cresset is a very diversified business that was born from Family offices.
So, could you tell us a little bit about the origin of Cresset?
Nick: Happy to do it. And, hopefully, I can maintain that same organic flow that we had gone before. But, happy to be here and really appreciate you having us. I think you’re right. I’m happy to tell you the origin story at Cresset, and I think it’s important because in so many ways, it colors the way we think about investing and the way we deploy capital.
That’s really based on kind of where we came from and how we were founded. So, take probably ten years back, our two co-founders, gentlemen named Avy Stein and Eric Becker. Both Avy and Eric were private equity investors.
Both had long story careers, both as operators as well as building Private Equity Funds that dates back 30 years. Between Abby and Eric individually had built more than 150 companies, raised and deployed a significant amount of capital.
The great thing about being in Private Equity is when you do well for your limited partners, you tend to do pretty well for yourself. And so, both had managed to create personal wealth for themselves. And in early 2010s, separate, unrelated, were both faced with personal tragedies. Avy was diagnosed with stage four Lymphoma and wound down his activity and his fund to focus on getting better.
Eric lost a daughter to Leukemia, a 21-year-old daughter, leukemia. And so he took time off, left his business, and focused on philanthropy. In that time away, they started focusing on family, and both had built their own Family Offices through which they were investing capital for themselves, for their children. They were both at their hearts, Private Equity Investors.
So, they loved buying businesses. They loved buying Real Estate, and that was really what fueled them. And a couple of realizations happened during that time. One, they both realized they were no good at retirement. They both like building and buying things, and so they were looking for that next opportunity. And two, they found that, as they were now private citizens out trying to identify high-quality, interesting private market opportunities, particularly focused on Private Equity and Real Estate, they looked across the landscape, and they struggled with what they found.
They could go invest in big multi-billion Dollar Funds, often at high fee levels and a lack of transparency. They could go source things from their buddies at their country clubs. But the quality of those opportunities were limited. They, as individuals didn’t have what they felt was the right degree of scale to go out really fully diligence opportunities and execute to the level they did at their firms.
And so they saw this opportunity to pull their capital together with the vision of overtime bringing in other families, with the belief that with scale comes advantages. You can hire more and better talent, you can face the Investment Community with larger dollars and therefore drive better benefits.
And so it was through that idea that Cresset was born. It really came from Avy and Eric’s Family Offices which over time has grown quite meaningfully to represent today, more than 1000 families investing… 1000 families approaching $30 billion at this point and really providing full outsource Multi-family Office solutions across public and private market vesting, Trust, Estate, Tax, Governance, Next-Gen Education, Concierge.
But at its core, they are very much focused on private markets. And so with that…
Andy: Why is that? I’m sorry to interrupt, but you know…
Nick: Yeah, please
Andy: When I hear family office… Let’s say you wave a magic wand and you put me in charge of the family office, there’s really two sides to it, right? There’s the practical, well, probably more than two sides, but there’s at least two sides. There’s that practical side of dealing with people in Estates and Trusts and Legal Accounting, and then there’s the side with Investment Management.
Honestly, I get the sense that managing the investments is maybe the smaller part of the job. But I think you can make an argument like, “Well, let’s just do 60-40, Vanguard Index Funds, stocks, and bonds, call it a day, get a great tax attorney, get a great tax accountant and focus on the human side of this.”
So, why the focus then on private equity and alternatives? Is it because the returns are higher with less volatility? Or is it just because this is how we’re wired and we get bored just holding the Vanguard Index Funds?
Nick: So, it’s funny, Andy. In the Family Office space, there’s an “all to use” phrase, but I’m going to use it again. If you’ve seen one Family Office, you’ve seen one Family Office. I think by the very nature of the term and family, it’s a very personal thing. And, we spoke before, I mean, the definition of what constitutes a Family Office is different to everybody.
Family Office for some is an individual and a bookkeeper doing accounting and that’s the Family Office. There are others that are multi-billion dollar, multi- hundred employee organizations with their hands in everything, and everything in between. It really is a very personal experience for many people.
It’s driven by who the family and/or the entrepreneur and wealth creator is, what their goals and objectives are. Sometimes it’s very investment focused, sometimes it’s not. It’s more a holding company through which you can execute on the wishes of the family. So, it’s really, really very unique for most families and individuals.
I think what drove things for Avy and Eric and for Cresset, they had this time away where they were trying to find their next opportunity. And one of the topics that came up was around wealth creation. How has wealth been created in the United States in the last century? And they actually, during that time petitioned to study, used a research group to go out and look at, remember what the universe was.
But, it was Forbes Data, one of the kind of billionaires list, and looked back over a long period of time and basically came to the realization that wealth was created by and large by doing two things, either owning a private business or by owning a real estate. And what was most interesting to them is the average hold period on those investments was long, 22, 23 years.
So, the idea was true wealth has been created either it’s through ownership, through owning an asset, through owning a business or real estate and holding that for a long period of time and being able to grow and compound that wealth. That’s not news to large institutions and, frankly, large family offices who have… look at the endowments and pension funds.
They’ve been investing in private equity and alternatives going back 20, 30 years in some cases. So, that’s very commonplace in the institutional world. That hasn’t necessarily trickled down to the… let’s call it ultra-high-net-worth smaller Family Office space. But the value is there, and that’s been evidenced by many of these large institutions, that long-term wealth creation.
There is an illiquidity of premium that exists in the market where if you can find good opportunities with good partners, be willing to hold that for a long period of time, there is additional return that can be generated. And the vision was, let’s try and bring some of that opportunity down to a level that didn’t necessarily exist before.
Andy: Yeah. No, I get that. And that’s a phrase that I hear over and over, Patient Capital. We’ve had DJ Van Keuren on the show who’s involved with the Family Office Real Estate Institute and he loves that term, Patient Capital. It makes sense to me that so many of these Family Offices have their origin with entrepreneurs, whether they’re real estate entrepreneurs or private equity.
And as I get older, I think…I’m an entrepreneur, and I think about a couple of businesses that I’ve co-founded and then exited and then grew to be way larger than I ever thought they could be. And so, I’ve kind of learned that lesson of Patient Capital, the hard way, I suppose.
But let’s talk about what being patient can actually give you in real terms, in terms of ways that it can enhance your returns, in terms of how it can give you more flexibility in your investment strategy.
So, I know that Cresset Partners works in a lot of different investment asset classes and you’ve made a comment, but at least before we recorded that you have that opportunity to be opportunistic. So, can you tell our listeners, what does that really give you? That long-term time horizon in practical terms, what does that mean?
What’s the difference then between a Family Office, that’s thinking that way, versus another type of asset manager that has their own sector that they have to follow? In many cases, legally, that they’re obliged to follow.
Nick: Yeah. It’s in a couple of ways. I think one thing that’s important, liquidity is one of the most overbought assets in the world, in the sense that many people don’t understand their own need for liquidity and therefore probably value it more than they need to.
So, if you’re dealing with true family offices who have what is multi-generational capital, it was part of their capital that they need to live, and I use the term live loosely. I mean that… Even if you have homes and debt payments and everything else, there’s a certain finite amount of capital that you need, that if set aside. managed appropriately, asset and liability matched with a high degree of certainty, you can cover your bases there.
Andy: Three years living expenses or five years living expenses or whatever the formula is, right?
Nick: And everybody can come to their own comfort level on that. But the bottom line is if you’re truly a family of scale or an investor of scale, that’s going to leave you with a pool of surplus capital which is probably meaningful, which will never be spent in your lifetime. And so that’s the flexible capital. If you can really isolate that capital and say, “What’s the money that I don’t need that can go out and be much more return-seeking focus on those longer opportunities?”
That gives you more flexibility. It gives you the ability to look across asset classes across time horizons, allows you to go up and down capital structures where you have a broader set of tools that you can employ in your investment strategy.
And you don’t have to be beholden to one particular time frame or asset class. And that’s very much the lens that we look at the world through. So, we at Cresset collectively manage $30 billion. We look at the world through the lens of, what would a $30 billion single Family Office do? What would you do if you had no defined investment mandate?
If you had a broad set of relationships and networks through which you could source opportunities, a broad and skilled team that has the ability to really isolate and execute on these strategies and you had an undefined time horizon. You could invest in things that are two months or 20 years.
If you had that flexibility and could really stack up, what’s the best risk-return profile, how would you do that? And that’s a real advantage. When you’re a hammer, everything looks like a nail. We don’t have to be in any one asset class all the time. We can really be looking opportunistically.
And we talked a little bit or you referenced Logistics Real Estate, good example where… That’s not something that may always be attractive, but there is a very finite moment in time where supply, demand, and balance is out of whack. We have the flexibility of mind and of capital where we see that opportunity and we can deploy capital into it knowing that it might not be there forever.
Andy: Sure. Is there always opportunity? Let’s say two years ago or certain periods in time where it just feels like every single asset is overvalued? Is that just because I’m not a Family Office that I come to that dumb conclusion? Or…
Because even at the institutional level, like speaking of Logistics Real Estate, you saw institutions wanting to buy just portfolios of Logistics Real Estate, Industrial Real Estate, warehouse, and they have to put to work large amounts of money. It’s not necessarily about getting the most attractive valuation. It’s like, “We have to deploy a huge amount of capital. What’s available?”
How does a Family Office deal with that, with a market environment and maybe we’re not there anymore, but in a market environment where it just feels like everything is overvalued?
Nick: Yeah. Great question. You know, listen, I think it’s back to the flexibility of mandate. We don’t have to deploy capital. If the market is such where there really is truly no opportunity and the best decision, again, looking at cross spectrum of risk-return, if the best decision is to hold cash as opposed to deploying it into overpriced assets, you have the flexibility to do that.
Now, I would argue that if you had really a truly untethered or flexible mandate, you can find opportunity and that exists…
Andy: But will it scale to the amount of money that you’re managing? That’s a different question, right?
Nick: Absolutely. And sometimes you have to be creative to find it. By the way, may come an important part. Opportunity may not just be in buying the right assets at the right prices, but there’s structural alpha. The way you structure something might be value added. So, sometimes you have to employ different tools.
You got to be a little bit creative in environments where assets are overbought. But I’m a believer that somewhere in this big world opportunity exists. And just to double-click on the logistics thing for a minute, not to go down that path, but good example on your comment. Logistics is not new news to anybody. The e-commerce revolution has been happening now for years, if not the last decade, that has driven a change in the way our supply chain functions.
And we’re operating on an antiquated supply chain and we’re shifting into what will be a kind of new supply chain built around e-commerce and reshoring. That’s not news. It’s a trend that’s been happening for a while. There are a large number of investors who like industrial and warehouses as an asset class and are deploying an extraordinary amount of money, thus driving prices up.
And so that’s been happening for years. But what’s interesting is there is a fundamental shortage of these logistics facilities, but there’s a shortage of capital that’s able to deploy them. Most of those big institutions that you’re talking about, either by mandate or by choice, are not able to develop logistics facilities.
So, they are happy to buy those logistics facilities once they are built, leased, and stabilized. But they can’t build. And so that’s where someone like us can step in and say, “Okay. We have expertise in logistics. We have the ability to be more patient and underwrite different risks than an institution might.” And so, if we can step into that gap, build logistics facilities, ultimately knowing that there’s an off-ramp for those, that’s a really attractive dynamic for us.
And so sometimes it’s just looking at the same opportunity through a different lens. With that flexibility, we can create the opportunity.
Andy: And the scale. I mean, reading between the lines, it sounds to me, well, you need the flexibility, but you also need the scale, right? Like I can’t go build a 5000-square foot warehouse and sell that to CalPERS. CalPERS might be saying, “We want to…maybe not CalPERS, I don’t know if they’re allowed to. But, you know, some big institutions might.
We want to deploy a billion in capital or 5 billion in capital into the sector but there’s nothing available even to buy right now. So, a Family Office with the capital and the scale and the know-how to go out and build it, you basically know that there’s a buyer on the other side before you even build. We recently had Saxum on the show.
I don’t know if that episode is published yet. I think it’s publishing shortly. But Chad, he talked about just the fundamentals with Industrial Real Estate and Multi-family are so strong. It’s not that there’s no risk, but you’re going into a space where you know, you have tailwinds of that supply and demand already being favorable. And if you project out another 20 years, if anything, to delta, what’s needed to stabilize the market and bring those two curves into alignment, seems like it’s only getting wider.
Nick: Yeah. I think just going back, I want to address your scale point because I do think it’s a really important point. It’s a realization that we’ve come to is scale does matter, particularly if you’re really trying to invest in institutional quality assets. And it’s in part back to our origin story, part of the view that if we could pull together our capital and the capital of other families around us, we could get to a point where we can write cheques very similar in size to an institution, but we can be a flexible kind of more opportunistic source of capital for some of these partners and I think you’re seeing that, by the way, very, not just in Real Estate, broadly speaking, where families, Family Office, Multi-family Office type capital is starting to compete for opportunities with more traditional private equity and real estate firms because the size and scale is there but you don’t have some of the constraints of let’s say a pension fund or a more established fund.
I think that scale piece is important in driving opportunities. On the real estate kind of the dynamics front, I think you’re right. I talk about it in more detail, but there are some very interesting demographic seismic changes happening in the U.S. around migration, and some of this was expedited by COVID and the ability to live and work anywhere.
But you are seeing some markets where the fundamental tailwinds, we use the term tailwinds a lot. We’re looking for markets that are very much backed by some of those trends that where influx of population is driving a shortage of multi-family office, industrial… Those types of signals are interesting to us because even at the rate we’re building, and that others are building, just the sheer numbers that are driving those trends give us a lot of comfort as we’re going into those markets.
Andy: And do you believe that nationally? I mean, are you looking just in terms of sectors Multi-family, Industrial? Industrial I guess is a little different because we need a distribution system all over the United States, right? And pretty much short of enough real estate everywhere. Multifamily to me seems like it’s a little, not riskier but it’s very location dependent and some markets have seen like 30% rent increases year over year.
Does that concern you, the geographic risk? Are you either outsmarting it or are you so diversified that it doesn’t even really matter over a long enough timeline?
Nick: I think it always matters and I think diversification ..we have now at this point national platform. We’ve invested in a lot of different markets. So, we are believers in diversification. If I had a crystal ball, I’d tell you what Nashville or Portland look like ten years from now, but I don’t.
And so the one free lunch is diversification. That being said, we are very specific in our market selection. We tend to be looking for, and I would say this across asset classes or product types though logistics has some kind of interesting and different elements, but we like growth markets. It tends to be markets that are driven by large, recent influxes of population that could be driven by quality of life, lower taxes, more business-friendly environments.
Geographically, that tends to be the coasts in the Southeast and Southwest, Smile States, if you will. So, as you look at our Real Estate portfolio, we’re active in markets like Denver, Austin, Nashville, Phoenix, Salt Lake City.
These are markets that ten years ago looked quite different than they are. But you’ve seen both influx of individuals as well as companies to those markets. And what that does is that it obviously has a supply-demand influence. There’s going to be a shortage of Multifamily, a shortage of office assets, and then transitioning to logistics.
Those same factors drive logistics demand as well. A lot of these logistics facilities are meant to serve consumers who are now buying and shipping a lot of goods online. You need large facilities located near major population centers. So, all of a sudden, Phoenix has 2 million people that they didn’t have before.
You need more warehouse space. I think the only additional element to logistics is you’re also seeing a little bit of a shift in the way goods are coming into the U.S. and how they’re moving around. So what would have been…
Andy: Wait, goods are still coming into the U.S?
Nick: Well, yeah, funny. If you’ve ordered a Peloton in the last two years, you know the pain points there. But that’s a very real situation. So, I’ll give you two examples. I’ll pick on Peloton. One of the big backlogs for a while was the Port of Long Beach. There was stories for a while, about 70 or 80 ships lined up, waiting for weeks to get in into Long Beach.
And so, you had fundamental choke points where goods were being shipped into the U.S. And so that’s caused a couple of things. It’s caused now port diversification. So, think about places like Houston, Jacksonville, Savannah, Charleston. These are deep water ports with access to the eastern seaboard.
Houston, Texas, for example, is, I believe, the closest deep-water port to the Panama Canal. So, where that backlog existed, those goods are now being redirected. Well, you’re going to be bringing in these huge container ships into Savannah. You’re going to need facilities there.
There was a New York Times story probably about a year ago where they were legitimately dumping these containers on the side of the sea wall in Savannah because there weren’t even warehouse facilities there. So, that’s driving opportunity. There’s also things… We were building a project in Phoenix, Arizona which you wouldn’t think of as being an outpost for a coastal port.
But it became so crowded there, particularly in the Inland Empire around the Port of Long Beach. That it actually made more sense for people to take goods off ships, put them onto a truck, and then truck them to Phoenix which is about a four-and-a-half-hour drive where there was much more space, much more land to be able to build these logistics facilities.
And so, you’re seeing some of that is driving some really interesting trends in the logistics space specifically. But it’s all centered around this idea of growth and migration and a pretty meaningful movement of people relative to the brand existing.
Andy: Yeah. You know, Nick, as you were talking about that, your examples of Georgia and Houston and Phoenix, I’m thinking like, who wants to deal with the union in New Jersey, the Smile States. I mean, a lot of it is that migration… maybe this is just circular logic, but migration because we’re seeing job growth and wage growth in these areas.
And they’re nice places to live and they’re easier to do business. I would call it a virtuous cycle of investment in those places that… I’m up North. So, don’t get me wrong, I love the Midwest and much love to any New Jersey listeners.
But it’s an investment or a bet that goes beyond just simply Multifamily Housing, just the economy that we live in. And people have the ability to migrate and work from anywhere. So, I don’t necessarily need to live in downtown Manhattan to do this job. It really resonates with me, just that whole mindset of the Family Office of Patient Capital.
And hosting this show, I’m not really inside the industry. I’m an LP, right? I like private placement offerings. I like looking into them, analyzing them, kind of keeping up with what’s available. So, when I look at a firm like Cresset, so successful in the Multifamily Office Space, so much assets under management with that area of the business, why bother with LPs?
Why bother with Private Placement Offerings? And your sort of everyday accredited investor or everyday financial advisor or RAA, does it just enhance your scale? Or is there something else strategic with the growth in that side of your business?
Nick: Yeah. I would answer that, certainly, scale is important. I think while Cresset exists, we are ultimately a collection of families and without each of those families, we wouldn’t be who we are. So, I think that’s important. And so, bringing in other like-minded families into and alongside our business to invest in these opportunities, that has value.
And we have been fortunate over the last few years to grow to a pretty reasonable scale. But there’s still plenty of opportunity for us where more scale can drive more benefits. And up until that point comes, we’ll continue to grow the business thoughtfully. So, I think that’s important.
But I would tell you we are big believers in community and the value of peer networks. And to say that all we get from our investors is capital I think would be short-sighted. We have done a very…
Andy: You also want my ideas, right? You want me emailing you at 4:00 in the morning with my latest crazy idea?
Nick: I will be a little careful on advertising that. But it’s… All kidding aside, it has been an amazing for me in particular a realization that we represent and invest on behalf of hundreds, if not thousands of what are largely entrepreneurs and wealth creators.
They didn’t create wealth by being dummies, right? They know a space. They have successfully either built, bought, or sold businesses in those spaces. They’ve invested in real estate. We would be naive to not leverage that platform. And so, we have done a lot around peer-to-peer learning opportunities and education. We will bring our clients together, often around topics to share ideas.
It’s becoming a source of deal flow for us a little bit on the real estate side, very much on the private equity side, where we have seen from our clients opportunities to invest in businesses, either their businesses or businesses through their relationship. So, it’s a tangible source of opportunity where if we have a thousand sets of eyes and ears out in the market, that’s a real advantage to us.
It also brings market intelligence. If we’re looking to invest in a healthcare company, odds are I can call a dozen healthcare entrepreneurs or executives in very short order who are investors of ours to get real-time feedback from practitioners in the market around a particular opportunity.
That’s extraordinarily valuable to us. So, I think, don’t get me wrong, we like additional capital to pursue these opportunities, but I think it’s really the network and the value that that brings is as important as anything.
Andy: Yeah, it sounds like that networking philosophy, community building maybe is a core part of who you are. I mean, thinking about gathering together so many families and having shared offices, that could be a very good powerful thing. And I think you spoke to the power of it and its strength.
It seems like in some situations or for some companies, that could be nothing but complexity and a headache. So, it seems like you all have found a way to leverage that to enhance your opportunities.
Nick: And I think it’s one of the things that we’ve liked about many of us here, we’re in the institutional investing world at some point. The nice thing about the Family Office space that we have found is Family Offices are not competitive in the sense that there’s lots of opportunity out there.
These families are largely trying to deploy capital or preserve capital and serve the families they represent. And there is a general acceptance in the market that you’re not going to know everything and you can benefit from talking to your peers and maybe you’ve got a great investment person, but you don’t know what’s happening.
You don’t know what the best technology platform is. There’s a lot of openness in the Family Office space and you see that with some of these family office groups that have been formed through organizations like ours. And it creates for a very collaborative environment. We all recognize that if we share information, if we pull resources together, if we learn together, we’re probably all better off as a result of that, rather than being competitive with one another.
Andy: Yeah. And I mean especially even structurally with a lot of deals and projects. You see Family Offices co-investing even if they’re not in a shared Office or Multifamily Office, just because it’s an easy way to diversify, but also have that direct ownership and still have some control.
So, I think that set up that sort of idea. I don’t want to call it a conglomerate, but having that Family Office side and then having the other side that can raise money from accredited investors, it’s so intriguing to me. Can you talk a little bit about which opportunities are offered to the accredited investors? I know you all have an Opportunity Zone Fund.
I believe it may even be fund two. Could we start with that? Fund Three. Wow, I’m way out of that.
Nick: That’s relatively new news. So, I will say just from the Cresset Partners standpoint, the way we’ve structured our business is we will opportunistically offer investments across a variety of asset classes, private equity, real estate, venture capital.
Different funds and different investments are structured in different ways. Some things will be for individual assets where we may go create an SPV to go buy a company or a single piece of real estate. Other things will be structured as pooled vehicles or funds, where we will be deploying capital to a number of assets because we believe there’s a longer-term thesis there.
And so those are structured more like traditional funds that we’ll make available. I have to be a little careful about what I talk about, given certain private placement rules and what’s out there or not. But, certainly, the Qualified Opportunity Zone strategy is probably, certainly, our largest strategy. I think our best-known strategy.
It is available externally, just to be clear, to qualified clients, which is a slightly different qualification than a credited investor, but very close. Not qual…
Andy: Not qualified purchaser, right? Now, we have a…
Andy: It’s a third definition. Okay.
Nick: So, third definition. It comes from the fact that we’re part of a registered broker-dealer. So, it is slightly higher than accredited. But goal is to… The idea of building this fund was to be as accessible as possible to the broadest number of people possible.
Andy: When are they going to index accredited to inflation by the way? It seems like that’s almost just a workaround to the fact that accredited investor wasn’t, I mean, even like every five years, shouldn’t it just be a job? I don’t know. Sorry, I digress.
Nick: Well and the view that somehow your level of income necessarily signifies sophistication. I’ve met a lot of rich unsophisticated people and I’ve met a lot of very smart, less wealthy people. So, anyway, that’s neither here nor there. But our goal is in a lot of these fund structure is to create as much accessibility as possible. Again, we’re believers in this idea that by pulling together many, we can be more efficient.
Opportunities Zones is an area, and I’m not sure how much time you’ve spent on it here on your podcast, but an area that lined up very well with our business in the sense that we are long-term investors in real estate. We are taxable investors who are always thinking about after-tax returns and we can be opportunistic and be responsive to new and emerging opportunities.
And so, qualified…
Andy: That’s a really interesting thing right there that you just said though, because I think Opportunity Zones are unique in that the tax incentive, and we do talk about it a lot on this program. The tax incentive is so valuable you don’t want a lot to let the tail wag the dog. You want to have a good investment with good fundamentals.
But the tax benefit is so substantial that it affects things quite a bit. And it seems like all these institutions, why would they be interested in Opportunity Zones investing, right? Because if they’re not being taxed on their investment returns so that seems to me to be an area where Family Office essentially might be the biggest player, right?
Because you’re the biggest taxable player. Sorry, go on.
Nick: No. You’re 100% right. I was just going to make the comment. I’ve heard the analogy that the tax benefits on QOZ, if you do it right, and I 100% agree with you, the reality in Opportunity Zones are you have to get the investment right because without that, really the benefit is on not paying taxes on your gain.
It doesn’t do any good if you don’t generate a gain. So, you got to get the investment right. If you get it right, the tax benefit is real, it’s meaningful. I’ve heard the saying it’s not the icing on the cake, it’s a whole another cake. It can really drive outsize returns.
And you’re right. You look at pools of capital, large Family Offices, people selling businesses, having large liquidity events. It’s a really very flexible program. It can be sale of artwork. There was a period of time where we we’re seeing a lot of crypto gains that were being put in the QOZ. But listen, for taxable investors, if you have and I’m going to go back to your term Patient Capital, if you have the ability to be patient, take a long-term time horizon, have interest in diversifying into real estate and have a capital gain, it is one of the best gifts you’ll get from the federal government.
Because the compounding effect of the program is very powerful.
Nick: To your point. So, we’ve been investing in that space since ’18. We are on Fund Three.
Andy: Is it a diversified fund? So, is each fund investing in new assets, or is it a pool of assets with a new fund that can kind of go anywhere?
Nick: No, so think of them as kind of traditional closed-end structures where those funds are raised, they’re deployed to a pool of assets, that fund is closed and we move on to the next one.
Andy: Got it.
Nick: So, we’ve done two series of those, both which have raised, the first one raised about $465 million invested in seven assets, the second raised $650 million is invested in nine assets. And we’re now on to Fund Three. Just launched that a month or so ago.
Andy: What was the latest estimate? It was $30 billion raised and… So, you guys would be 3%. I think that was from Novagradac or someone recently. By the way, I think that wildly underestimated the actual money that was invested in Opportunity Zones. So, Cresset Partners is one of the larger players then.
I know that you guys got in early, so you’re one of the larger players. And they’re diversified funds. Are they focusing on logistics? Or is it a mix of logistics and other sectors?
Nick: The Opportunity Zones are largely focused on Multifamily, not necessarily by design, but I would say probably 70% to 80% of the capital there is in Multifamily. There’s a couple of reasons why we like Multifamily within the context of a 10-year hold. One, the annual rent roles on leases that has a better inflation hedge with it.
There’s some concern Industrial, a lot of industrial leases are 10-year leases, often with single tenant buildings.
Andy: So you can’t reprice or rent with Industrial necessarily. And if inflation sticks at 8% for five more years, that could really get wonky I guess with some long-term…
Nick: You can often negotiate in rent increases and escalations into a contract. The bigger concern, particularly with QOZ, is if you have a logistics building that has one tenant that’s going to roll over every 10 years and you’re going to sell that building at 10 years. You could have a situation where you are either 100% leased or 0% leased.
That’s not a good…
Andy: We want to exit a stabilized asset that’s 98% leased up. Right?
Andy: I could see that also.
Nick: Yeah. It’s versus multifamily, where at any point in time you’re 90%, 95% leased. There’s much more certainty around that at the time. So, we like Multifamily, but we’ve done a couple of office buildings. Logistics is tough for that reason.
The other challenge with logistics today, right now, given the current environment and the dislocation in pricing to build a logistics building and hold it for 10 years, you’re actually better to build it, lease it and sell it. The premiums that these are fetching in the market, given that supply-demand imbalance, the economics don’t work out.
It’s kind of better to develop and sell it than it is to develop and hold it.
Nick: Yeah. So, for that reason, we’re focused mostly on Multifamily and Office for now.
Andy: And then I understand that Cresset also is involved with private equity and venture capital. So, let’s talk about those spaces for a minute. We’ve seen real estate, like Institutional Quality Real Estate. Obviously, there was a big run-up. I mean, you just mentioned yourself with Logistics Real Estate to where it’s still, let’s say, not necessarily priced attractively for a long-term buy and hold.
And I know that overvaluation these days, in the past decade or two, it seems that just everything kind of moves together. So, are valuations attractive in private equity and venture capital right now? Are they more attractive relative to public markets?
Or is it, again, finding the quality and it’s sort of not so much the big picture, it’s more that the certain opportunities that you find are attractive.
Nick: Yeah, it’s a good question. Say, remains to be seen. Let’s maybe check back in three to six months.
Andy: You’re probably the most honest guest I’ve had so far. I’m kidding. I appreciate that candor though.
Nick: It’s interesting there are pockets where valuations and multiples have not come in and you’re witnessing a little bit of a game of chicken right now where the owners don’t want to reprice. But there’s a general feeling in the market that the asset needs to be priced, repriced and everybody’s waiting to see who blinks first.
Andy: You will just all wait for two years and there will be a 16% real repricing if it nominally stays flat.
Nick: I think that’s likely. Though the interesting thing about this environment, yes, multiples were high. However, interest rates are going up, but you still have it, many of full employment, you’ve got companies that are continuing to produce, continue to grow, and produce returns.
So, it is a very case-by-case analysis, by sector, by business, that just because market multiples are coming down doesn’t necessarily justify that all multiples should come down.
Andy: That’s so interesting. It seems to me like the recession that we’re in, I guess not everybody agrees it, that we are but it’s hit a segment of people and then there’s other segments of people or MSAs like Washington D.C. It’s like, “Recession. What are you talking about? Our revenues are up 30% or whatever.”
And so, it’s not that overall down, you’re right, that overall pressure, it’s not evenly distributed throughout the economy at all.
Nick: It’s not. And I think to the other part of your question on the venture, where you have seen multiples reprice is in things that were much more growth-oriented. So, where multiples have come in is on… growth is not being priced the way it was before. That has absolutely impacted Venture Capital. Some of these venture companies, they have repriced. You’re seeing down rounds on companies.
Interestingly for us, are relatively new into venture capital. So, we are actually early in our deployment. I’d like to take credit for this, but we’re going to probably end up more lucky than anything else. It’s a really attractive time today to be deploying into venture capital because those multiples have come down.
Some of the supply-demand, I shouldn’t call them supply-demand, some of the imbalances that existed in the GPLP relationships adventure, where these VCs could drive extraordinary terms and raise ungodly amount of capital, those things are right-sided. So, you’re seeing much more normalization in venture. You’re also seeing just slower deal pacing which allows these VCs to really underwrite the deal, not just feel the need to jump at everything.
This has actually created a really nice landscape for venture capital investing. And if you look back historically at VC vintage years, it’s typically the vintage years coming out of recessionary environments that are pretty good, Post Dot Com, Post GFC. Those are decent times to be deploying capital into venture.
So, we feel like there’s some value and opportunity there. We’ll see on the kind of more traditional private equity side of things, we certainly think there’s some opportunities and way to do it more defensively preferred securities, defensive industry sectors. But there’s not a wholesale step down yet there that’s screaming buy signal just yet.
Andy: Well, we can only hope. We could all use a little humility, myself included, and I think that the VC industry, they’re probably due for a little humility. But as you said, it is really…timing has such a huge role in this, and where there’s a surplus of capital that’s chasing opportunity, you have very little leverage, right, when you’re looking to place that capital, when the market dynamic shifts coming out of the dot-com crash obviously a very different dynamic there and as you said, created a great vintage year.
So, Nick, this was just an awesome conversation. I can’t thank you enough for just sharing your knowledge about Family Offices and the strategies that you use at Cresset Partners. For our viewers and listeners who are interested in learning more specifically about your offerings, for accredited investors, where can they go to learn more about those opportunities and about Cresset?
Nick: Yeah. I would probably say check out our websites. The best way to do it, cressetpartners.com, a lot of detail on Opportunity Zones and Logistics in particular, but, certainly, ways to connect with us to learn more about anything that we’re doing. So, start there and we’re happy to be a resource to anybody who we can be helpful to.
Andy: Awesome. And so, for our listeners, if you want links to all the stuff we mentioned in today’s show, including a link to Cresset Partners website, I’ll be sure to put that in the show notes at altsdb.com/podcast. And don’t forget to subscribe to our show on YouTube and your favorite podcast listening platform so you can be sure to receive our new episodes as we release them.
Oh, and don’t forget to leave us a five-star review. I also love getting those reviews. Nick, thanks again for coming on the show today and sharing all your knowledge with us.
Nick: Thanks, Andy. Happy to be here.