Taking a Vision and Making It Reality with Chris Carsley and Brock Freeman

Amanda Jogia - CEO of PrimeAlpha hosts Chris Carsley and Brock Freeman of Kirkland Capital Group.

I would like to introduce Brock Freeman and Chris Carsley, the Managing Partners of Kirkland Capital Group and managers of the Kirkland Income Fund. Their objective is to provide a high-yield, principal preservation-focused fixed income return to help build and fortify wealth for their investors.

“Individually we're strong, but we found that when we combined our skills, that's where we can really make magic.”

- Chris Carsley

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Transcript

Amanda: Welcome to PrimeAlpha interview series insights from industry practitioners discussing their journey and their discoveries. Hello, my name is Amanda Jogia the CEO of PrimeAlpha an online ecosystem, bringing together alternative opportunities and their investors. I would like to introduce Brock Freeman and Chris Carsley the managing partners of Kirkland Capital Group and managers of the Kirkland Income Fund.

Their objective is to provide a high yield principal preservation focused fixed income return to help build and fortify wealth for their investors. Welcome Brock and Chris, it's a pleasure to have you here. Right. This is unusual for us cause we usually never have a podcast with the two people.

Chris: We will try to make it as interesting as possible.

Amanda: I'm sure that's what's going to be so let's start and talk about what led you both here.

Chris: Yeah, I'll kick off with that. I have had a lifetime of working in the investment arena. I've been fortunate to start my career in traditional investments. I've worked with hedge funds, fund of funds, dealing with a lot of different special situation alternative platforms of all types, and then worked in venture and startups. And throughout that always touched real estate in one form or another, whether you're running debt portfolios for investors or not, but that has led me to having such a diverse background. I'm constantly educating or finding myself, educating myself to expand my knowledge base and really what it is to keep up so that you can constantly be building amazing investments for whatever company you're working for or investors that we're servicing. So that's sort of my career.

Brock: I started out not too much different having a finance background like Chris, but I quickly got dragged into Tech when somebody found out that I knew how to do things and make things more efficient. So I've really worked at that intersection of tech, finance, real estate, and done it both in Asia and America here. And I've swung from pure finance as an underwriter and some other things in capital markets, analyst, and then to tech as a pure programmer, I found out that particular on the programming side, I can do it, but you don't want to hire me. I'm too slow. But I do leverage that knowledge and understanding of really bringing things together. I love that intersection. That's my real area that I shine in and really using technology to build efficiencies and better returns.

Amanda: That is so interesting that you know how to code, because I think it's like a putting logic and super complicated string. You're tying all these pieces together. So you can think about really complex things and simplify it down into a very logical format.

So awesome. So describe that pivotal point in time when you decided to go off and start the firm.

Brock: Well, for the last decade, I've been actually out of the real estate finance industry, particularly after oh eight. And I took a turn and went into corporate finance and IT at Microsoft, True Blue, and others. And that really taught me a lot about how they approach things, which was good. But really I've seen the great changes in technology over the last couple of years and seeing that was finally affecting real estate and finance again, and really going back out there and speaking with some of my old contacts, old buddies from my old days in real estate, just happened across a great opportunity where we saw a marketplace gap in real estate finance.

And that's something where identify like, Hey, this is something I can wrap my head around pretty fast, but I didn't know so much about the fund management side. And I realized I was going to need that, but that was a great opportunity where I could bring my longtime friend Chris in and really leverage his amazing experience and talents on that.

Amanda: Yeah. Chris, it sounds like you had a pivotal moment in 2008 as well.

Chris: Mine actually became a little bit after 2008 after working for a hedge fund for eight years. You learn chaos and disruption is your friend. So I had joined an excellent company, a fund to fund, and they were living through 2008 firsthand.

So I was actually really enjoying myself doing a variety of different high level tasks for a fund to fund great company, great people. But it was one of those things where shortly after that, a couple of years I had just decided I was going to kind of branch out and see what I could do on my own, because I've really learned from my boss, because just hearing his stories of how he had branched out and built this fund to fund from nothing, even to the point where his wife had given him no more than you have six months to figure out if this is going to work or not, or you got to get back to work kind of thing.

So hearing those stories, although it was a, it was tough to leave. It was my time to sort of go out and see how what was I going to build and how was I going to do that? And so I actually went through a lot of iterations of building things that you learn. I'm never going to do that again, or I need to make sure I'm working with the right people.

So my spin out to do my own thing has many different iterations and some failures that really, I was able to take that entire knowledge base and what we built here at Kirkland capital group. So long process.

Amanda: I always say we all live multiple lives.

Chris: Certainly.

Brock: And just throw one more kind of a interesting fact out there.

So Chris and I met many years ago in martial arts class.

Chris: Yup.

Amanda: Cool.

Chris: Decades of knowing each other, but never really working together. And here we are.

Amanda: So when you guys were a little, not recently.

Brock: We were literally, we were in martial arts.

Amanda: Oh, wow. Okay. So you guys are true and enthusiastic.

Chris: I'll take that as a compliment. You must think we look relatively young that we would have been kids when we met 20 something years ago.

Amanda: That's for the audience. They look at me. So Chris, I think it's so interesting because you're going from the hedge fund world and you're going into the kind of almost the opposite, the real estate world. What was that attraction for you?

Chris: Well, one, that's a funny story. You bring that up because after building this fund and seeing what we're capable of doing, I was like, wow, I should have done this a decade ago because I knew people who did come out of 2008 and went into private debt.

And I knew a lot about it, but just never saw that opportunity for myself to be a leader in that space, but watched other people being quite successful. It wasn't so much of, you'll find that moving from hedge funds as a certain mentality of where everything is a trade and you have to be dynamic and you have to be moving and constantly thinking about what angle you're going to deploy at your company either to mitigate risks or capture a return.

Hedge funds are all about where's my next arbitrage. Where's my next risk-free trade. And that mentality actually, within a fund structure that we've built, translates actually quite well to real estate. There are opportunities. There are things that you can take advantage of and do the research and come up with something that's viable for your portfolio fits your mandate, but it may not have been what you thought of day one when you started this. It's also from a risk mitigation standpoint, one of the things is seeing a risk understanding what that might mean and how to move that out of the portfolio when COVID hit, because we launched this fund in January of 2020, it was a big decision for Brock and I will, are we going to continue to do this?

One thing we did realize is a lot of the fear around rent control are people gonna pay the rent eviction moratoriums. We sat down and quickly decided how do we mitigate some of this risk? And without really any prompting, we move right forward to asking for prepaid interest. So a lot of our loans we were writing in mid-2020, and we were requiring our borrowers to say, Hey, listen, we're going to do a 12 month loan.

You got to pay six months upfront, and there was some pushback, but people realized it wasn't obviously we weren't alone in that decision. That was a very quick move to do that. And now it didn't mitigate all the risks obviously of what was happening, but it did push some of that risk back to the borrower and not onto us and our investors. So that's what I mean is like to answer your question, it's a different field, but you can actually take a lot of the mentality of trading and that dynamic nature and deploy it here. So I actually even found it quite interesting. A lot of the things that I was doing in the hedge fund space, I can deploy that mentality here.

Amanda: So interesting. Brock, can you expand on the opportunity set and also how you help your clients?

Brock: Yeah. So what's interesting about those is going to be a little bit different than a lot of the other funds out there as we're a two-sided marketplace. So, whereas you might be in the sense of a hedge fund or looking for something that doesn't necessarily involve bringing other clients.

In on the other side, sometimes it does, depending on it is, but it's very, definitely in our space. We have to bring borrowers to the table and we have to offer something that's compelling enough that makes sense for them, but that's sort of back to the gap that I mentioned before is there was a lack of lenders who are active making under $1 million commercial real estate bridge loans.

So there was this tremendous number of properties, though. If you think about it, the places that you drive by or take a bus by the vast majority of those little commercial properties are needing less than a million dollar loan or maybe slightly over. They're not these 20, 30, $40 million deals. So what we're seeing in the marketplace was this where all the lenders were going way up market competing there. And I won't dive down into the details necessarily there, but there was just this tremendous opportunity. To help these types of clients. And I think a bunch of things around both the timing of that with COVID, the timing of this with technology and the ability to get data that we weren't able to before has made this an opportunity to be able to take advantage of and I think on the other side, Chris, you can talk about the investor side of this as well.

Chris: Yeah. I'll talk about the investors. One of the things I did want to mention, it just kind of came into my head as we were talking about hedge funds. And I want to talk a little bit about the opportunity set is there's one important note. I want to make sure we get mentioned it here is any type of fund you're always looking for inefficiencies. You're assessing well, what inefficiency are you taking advantage of and how are you monetizing that? And one of the things that we do here from an opportunity standpoint is we are functioning in what we call a micro balanced space.

It was really funny when we first started this, we were calling our small balance, but we realized small balance could be. A very large number in the real estate space. And so we just coined micro balance because most of the loans that we're doing are below a million dollars. And what Brock really brought to me back in 2019 was that idea of that inefficiency was there's a number of developers that he knew.

There's a number of brokers that were complaining I can't find a place to put these loans. And that was really that opportunity in a very inefficient space because what we were seeing, or I should say what Brock was seeing was no one was. The banks are obviously not servicing. That's why we have the industry we have in private credit now.

But you also, weren't seeing even the private lenders servicing smaller loans, we understood. And we can see that there was pricing power and capability in a very large market space for us to step in. So I just wanted to back up and address that from an opportunity standpoint. And then yes, Brock you're right from the other client's standpoint.

Obviously a very important aspect is our investors. We are here to one offer full transparency. We want to be aligned with our investors. And we're here to offer that principal preservation focused, fixed income fund that they're demanding right now. Right now, yield is hard to obtain very while you can obtain it, you just have to take more risks.

So now people are struggling with the idea of, well, how do I get the yield I need without going too far out on the risk curve. And that's the product we have created and we're running and we'll continue to run. And so that's that entire giving the right product. Making sure that we have good transparency and constant alignment with our investors.

Amanda: You guys started the firm at the most interesting time. So I want to ask since starting the firm, how have you guys developed or pivoted your thesis or have you had to, and why?

Brock: It is the interesting thing and maybe it's simply because for both Chris and I were long time in our career, we've seen the good, the bad, the ugly been through it at our own failures.

And so we did enough due diligence before we begun to make sure that when we launched it was right on and it has proved to be so we took the right market. We picked the right way to set up the fund. Everything has proven to be exactly as we had researched upfront. Now that's not the same. We haven't changed a little bit about how we might market, et cetera. But the reality is we have not done any major pivot and probably that's just the experience and such that Chris and I bring to table.

Chris: Yeah. And a little bit of luck, always, always a little bit of luck to realize, wow, this is really opportunistic and we've been able to stick to that theme.

Amanda: So what do you feel like that you did, right.

Chris: It's always easier to talk about all the things you did wrong. I guess one of the earliest turning points for us was that the launch and then the realization. You were about to go into a left tail event that was monumentally different than anything I'd experienced. I know this is dating myself, but I have actually been involved in four left-tail events.

So people who know of those major events, yes. I was standing in a Smith Barney office in 1987 while they were putting the ticker tape up on the wall because you had to read everything. They didn't have computers back then for what was going on in the news. So I got to see that as a kid and I was investing in running my own money.

So here we are in another different event and we had a lot of investors, a lot of money that had basically said, Hey, you know, I'm primed, I'm ready, love it, love the team, love the idea. And that'll dry it up that went away. I'll never forget I, you Brock. And I just jumped on the phone. I said, well, Brock, we're not going to have an anchor investor.

We're not going to get the money that we thought we had. What do you want to do? And his question was, well, what do you think we should do? And I said, we have the right product. We are bringing something that people are going to demand. Let's just go to work. And so we wrote our own checks. We did that short family and friends and family round amassed, everything we possibly could.

And we just started writing debt. That was probably the key right decision was not to give up, was to realize what we had created was working. It was opportunistic. And to just, even if it was baby steps at first, just get going and it turned out to be the right decision that led to a number of intros. And if anyone's out there and you're starting your fund, sometimes just get it started so that it's no longer an idea that you're talking about, but something real.

So when I talked to that next investor that I don't know where I'm introduced to somebody, I'm not pitching an idea, I'm pitching something to where I can show real loans, real returns. Real money, it's not ivory tower stuff. And that was probably one of the scariest at that point, because you're always worried about we're going to spend all our own money.

We're going to put a lot of work into this and we still do. And we're not out of that situation, but that, was probably the most pivotable right the point was right around March. What are we going to do?

Brock: It's a cliche, but we put our money where our mouth was. Yup.

Amanda: It's so interesting. Cause it's like, if you have the conviction, right. And you believe in it and you've planned it out and methodically planned it out, people think, oh, that's the hard part. I was like, no, you gotta start. And then the hard work starts.

Chris: Coming up with ideas and writing on the paper is really easy compared to really making it happen

I mean, making it tangible.

Amanda: Starting, you've got to start always lots of great ideas.

Chris: And don't be afraid of there's tons of little things that we did or that were wrong. And it's like, okay, you just gotta be flexible and move and get past it.

Amanda: Yeah, everyone makes errors just a matter of how big is that error. If you're making a ton of little errors, then great. You learn pivot, you keep going. So I think it's all part of the journey.

Brock: And go down the rabbit hole too much with that, Amanda. But that's an interesting point. You bring up about errors in that. One of the reasons we like, and we've been able to focus on capital preservation for this is because when let's say someone who buys an apartment complex that we fund, it makes a little error on it.

We're only talking an error on a, maybe a six or seven-hundred-dollar apartment complex or one that's a million dollars. Those are a lot more easy to recover from than some developer who's doing a $25 million project and they make an error. Also now you're upside down and that project is not worth what you lent on it.

And now recovering from that and getting principal, all your principal back for your fund is really difficult. Whereas someone makes an error again on this kind of thing. Well, the worst we take up in the property and there's a lot of buyers out there who want on a small apartment complex or small commercial at a slight discount, and we make our fund completely whole again with no loss principal.

Amanda: So I'm going to ask the last question I would love for both of you guys to answer. What do you think is your superpower?

Brock: This really is both Chris and I know you were kind of joking how this is your first interview with two of us but that is our superpower. It's that Chris and I have a long relationship already as friends.

And then when we came together, we have a deep respect for each other's area of expertise, but at the same time, there's enough crossover that Chris can very quickly understand what I'm talking about, about with loans or any of the other things that I handle as a COO. And on the other hand, when Chris talks about different parts of the fund, et cetera, because I have that finance background, it's not hard for me to go.

Yep. I get it. So we can be responsible for each other's area. We can watch over each other's decision-making and actually be able to weigh in and help each other, change our minds on things. So it is it's really that being together, that full transparency with each other, the decades of investment management, operations, risk management, regs compliance that Chris brings, and my real estate underwriting technology programming.

I could go on and on that we bring and we put together that's really our super power.

Chris: Yeah, I'll kind of make a joke here. As we referenced in our earlier conversation, Saturday morning cartoons when Brock and I were thinking about superpowers, and I guess you can kind of say we're a little bit of like those Wonder Twins from that old DC cartoon, you know, individually we're strong, but we found that when we combined our skills, that's where we can really make magic happen.

Amanda: Right. That's wonder powers. Activate.

Brock: Exactly.

Chris: Exactly. I'm glad someone knows that I wasn't going to go that far down the geek path, but I'm glad somebody did.

Amanda: I am a nerd at heart. Thank you. It's been a pleasure, Chris Brock. I hope to have you guys back on again and thank you for taking us on your journey.

Chris: Thank you very much.

Amanda: Thank you for listening to PrimeAlpha visionaries and innovators podcasts. As always, you can head over to prime alpha.com to sign up to our email list as well as check out our other podcasts.

See you next time.