4 Factors to Help You Avoid a Disappointing Private Alternative Investment

Private alternative investments are a powerful way to build your wealth. However, like other powerful tools there is risk if the user manual is not read, and the proper precautions are not taken before using. Understanding how to look at the selection of tools available, assess, and select the right one for your need is critical. Good ones build and protect your wealth more efficiently; the wrong one can do much harm to your wealth (and even your health).

In this webinar hosted by Verivest, alternative fund expert Chris Carsley and his partner at Kirkland Capital Group, Brock Freeman, walk through four important areas to equip you in assessing a private alternative investment fund. The documents (the fund’s “user manual”), fees (what will you be charged), fund operation risk (can hackers steal your money), and transparency (or do you know what your fund manager is really doing with your money).

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Transcript

Brittany: Here we are at the sponsor directory. Like I said, you can sort by minimum investment, strategies, property types, risk profile, anyone who has an open opportunity, you can click there, and they will show, and then I will show you the verification requirements. There's verified gold, which Chris and Brock are.

And then there's fair, best verified. So Verivest verified is the minimum verification for people to be a part of our platform. That means no felony convictions. No unfavorable resolved lawsuit. No personal or business bankruptcies, no regulatory sanctions. So, all of those things are the baseline to becoming bare best verified as well as signing the code of conduct.

Here we are at Kirkland Capital Group, who we have here with us today. They're private lending firm, and you can see that they're a hundred percent monitored, which I'll go into what that actually means, but their best verified gold means that they are following the rules that the deal's operating agreement and allocating the money, how they said they would.

 This is the highest level of transparency. So, look for the gold check and you will make sure you are working with a sponsor that has no issue being transparent with you. Let's move on. The sponsor track record, this is another thing that sponsors can engage us to verify for them. So, here's we have the loan up from a Kirkland capital group, actually right now, this is just a screenshot. You can go on Kirkland capital groups page on verivest.com and see all of their loans, which is awesome. And the loan amounts. And there's a bunch of other little interesting attributes that you can see on there as well. If you would like to the best community network is a network where you can connect with other people in the real estate industry, connect with sponsors, connect with other investors, ask questions, join a webinar. Opportunity webinar or an educational webinar like we're on today. If you want and are interested in that you can scan the QR code on the screen that you see there, or you can just type in the hyperlink below.

All right. So, without further ado, we are going to introduce the guests for today. We have Chris Carsley. He is the CIO of Kirkland Capital Group with over 25 years of investment industry expertise. While he has more than 23 in real estate alone banking, private equity, and principal investing experience.

Let's move on to Brock. Brock has been in the real estate finance industry since 1990, with roles and underwriting, construction, origination, and technology. I also think it's fascinating that Brock has expertise and international experience in Hong Kong and Taiwan. That's also a really cool fun fact about Brock. I will let them explain a little bit more about themselves. So, I'll let you guys take it away from here.

Chris: Thanks Brittany.

Brock: Thank you, Brittany. So, let's see if we can share screen. I think you need to stop sharing the screen, maybe Brittany, and then I can, okay, let's try this here. There we go.

Chris: Okay.

Brock: Let me know that you can see that looks good. Great.

Well, it's wonderful to be able to talk with all of you today. Obviously, we're going to talk about your first private alternative investment. That's why you guys came here, and we hope that we can help you avoid a disappointing investment. Now, of course, we'd love to see your invested dollars in often, but it's not a fit for everybody, but in general, as you look at different alternative investments. We want to teach you with this some top-level items to help you really determine upfront whether something matches for yourself or not. In the end if you think about what kind of approach are we talking about here? Think about it as is that manager. So, every private investment, just like every company has a CEO, a board of directors.

Every fund has a fund manager or managers in the case. So, Chris and I are the managers of the Kirkland Income Fund, but is that manager or managers of that fund in alignment with you? What you want a picture in your mind is really what you see on this cartoon we had drawn up. You as the investor, you have the money, you should be in control of your money not the other way.

 Too many times in the industry, it's the fund manager thinking that, well, I've got your money and now I'm the king when it should be the other way around. So, as we go through these things, think about how do you make sure when you're looking at an investment. Is that manager with you, and I'm super happy to have my partner here where my expertise really lies more on the real estate side. And I've learned a ton from Chris. I'm really happy to have Chris along here because he has had his whole entire career making sure whether he's worked for a wealth management for high net worth and early on his career, or whether later on working for other fund to funds, he’s tearing apart other funds that they invested in to make.

The manager was aligned with them at the time. He spent his career in making sure that they were investing in things that were all well aligned. And so, it's been great to have him along as we built our fund. And I think he's going to have a lot of stuff to share with you today, as we walk through these things and I put a lot of questions to him, I won't go through here too much here.

 Chris, I don't know if you want to say anything else about yourself.

Chris: No, we don't need to do that.

Brock: Okay, great. And I don't think I need to say anything about you. You really did a great job here, let's just move on. Here's the four factors we're going to cover documents or the manual as Chris likes to say, this is the manual that we're supposed to follow. If you don't read the manual

Sometimes I'll call it the rules to the game. You got to run up there. He goes before, you're going to sit down and play the game. That's right, they are the rules to the game. Fees, what are you being charged? People would be surprised to know that even no-load mutual funds or some of the stuff you buy in the public markets there's fees in there, they aren’t zero it's just depending on how those fees are treated and how those fees are passed through to you.

Operations. How well does that operate? And then finally transparency, it's a fund, there's certain things that funds can't be completely transparent with, but you want to get as transparent as possible, and you want to know what's going on. What is that fund manager doing with your money that you're relying on? Let's, let's dive into these. Number one document. There's three of them here. And I'm going to have Chris go through and talk about each one, but private placement memorandum. I would say actually, that's really kind of that rules of the game you're talking about for Chris, is that right?

Chris: And it's, it's actually got another name. Also, some people would just call it an OEM or an offering. Men are memorandum as well. One of the key things I want to stay with here is. We've kind of chosen. It was tough to choose which four out of about 50 things you have to pay attention to. So, we tried to grab the ones that would be the most encompassing, that would give you the broadest breadth to generate further questions and make sure that at least, You've got the highest probability of avoiding something.

That's not going to fit your portfolio or be working with someone that's not going to be a fit for you personally. That's so just to let you know, this is not all of due diligence by any means. But yeah,

Brock: Good point, Chris, that you made that there's, we're not covering everything here, but when you're looking at stuff, particularly at the beginning, you're kind of looking at what can I quickly move away from? I can quickly decide, Hey, this fund, definitely not. Yep. I think that's what you're kind of saying here, right?

Chris: Get to the know quick or get to the, I want to know more. So documents, it is the rules of the game. I will tell a funny story. I do actually help people out every once in a while. If you happen to know any personally and you want to go into an investment, you can send me a doc. I really don't know what I'm looking at here. Can you give me an idea? I do that for a few people. And the recent one that I had was the guy sent me a sub doc and a marketing doc and, a short operating agreement. And I looked at it and I said, where's the information on the fund? I mean, what are we investing in? What are the, the risks, the conflicts of interest that the manager is aware of and what Brock was alluding to earlier? A lot of that will be embedded in that private placement memorandum.

 It is that comprehensive, legal document. It is usually long. It is usually boring. We bought, I will tell you, you need to read through it. You need to understand it. It is literally that. And well, it should be, everything should be in there if they've drafted their document correctly and they have a decent lawyer. But it should be that document. You really spend the time reading through understanding and generating questions. If you read something and you don't know what it means, there's no such thing as a dumb question. Be sure to ask if you can't get the answer from your manager, that's an initial clue right there that wait a second.

This guy actually even knows what's in his. You'll be surprised. There's a lot of managers out there that have a lawyer create these documents for them, and they really don't necessarily read them and understand them as thorough as they should, as you know, it's the rules to their game. That is the, the first RPMI story. I don't really bother with any other documents. I'll look through your deck really, really quick. It's usually some pretty pictures and it gives me an idea or at least builds a premise of what I'm going to be looking at with this fund. But the real document for me is that PPM. That's what will drive me to that next decision. If I'm going to keep reading.

Brock: Okay. That's good stuff. So let me just make sure we understand, because if we're talking to people who are doing this for the first time, you're kind of saying that, look, maybe look at the presentation deck. They have most fund managers have one, or maybe these days, they at least have a webpage. They're going to send you or some sort of document with highlights. And if that matches, then the next thing you want to move to is you really want to request that PPM.

Chris: Yeah, go through that. And it shouldn't be part of their natural process. If you, if you, if you talk to a manager and you've got their deck and you've maybe had a meeting with them, you should be moving or have access through a portal, or some other sources get access to that PPM.

That should be your right.

Brock: And, and the reason I I've read a bunch of these nowhere near the thousands that Chris has probably read, but the reason I kind of put the iPad and the notebook and the cup of coffee down there is that really should be you on a Saturday morning sometime when you're fully aware.

Because these things are anywhere from 60 to a hundred pages and you think, hey, this investment looks really good. You grab that PPM load up on your iPad. Cause they're usually in PDF. I get your note pad out and you go through that thing and you're going to write that. Every question or everything that you don't understand there.

So, you have then a bunch of stuff to go back to that fund manager and say, I don't understand these things, or please help me understand these things. And believe me, we expect when we get that someone that doesn't read the PPM or doesn't come back with questions, we got to kind of wonder about that person. It's actually better. We like it. When people come back with question.

Chris: Yeah. And I mean, and if you don't feel comfortable, you don't have the knowledge there. You know, there are people, I mean, you can reach out to even some, I'm sure. Some various resources within Vera vest itself to get some answers on some things about the PPM. Cause, I was very impressed, very early, where obviously someone within the Verivest empire read RPM and came back on some very specific points that were very deep and I laughed and chuckled. And I said, well, I don't think I've ever been asked that question, but I'm glad you asked it. Yeah. So, I mean, look for, there are third-party resources that can help you understand.

 If you're, this is your first time you're coming into an alternate investment, and you don't feel comfortable. I will say this. I know I'm not gonna make any friends with lawyers with this statement. A lot of people go to their lawyers to read these for them. Unless your lawyer has some knowledge in alternative investments and that's something that you really specialize in. That's great. They'll understand what they're reading, and they'll be able to identify some snags if they exist or if it's not really, you know, but they shouldn't be lawyers, aren't licensed to give investment experience advice, right? That's not what they're there. That's not what they're there for.

It's not their knowledge base. It's not what they do and so just be very careful and take things with a grain of salt and make sure that you understand it for yourself and you're, and you're having the right help with some of these documents.

Brock: I mean, bottom line, if you're going to sink the 50 or a hundred thousand dollars minimum that is usually required for a private investor. It is definitely worth your while to read these and understand it. So once, once you read that PPM, you feel like you got your questions answered. You feel like, hey, this is something that I think that is a good match for me. And then obviously you're going to move on to that whole way and subscription. So, you're going to want to break down those two documents for us, Chris.

Chris: Yeah. The operating agreement. Is there again, that relationship between a or another name for it is the limited partner agreement, depending on the structure of the fund or LPA is some people will use the acronym. That is the further rules of how your relationship with as a limited partner or a limited member works with the fund and how things work.

It's a process and procedure document of how things will carry out and how the fund actually operates. Less about what it's doing, less about risks, but more about, hey, if this occurs, then ABC will happen. It should walk through. And some of it will be. To the private placement memorandum. I mean, there's just certain aspects that just naturally would show up in both documents, but this is just that further explanation so that you understand your true relationship legally as a limited partner within the fund, there again for their expansion to the rules of what will happen in various occurrences.

So, a lot of that stuff is situational. You may never run into half of the things you're reading into the AUM. It will be a document you'll have to go back to and sort of assess if something does occur in the future. I mean, even with regards to like, hey, I want to redeem from the fund. How does that actually work? Okay. That'll be, that'll be listed out the exact procedure of how that should proceed is in your operating agreement. And then the sub doc agreement, we don't have to spend too much time on this subscription agreement. A lot of these are very templatized. They're the real importance in why I want to mention it.

Here is it is the legal proof of your. It is the document you actually sign. It is the one that you prove. If it's the fund that requires accredited status, they may have an entire accredited status document through there. So, if anything, there's any challenge to your ownership of the fund or the nature of it, or the timing that sub doc is. And that's why it's important. And I want to mention it there. But it's not, it you'll find from one stop to a sub doc to another sub doc, depending on the nature of the funds are very similar. You won't see a lot of differences, or changes in structure. I mean, there are other documents out there.

 Some of your bigger funds might have due diligence questionnaires, that goes into. Listing out everything you could possibly imagine around compliance, business continuity and operations around the fund into a granular level. That's a very institutional level document. You won't see that in a lot of small funds, so don't run around and think you're coming into a smaller fund and say, hey, I'd like to see your DDQ. The due diligence questionnaire, they may or may not have it. But and another document you might see is an FAQ, which is the frequently asked questions document, which will be a little bit more common. And hopefully that dives into some of the questions you might actually have that would come from reading and the private placement memorandum.

Brock: Great. One of the things I'll mention here too, is, you know, what's great about Verivest as they've gone through these documents to kind of vet them. But on the other hand, though, what they don't do. Necessarily decide for you, whether this is the right investment for you. You know, they don't decide on the fee. They don't decide on, you know, when you can get your money back or any of those things. So those are still things that you have to match back to that cartoon. You decide whether that the manager really matches what you want out of your investment for this. Correct. Okay, great. Let's move on to the next.

Yeah fees. So, I mean, look everybody charges fees, no one does anything for free in this industry. There's no free lunch. Put it that way. So, it's super important to understand what fees are out there, the type of fees and it doesn't mean that low fees are necessarily a good thing. I'll say that right away. And then I say that. Having Kirkland Income Fund is like one of the lowest fee funds out there, but there's a reason for that. Other types of funds are not able to do it because of the nature of their investments. So don't necessarily look for low fees, but be aware of what your fees are, particularly as you compare it to other things. But now I think I'll let Chris kind of go through and, you know, one of the biggest one, everyone's going to charge a management fee. So why don't we start with that one, Chris?

Chris: Yeah, and I mean sort of keeping this in, there's a lot of things mentioned right here. I laugh when everyone always tells me, I'll tell a short story. I had a very prominent investor. Obviously, he didn't read his documents, so he was not paying attention to slide one that we just covered. He was like, well, I only pay two and 20. I don't have any other expenses. And I was like, I'm pretty sure that's not true. And we actually made a bet. the usual bet, if anyone knows trading places, it was $1. So, he gave me his PPM and I read through it and I found all the other fees that he was paying and he was totally unaware of. So, keep that in mind. When people talk about, oh, my fees one and a half and 15 or two and 20 or five and 50 or something of that nature. That's just what people want to, that's the common nomenclature that people like to sort of just make it simple.

But let's dive in. I mean, management fees, the actual definition I was given years ago is that should be the fee that covers the cost to run the manager of running the fund. That's what it should be. You'll have to dive in and assess that a little bit. If that feed makes sense and that's  covering the cost of the manager and two reasons you need to assess that one. Is it a compensation scheme where they're just getting rich on management fees, or to the other side, are they charging enough to actually treat? Maintain the manager.

Brock: Let me ask you about this compensation fee. What do you mean about that? About them getting rich only on management fees. So, what's wrong with that. If I'm an investor, I'm thinking, okay, well, they, it seems like a great investment. Okay. The management fees are a little high, but you know, it seems great. I mean, what the promise of meaning is really nice. What would you say to that?

Chris: Well, that might be true. Listen, you can look at very high fees and you've got to look at the net returns and say, well, wait, these guys are charging a ton of money, but their net returns, they are still creating an amazing amount of consistent alpha and outperforming the market. And they're charging five and 50. I gravitate to that number because there is a fund in the world that charges five and 50 and still be. Well, I mean, they must be some secret. Yeah. They consistently beat their competition. So, I know five and 50 sounds ridiculous. But when you could beat everybody at, and that's what you're charging on a net basis, you, you got something. But you can probably Google it to figure out who that is. But, When I stick compensation this game really, it's what a lot of unfortunately occurred in the early days of alternative investing, where you had a small fund charge two and 20, and they definitely were meeting their management fees and then their team had to expand.

And all of a sudden, there's the leveragability of this business to where all of a sudden, I'm not running 200 million. 5 billion, but I'm still charging 2% management fees. Well, it's not tough to think that that 2% management fee of $5 billion is no longer just covering the cost of the manager. It is beyond, especially with the growth of technology we've seen in the industry to date, it's only empowered this industry's ability to have larger leveragability of needing less people and able to capture, achieve the management of a fund for less.

Brock: The biggest point here takeaway is that if you're seeing this management fee, particularly for, as the AUM or the, the assets that that fund has grows, if it's out of proportion, that means that they're really no longer incented to do well on performance. That means that even if they have poor performance are negative. No, you're still collecting that management.

Chris: Not necessarily. That is one possible occurrence. Everything is a probability. You can't identify one thing by, by one indicator. And this is just, we're talking about the rough definition of what a management fee should be. Just like I went back to the other thing, the guy charges five and 50. Well, is he worth it? Yeah, he beats everybody. So, it was 5% too much, even though he's running billions. Not of course it is. And I mean, how would you possibly argue with. He's beating everybody. And so that's what I just really want to, you know, management fee is one of those things, dive in, obtain that transparency, understand.

Can this manager maintain itself when it achieves its goals, understand where this gets into like, well, what's the capacity of the fund? Where's this manager think they want to be, they are running 50 million, they're running 2 billion. What what's, what's the real goal and understand that business. That's where it's important to understand management fees.

Brock: And let's talk about these incentives and performance, because that seems like as an investor, I want that manager to be incentive because that's going to help me as an.

Chris: Correct. And it also gets into one of the potential conflicts of interest. In alternate investments, it does usually require a specialized network, knowledge base, or combination thereof to achieve an alternate investment of any type we happen to be in debt. But in my previous life, I did a cross-border arbitrage for a hedge fund. And we were worth every ounce of our deeds. And so, when we outperformed a series of benchmarks or other hurdles that might be embedded in the language of the document, we were incentivized with these performance fees. It is something that has been a contentious point for a lot of institutional investors. They always want to see less.

But I'll talk to you about the conflict of interest. Now with regards to incentive fees, you want to incentivize and have the smart people running this. So, you need to make sure that the incentive fees commensurate to what that the other side of that coin is you also need to make sure and monitor are this is this fund or this alternate investment has style drift. Are they going outside their bounds, understanding their risk? Are they taking excessive risk to maximize incentive fees over a certain hurdle? That's where. That's where I kind of really, when I think incentive fees, you know, listen, okay. 15, 20%, whatever. We'll figure out if that's warranted or not. But where I'm concerned is do they have a team of wild west guys that are out there really pushing the envelope, trying to maximize those incentive fees, that the risk of the investor.

Brock: It kind of goes back to the TPM that we're where you talk about in the PPM. As laid out those risks in the manual. So, to say the rules of the game has laid out, here's the risks that they should be taking or  limiting themselves on and what they should be investing in. And when you say that style drift, what do you mean by style drift?

Chris: Yeah, they'll have a certain number of parameters that they'll invest in, and this is what they say they do for their fund. This can get a little wonky because we're talking about alternative investments, which really can be a little bit of everything. And so, some of your multi-site. Alternative investments can have very wide bands of what they can trade in.

 So, it's hard to determine, are they within their risk parameters or not, but a lot of guys are running third-party risk reports. In today's world of algos, there's computers that can calculate a lot of this across multiple complex trading platforms. Any good fund that is saying, hey, I'm going to be a multi-start and I'm going to be in 10 different places. They should be pretty advanced in the systems and the capability of understanding the risks and be.

Brock: On the other hand, I know a lot of Verivest it's very real estate focus. So, I would expect that if you look at the PPMS across the board and you can look at RPM, it's really narrow about what we do. I mean, we invest in commercial real estate debt period. We don't do anything else. So, all of a sudden, if we wake up one day, Chris going in, buying this business over here and giving that to this business. Hey, that sounds like a good day. I mean, it's a high rate of return, but yet it would be outside of what we said in our rules we would do. So that would be something we wouldn’t usually watch.

Chris: Exactly. it may even still be in real estate, but all of a sudden, we start buying like private equity pieces in San Diego. That would be, that would be enough style drip outside where I'm clearly taking risks, way beyond what I said I was going to do on the front.

 Okay. Now fund expenses. This is the one there's going to be a section in your documents. They will go through, and they will list. A laundry list of things will be embedded in your fund expenses. It will be no short list. The one thing I always try to look for is, you know, how much people are embedding marketing and other expenses, the ability to go raise other people's dollar, spending your money to raise that. It's a personal taste. There's no rule that says you can't there was a lot of pressure against that. I know institutions, big institutions have a lot of pressure against that. But in smaller funds, maybe it's a little bit more accepted and sometimes there, again, you've got to dive in and get that transparency of how much money are you spending on marketing and is that embedded at the manager?

And how has that and how much flows back to the fund? Those questions understand what those are. So don't just read this under fund expenses and go, oh wow. That's a lot of things there they're charging me for fund expenses. Really dive in and make sure that you're okay with that. Your dollars are going to pay for those things for the advancement of the fund.

 And, you know, then what are they also embedding at the manager? What are they paying for at the manager? Now the next one, the acquisition fees, refinancing disposition. Those are a little bit more on the syndication side. I throw them in there. Cause it's something that could be pretty common for those multi-family syndications. Exactly there again, there'll be more layers of fees and syndications may or may not mean more dollars out of your pocket. But it's something you need to really dive in there again, read through the documents, understand how much is coming out of.

Brock: I think for those, one of the things to watch out for is there's nothing wrong with any of those fees, acquisition, refinancing, disposition, because as you look at them, they are fairly well aligned with the amount of work that a manager has to do at each one of those gates. So, to say, if you have a multifamily, you know, there's a lot of work that goes into acquiring that asset. And then, if you ever bought a house or refinance the house, you know how much work it is even just on a house, getting all that stuff together. You can imagine how much work it is on a multifamily, large multifamily to get stuff together and do that stuff. So, it tends to be well aligned, disposition, all the work to get it ready for sale, et cetera. That can be a lot of work as well. So not those fees aren't wrong or bad, but it's good that you kind of understand them to get an overall picture of the entire syndication of what it's going to cost you as far as those fees go.

Chris: It's like the other fees that would be embedded in the fund. You just really need to understand and know, maybe even ask the manager, itemize it out for you. There again, it's sort of a test of transparency.

Brock: What's a fee spread

Chris: Fee spreads, participation skins. I've had people throw a lot of names of this one. This is very debt to debt real estate related. This is not something you see. Especially in my institutional life. I only saw this when I started working in the smaller funds and specifically in real estate. It's very common to where I will go out and I'll write a piece of debt, whether leveraged or unleveraged at 16, 17%.

And then I have achieved that, you know, where I went out and I borrowed money from you as an investor. And I'm paying you 9%. And so, you were taking that spread between those two of 7%? Well, okay. That's a lot, People googled hedge funds for charging two and 20 enough, I have my hedge fund that goes and makes 10%. And I charged 20% of that. Let's just say no hurdles or anything else. That's 2%. So, my total fee as a hedge fund on my AUM would have been four, but technically if you're dealing with funds that are running debt, the debt, these spreads can be quite large. Things also with like revenue shares. If you get into a fund who has a revenue share structure, really have them walk through that so you can understand, well, what does that really mean in aggregate fee?

Because they they're kind of hidden and they can be very large numbers. One of the things that you'll see also in we'll back up a little bit here sometimes in fund expenses. Together, if you read a document and you're looking at something that's not very common in the real estate world, but in hedge funds, that can be, is what they call pass throughs. Pass through structures is where I basically just take every expense, everything I bought toilet paper yesterday. So, I'm going to put that expense to the investments and it's a pass through structure. And there again, it's hard to understand. Well, what does that fee actually mean? So just like, you know, revenue shares or fee spreads.

There again, you got to get that transparency and that comfortableness around. Well, what is the actual fee at the end of the day I'm paying? Because there, again, there are some funds out there that do pass through structures and the in pass through is like a 9%. So, I mean, huge. Oh, if they're delivering, they deliver a return, but it's a little bit of a makes you go a little bit like, wow. The pass-through structure net to me is a 9% fee. I'm not saying none of these are good or bad. I'm just saying you need to be aware they exist.

Brock: Yeah, it seems like the thing on the feast bread that I, you know, we've seen before is where you're, you're not actually investing in the fund. You're actually lending to the fund at a standard rate at eight or 9%, but then they're going out and lending this at very high risk. And they're going up for as much as they can. They'll do a 16% loan to a high-risk thing, knowing that, well, if we lose it, it's not off us. It's the investor. And meanwhile, they're making it.

Chris: Hopefully you're not working with a manager that actually views the world that way he's taking a much more fiduciary view. But you are correct. That's always been my biggest concern with big spreads is what it really means as an investor. You're being exposed to a lot of risks and not being compensated for it. So that's biggest concern you should think about.

Brock: Not that fee spreads are necessarily evil or anything. It's just that if they get too out of hand, then you got to kind of watch whether that manager is really in alignment with you again.

Chris: Yeah. And also, you could easily say, and I've heard this. It's like, well, listen, I have a particular niche where I can charge a fee like that or run a spread like that because you can't get it really easily. Anyway. And it makes sense. And so, there is justification to some of these fees, a lot, this got it. I just want to harp on the issue of know they exist and make sure you're comfortable with it.

And sometimes if you feel people squirming, when they're talking about their own fees or they avoid talking about fees, that's usually an indicator that they're not happy with their own fees if they wanted to pay it. And lastly is. Kind of an interesting one that I ran into a couple of times, one just recently within the last couple of months, its formation is something that a lot of people really don't think about. There is a section in the document that we'll talk about your formation costs it'll run through and really identify, hey, this is how much money we should. To do this, and this is what the fund is liable to cover.

Brock: Hold on, just to make sure what we're talking about. Everybody's cause many people may not know what a formation cost is. That's really the cost of to set up the fund, all the legal costs, banking costs, you name it. That this can run low in the case of us work, we kind of, you know, you knew, knew what you were doing. We got a break with the lawyers, but to someone who doesn't know what they're doing, shoot, we've seen a $150,000 formation costs. Right?

Chris: Yeah. And. There are some strategy types and structures that will cost more to create. So, you will have formation costs. That will be higher. It doesn't mean that, oh, you paid 50,000 information costs and this guy paid 150. Well, the guy who paid 150 is clearly, you know, it doesn't know what he's doing. Not necessarily. You got to understand the strategy and what it really takes to pull it off and what kind of structures that person needed and understanding. I want you to be aware of this fee structure and understand what they are putting back. It is pretty common. I know this is bad to say, but hopefully nobody at Verivest or anybody else is doing this, but they'll basically come in, they'll rack up some big fees and they'll put that to their investors, which creates a pretty big old walkout of it's an initial drag on the funds return. And that's why it's important to understand it's there, it can create a dip before you even get started.

And then you've got to understand that if it's a new fund, how much of that's being allocated to you? I will tell you, like I said, I was dealing with this just recently with a company that was going to register with a department of financial institution at one of our states and the state didn't like the fact that they were going to basically back charge about 125,000 to investors, that they really thought that the new norm should be somewhere around 50. I'm not saying that's right or wrong. I'm just saying that's what the department of financial solutions came back and said, I can't believe you're going to put $150,000 of cost to build your business back on the back of the investors. They had thought it was more normal to see something around 50. Whether you want to draw a line in the sand on that or not, that's your personal choice.

Brock: Just really understanding how much under, so what you've put in on your thousand, you know your actual  value of your investment is also less than that on day one because of those formation costs, it's just something to be aware of.

Chris: Yeah. And if you're coming into a fund that's been around for a long time, is that been paid off? Is that done? Is that out yet? Is that still being shared out? How does. Say, that's a question you want to put on your list.

Brock: Again, it sounds like none of these things are wrong or bad. It's just really taken a look at it and see if those things align with what you want out of the manager. And the manager is really aligning themselves with, to do the best. I mean, all of us are in this to make money off course and make money for the investors. So, you know, obviously you got to pay for that. And it's up to you as a, as an investor, when you're looking at those to decide how much am I willing to pay that, that, that manager for that service of making money for me? All right. Let's move on to the next operations. So, operations is one of those interesting things that most people don't even know. They think of primarily I'm putting money in and this trader or the fund manager is going to make these trades and make a lot of money for me. And this kind of operations thing about money movement, about controls, about operations, about cybersecurity due diligence process and procedures.

 These are all, some huge items that are in the background that take a tremendous amount of time. So, Chris, why don't you talk through a few of these things and maybe use even what we've done at Kirkland capital you know, with the Kirkland income fund, you know, talk through cash controls and third-party integration maybe start with the cash controls to start with. Cause you know who who's got. Sort of the finger on the trigger. It can actually move cash around. Cause that's, you know, that's been a big deal with fraud in the past.

Chris: Yeah, no, I spent years I'm actually developing operational programs for the assessment of alternative investments. Nine and 10 was a pretty interesting time where people realized no one was watching anything and no one cared about operations. It was all about investment due diligence and what they realized when everything was breaking apart. And even in some of the frauds that they'd run into previous to oh eight the failure didn't occur at the investment level. The failure occurred at the operational level. And I think that the ratio is down a little bit. It used to be as high as 66% of fund failures was while it was operational related. I think it's closer to 50 now.

Brock: Amazing, if half of all fund failures are not because of trades, but because of operations and this is definitely something that as a first-time investor, when you're looking to investing in a private fund. It's a super important item to look at.

Chris: Yeah. A lot of people, they focus a lot on the investments, and I think there's an error made in the psychology of alternative investments is you got to understand the investment and yes, that's where your money made you to be deployed. But at the end of the day, your money is going into an investment.

As an LP into a company, you are investing in a company and that company has a management group. With a manager and has its own operating agreement as its own entity. And so, you got to understand how the assembly line works. So, a lot of people want to look at with a widget and understand how cool that is and how that can be valuable to them, but they don't bother to pay attention to the assembly line that made the when and how, we all know how assembly lines work. There's about a hundred different steps to it on how it goes from a to Z. And that's the important aspect of operations. And I mean, we could spend days on this. I'm going to be pretty short. A lot of it is around. And what came out of 08 was, there was no longer allowed to be self-administered, which means you basically did your own accounting, your own back office, your own middle office.

It was all inside it now needed and was required to be monitored by an external third party. I'll laugh. This is where I first met Lance when he was starting his administrator and he was embedded in a fund and I said, well, you're going to have to change that six months later, he called back and said, wow, you were right. And I go, yeah, well, and that was back oh 8 0 9. When people were looking at where he is now, people are just getting used to these rules back in 08 and 09. And now we kind of take it for granted, but it's still equally as important as new threats arise, like cyber security. This is where you have those third parties in place that are looking over your shoulder.

Like a Verivest is a great due diligence tool of where they're coming in and asking the questions and making sure that information is collected. And you know, now it's you pretty much. If you want to go anywhere, you got to have a fund administrator for better or worse. It depends on what time of day you catch me. I'll either be pro or against fund administration.

Brock: As a fund dealing with all these third-party administrators and everything, it takes time. And it's sometimes frustrating, although in the end, it's good for our investors and good for us too, because the put us for making mistakes

Chris: And like the list has here you got, if you're something that has to be custody, who's your custody agent or your administrator. Do you have an auditor? That understands your particular business. Do you have tax in place? Do you have banking? Do you have securities legal representation if you're in the real estate business, which we all are, do you have real estate counsel does the fund have all this in place? Who are they using?

You don't always have to be a big name. And this is the one thing that is a Michigan. Cause I've worked with the big names, and I've worked with the smaller names, and it really sits on the funds capability and the managers to work and, and help their third parties really understand what they're doing and work the way that's best for that particular fund. because everyone's a little different, you don't need to have a big name. A lot of people want to name drop. If I'm going to go out and raise money for major consultants, they're going to want to see a big four on the accounting side. Or you're never going to get money, but when you're talking with smaller funds, find out, you know, okay, why did you use this administrator? Why did you use this auditor? Or banking. Walk through those, ask those questions. And that's the key aspect of this, this whole. Adventure we're going on here is to give you hopefully an insight of what to pay attention, to and ask the right questions is why did you choose those?

How do they work with you? What's the pros, what's the cons. You don't always have to know. It's not always a name brand, but as Brock was saying having those right people in place, they're looking over their shoulder over your shoulder. They don't have an interest in doing maybe what's right for the manager. They have concerns. Of what's right. According to rules and regulations. And that usually falls in the camps of it's going to be right for the investor. And that comes down to cash controls. Who can move money? I think this is a huge one. It was super scary. I'll tell you a funny little story.

I walked into a hedge fund, and I walked right past their front desk as no one was there. And I walked into this little room that they said was their wire room, sat down and sat at the computer. This is the kind of due diligence I used to do on onsite verifications. I was pretty nasty. And what it showed was I had a complete stranger that wasn't even part of the fund that walked into your fund, walk across the threshold, walked into your whole wire room, and sat in front of the computer where you control all your wires and it only required one single person to do so, but you could imagine after my meeting, a lot of that changed quite quickly.

But it also now is becoming more. To where there's no one single person who can move money. There's a CFO, there's another partner. There's someone else. Or maybe even you have a trifecta of some level of control. If you're a larger fund that has lots of movements some type of automation and rule writing between your fund administrator and yourself, and even maybe your bank you know, it can get fairly commonly. You don't want as a fund; you don't want to make it too complex. If you're a small fund and you're an investor looking at a small fund, you'd literally want to see, okay, well, where's the dual control, you know, and can, can Chris come in and like, you know, start an offshore fund in his name and move money.

Brock: And for example, for us here, we're a fairly small fund. But we from day one, put it in those cash controls. So that, for example, when we need to, because I just did this the other day, put a wire out to fund a loan, but put the wire to the escrow. So, we've got a whole form that gets signed off that the due diligence for that wire, the amounts where it goes you know, wire fraud is a big thing today, so that, you know, the telephone call has been made to confirm the wire the banking information. And then that goes to be signed off by someone else. Chris

Chris: Brock is the originator. I'm the reviewer and second signature. And when I go put the wire in, it then has to be reviewed by the CFO because she's the only other person who can actually do a little sign. The completion of the wire

Brock: So, in our small fund, we've got three signatures to make sure that nobody can send out something inadvertently. And at the very minimum, nobody can just send off some wire accidentally because that requires dual.

Chris: Great. So, yeah, I mean, we can take some questions about operations, but we could go on and on and on. We have to move on because I know we're probably running out of time. But yeah, let's we can take some questions on operations cause it's a rabbit nasty goes. It's lots of tunnels taking a lot of stuff.

Brock: Bottom line is you've got it down where, take a look, ask the questions to the manager again, in that phone call that you're going to have with them about, hey, tell me a little bit about your operational controls, particularly on money. How do I know that someone's not going to easily break in and steal all my financial information? You know, just, just those kinds of questions, you know, what's in place.

Chris: Yeah, and I know it, and it's tough in today's world to verify everything, especially in the world, the new world we live in, where everyone's all over the place. But you know, if you're writing really big checks, I mean, we're talking seven figures plus to a fund. I'm big believer in, in on-site verification, whatever that might be in this new world. But that's what I spent a lot of. I think my record was I spent about eight hours inside an office going from all the way to the top, to the bottom of a hedge fund in New York. They were happy to see me leave. But that's, I'm not saying you gotta be that thorough, but if you can try to get some type of on-site verification and really kind of, okay. Hey, is there really. You don't do it if you can.

Brock: Otherwise Verivest provides, know that great level if you're not doing the seven, eight figure checks, right. So, let's move on to transparency. This is one thing that, Chris from the very beginning, as we put our own fund together has been big on, hey, let's be as transparent as possible. Let's you know, we do loans. Once the loan is started and booked. Let's let them know, Hey, here's the address.

 You can go look out; you can go look it up. You can go look up because property records are public records, so you can go up and look and see our lien on the property, all of these things. So, in this transparency, you know, let's talk a little bit, Chris, about, what's your opinion on this trade transparency versus opaqueness. Let's talk about that first. How do you balance, how do you know when someone's saying, a fund manager says I can't share that? How do you know if that's actually legitimate? They're saying. That's really an issue or whether there, there may be heightened.

Chris: I'll give you what I used to say, but let's go through trade transparency and opaqueness. There are strategies that are what they call a zero sum. Whereas like, if there's a dollar in the trade and I tell you how to do the trade, you're going to take 10 cents out of it that comes directly out of my pocket. That's the definition of a zero sum. So, everybody who comes into those trades. Piece away from the only dollar available that is something where there needs to be a level of opaqueness. There are funds that actually require that it's important. It was what I did for eight years. I couldn't tell anybody what I did.

Cause most of the trades I did in arbitrage were zero. So and so it's not always, it's not always a negative thing when someone says, I can't tell you, but what two blocks question is. If you don't think it is. And I'll tell you, be careful with this because it's not always the nicest statement. I would go and I'd say, well, listen, if you're not going to show me what you do, that means one of two things. It means it's not really that difficult. Therefore, you have a low barrier entry and it will be easy to repeat your fund, which means somebody smart coming in off wall street will easily take away your trade.

Yeah. You know, that was, that was, you know, you know, or it's, it's, you know, it's so simple. I could repeat it just by you telling me how to do it. That was one of those things with. That I would say to people, is it really that simple? And often not it wasn't. And so, you'd get access to kind of sit with some traders and walk through, or have somebody kind of walk through and show you some of the inner workings of the trade. But if you can get trade transparency, I find in real estate, especially once the trades done, one of our mottos is like once I have a loan in place, I have no problem telling you about the loan. It's not like my previous world. It's one of the things that I loved when we were building this.

I was thinking about all the movie pieces of what I was going to be capable of doing. And I'm like, oh my God, I can, I can be transparent almost about everything. Once I pull the trigger, I can tell people how accounting works. I can tell people what trades we have in the book. I actually you want to give you that transparency. So, the key aspect of transparency within the trade is, I understand the nature of what the fund is doing. And usually just apply a lot of common sense and we know are not talking a lot of high knowledge level.

 Should I be able to get access to that information without hurting the fund? Because if the fund is, this is not good for you. If they're going to tell you all the secret stuff and the fund goes and tells everybody else that secret stuff, well, then those funds are going to be out of business pretty soon.

So that's not good if they're sharing information that is very key and super-secret to their strategy of how they're getting excess returns. But otherwise, you should be able to get that.

Brock: But that comes in about real estate, Chris, it's so transparent that, you could go look at an address and go do a Google drive by, or if you live nearby, go drive by and see, hey, I'm going to invest in his fund. I'm going to own a piece of this particular role. Whether that's on the loan side or whether that's on the equity side,that's kind of, there's a, there is a tangibility to this in this alternate investment universe. That's not present in a lot of others. So, I mean, that is, that is nice. And so, if you, if you don't recognize this or, you know, this is a restaurant of served, many of you have been to a restaurant where you can see the chefs. And, you know, I always like kind of like that because it's like, well, you can't have a dirty kitchen, you know, you're, you're fully exposed. You maybe not see every ingredient that goes in there, but it kind of gives you this nice sense of of confidence when you see that transparent. And you can look through the window and see what's happening there.

Chris: The background picture to this slide is showing you how they're making the food that you're going to eat and that is the nature of the transparency you want from a fund as well. The key aspect of transparency, the amount of investor communication in the form of investor communication is that ample for you?

Everyone's a little different, so that level of transparency, some people might want, hey, I want to have a monthly one-on-one call. Other people are like, I don't want to talk to you. I just want to listen to your quarterly update. And so, and then not a refund, a small funds will be audited.

So, this point here with audited financials. Yes. It's a form of transparency. Not all small funds will be audited. There are auditors out there that are specializing in small funds. They are cost-effective. I mean, it's still not cheap. But when you get to a certain size and it's something, I think it's not the do all of everything that like a lot of people like to put it on this pedestal. But it is an extra checkpoint. It's an extra level of comfort to see audited financials. And so that's something that maybe a form of transparency that, you know, maybe you just require. So, you know, you won't invest in a fund that doesn't have audited financials. That's your personal choice. Government registrations. The reason I mentioned that was just understanding how they've registered, how they're exempt did they build the fund correctly? If you have a base knowledge or you'd like to understand a base knowledge of how funds are built and why they're put together the way they are, it can be actually quite telling did this person put together I'm going to go a little deep here. 5 0 6 C exemption or a 5 0 6 B exemption. There's you know, different rules for those exemptions. Ask the question. Why did you choose. So that you can understand and get into the mind of the manager. Isn't that really the job, what we're trying to do, and due diligence is, you know, on get into their mind and understand, or why are you doing it this way?

And does it, everything does the say in the do constantly match? That's what we used to say. When we would tear hundreds and hundreds of hedge funds apart, we'd walk out of that meeting. We'd be in the elevator, leaving the meeting, and I'd always asked some of the junior analysts. Well, do you think that let's say in the duty. And if you don't, why, so we'd have like an elevator talk on the way down from, from a meeting of what they thought was maybe a little wonky or what was you know, we couldn't find anything. We think these guys are rock solid. And so, some of that came out of the, do you think they put the fund together correctly?

Are they doing it? To meet what their objectives are. And then, you know, there, again, third-party verification, we've talked about it a few times. It's a big piece of that. The operational piece is understanding like, well, who do they have in place? That is looking over their shoulders and offering further capability of transparency. It's one of the things that You know, Kirkland income fund was able to get listed on some fairly big and difficult alternate investment platforms for investment. And a lot of that came from our process and procedure manuals. They came from our aspects of our continuity, our third-party verification aspects, and you know, a lot of this constant focus for us on the protection of investors.

And that's what we'll eventually get you on some of those platforms, because those big platforms, that's what their main focus is. They're not there to condone your investment. They're there to make sure you've built the right structure for the safety of their investments. And so, in a lot of that comes from third party verification. And if you're worried about third-party verification here, again, you're obviously on this call, you all know who Verivest is. If you don't, you can go look them up. It's I was just on an investor call today and he said, hey, I found you on Verivest, and I was supplied a ton of information about you. I'm not really sure what to ask. And of course, he asked me the tough question. Well, what questions should I ask him? Like what have you read? You know, what questions did you already ask? So, I can find which ones you don't know. So, there we go that's a good overview of at least four things to think about.

Brock: I think in the end this is enough to really give you that initial. Answer to your question, is this manager in alignment with you when you look at an investment and you should feel like, Hey, you're, you're the one in control of your own dollars. You're the one that's got the fund manager really saying, I'm willing to make sure that I'm aligned and I'm doing the best for the investor.

So well, Chris, it's been great talking through all these things with you.

Brittany: You guys. Thank you for joining us. If anyone has any questions, now you can add a question in the chat or you can raise your hand. I'll see if we have any, or you can send separate messages to Chris or Brock.

Brock: One of the things that we can do is we'll send all of you a little bigger. What is it? The eight keys or eight areas where you should dive down and do some additional due diligence. We'll send out a link to all of you about that expands beyond a bit, what we've covered today. And then you can always reach us at these other links here, or both of our emails are there.

Brittany: You guys, if we don't have any other questions or comments thank you for joining us today. And we will see you at our next webinar.

Brock Freeman

Brock Freeman serves as the Chief Operating Officer and Managing Partner at Kirkland Capital Group, a leading investment fund manager renowned for its principal preservation and superior returns derived from commercial real estate. He boasts an expansive background in technology, finance, and real estate across both the Asian and American markets. His impressive career portfolio includes diverse finance technology roles within Fortune 500 corporations, alongside his contributions to startups and high-growth entities. Outside of his professional commitments, Brock is an avid skiing and hiking enthusiast. He holds a distinguished position on the National Small Business Association Leadership Council and harbors a deep-rooted passion for U.S. Taiwan relations. Brock is an alumnus of the esteemed Foster School of Business at the University of Washington.

http://www.linkedin.com/in/brockfreeman
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