Season 4, Episode 7 Finding Alternatives: Using Commercial Real Estate and Private Equity to Reach Your Financial Independence Goals

[00:00:00] Eric: Welcome to Don’t Retire… Graduate!: The podcast that teaches you how to advance into retirement rather than retreating. I’m your host and valedictorian Eric Brotman. And today we have a special guest, Brian Adams. No, not that Bryan Adams. There’ll be no, no acapella, but Brian Adams is the president and founder of Excelsior capital, where he spearheads the investor relations and capital markets arms of the firm.

He has 10 years of experience in real estate, private equity, and has advanced knowledge in best practices for strategic real estate investing. We’re going to talk to Brian today about how you can use private equity and real estate as a part of your investment strategy to reach financial independence and to graduate into retirement. Brian, welcome to the show.

[00:00:42] Brian: Thank you for having me.
[00:00:43] Eric: I’m sure no one has quipped about your name ever before,

right?

[00:00:48] Brian: You’re the first one today, but it’s early. So we’ll, I’ll let you know what the tally looks like at the end of the day.

[00:00:55] Eric: Very good. So this is Brian with an I for everyone out there, not Bryan with a Y.

[00:00:59] Brian: And you are, you are dating yourself a little bit. I hate to go there, but you know, people I work with, millennials, have no idea what this joke is. So

[00:01:07] Eric: Well maybe, maybe they’ll Google you, maybe they’ll find, maybe they’ll find some of your hits from the eighties, which I am now dating. I’m turning 50 Brian, which is alarming in and of itself. I’m a lot older than you, I think, but I’m turning 50. And that means that I’m allowed to, to crack dad jokes because I’m also a dad.

[00:01:24] Brian: I’m here for it.

[00:01:26] Eric: Well, we’re glad to have you on the show. Let’s talk a little bit about your background. I know you’re in Nashville, Tennessee. One of my favorite places in the world, actually. Tell us a little bit about how you got started on this journey. And what gets you excited about, about wealth building and helping people amplify their, their own resources?

[00:01:42] Brian: Absolutely. So I’m from New York originally. Met my wife in college in Connecticut. We both went to a small liberal arts school there. And my wife is a Nashville native. So we did the Northeast thing for a little bit. I went to law school in Boston and then like every other Nashville girl ever, she wanted to move back home. And so I’ve been here about 15 years and very serendipitous in terms of my entrepreneur journey. I practiced law for a number of years. I grew up, and I feel like everybody says this, but you know, upper middle class. My father was an attorney. My mother was a child psychologist, which is a whole different kettle of fish we can get into on the next one. And I I grew up comfortably, but I had no concept of what a family office was or what private equity was or what alternatives were.

My wife’s family has a single family office here in Nashville. And when I joined the board, after we got married as an ex-officio member, this whole world opened up to me through my father-in-law who’s the patriarch and through our CIO who helps us invest in, into private opportunities and just went on this crash course of, of learning and was very fortunate to have a great network through my wife’s family of people who were willing to just sit down and have coffee with me and, you know, real estate was something that the family had invested in for a long time. And I became enamored with the asset class, with the business. And I connected with my partner. Who’s also a New Yorker, married a Nashville native, and we started the company 11 years ago now. And it’s been quite a journey, but today we have 17 employees and almost $500 million of of real estate under management today.

[00:03:35] Eric: Fantastic. So, so we are, we have similar trajectories in the sense that, you know, I, I started BFG back in 03 and we’ve now grown to about 23 people and about 600 million in assets. So we’re, we’re running some similar, similar entities. However yours is very specific in terms of its in terms of not only its asset class, but the way in which you’re handling that. Tell us, tell us a little bit about why real estate makes such a difference. And why alternatives in general make a difference in a portfolio design in a wealth building strategy?

[00:04:09] Brian: Yeah, absolutely. And this is something where, you know, families have understood this for a long time, that if you want asymmetric returns, you need to take asymmetric risk. And what I mean by that is you can’t just do a 60/40 portfolio, right? If you want to create alpha, if you want to create return beyond what just the market will give you, you need to be in private equity. And I just think this concept of alternatives should really be reframed and it’s just investing, right?

If you talk to families in Europe that have existed for hundreds of years, multi- generational, there’s an adage there within the family office community that you should divide your money into a third into gold, a third into real estate, and a third into art. Right? Those are things that appreciate over time. They can provide you with current income and they’re very tax efficient. And, and I think those thirds of a pie are still applicable today, but they may just look a little bit different, right? So real estate, now we have a buffet of options because of sponsors and GPs like yourself and me that people can access.

And then you’ve got art, which now you can do NFTs and you’ve got masterworks and all these other abilities to have fractionalized ownership of these assets and then gold, maybe it’s crypto for you. Right. But conceptually, I think that’s a lesson that a lot of people need to take to heart because wall street has taught us or tried to teach us that we just need to do these index funds and everything will be okay.

But if you take a step back, bonds are not going to deliver for you and the market can provide some upside, obviously, but you need to have diversification if you want to achieve certain goals over the long term.

[00:06:13] Eric: Well, the good news is you’re preaching to the choir. You know, the, the challenging news is some of the strategies that you’re talking about and that we espouse are really not available to everyone. A lot of them are available to accredited investors or they’re where they’re available to higher net worth families or family offices, or… but more, more, these are available to, to more what I’d call upper-middle-class investors. Folks who have portfolios that need to be managed that don’t want to just hold an index fund and forget it. So can you talk a little bit about the access to these kinds of assets? Because I think, I think this is a world that is exponentially growing.

[00:06:54] Brian: I couldn’t agree anymore and this is hackneyed, but this democratization of access to alternatives, what I really view as the moat that wall street had created around private equity for the last 35 years is being disintermediated. So now through social media, through networks, through podcasting and blogs and webinars and YouTube, people now can educate themselves 24/7 and really learn about these different asset classes, different niche strategies. And it does take a little bit of work and there are some barriers to entry like you said about being a qualified purchaser, being a credited investor.

But I think more and more people are realizing that they can do that heavy lifting. They can do that homework on their own and they can find out about

these investment opportunities and these sponsors and it’s growing, right. If you think there are 13.3 million accredited investor households in America and that number is only going up. And roughly 3% have access or exposure to private equity or alternatives today, this is, this is going to be, I think the next frontier of investing. Where people have seen how private equities outperformed over the last 20, 30 years. And now everybody is going to start, hopefully gaining access, learning about the space and, you know, reaping the benefits of being an investor there.

[00:08:32] Eric: If there’s one thing we know from from, from understanding the financial world, it’s that there’s, there’s no such thing as a free lunch. And, and you talked about asymmetric returns and risk. I think a lot of folks are a little bit skiddish having gone through the great financial crisis and, and many of them, Y2K before that, and many of them black Monday before that. I’m dating myself again. But in terms of, in terms of the private equity piece, one of the challenges in this asset class, and there, there are several, one of them is basically complete illiquidity, which means you have to know what you’re doing in terms of your, your need for accessing capital and the other is the J curve. Can you talk a little bit about that for us?

[00:09:17] Brian: Sure. And I would like to kind of piggyback on top of that commentary. I don’t disagree. And for. A long time. We have been told that wall street and the wirehouses and these big banks are the quote unquote, smartest guys on the street. But they’ve managed to blow themselves up about every 10 years. And so, you know, I really pushed back, I mean, and I know some of these folks, I went to school with some of these guys and they are incredibly smart, but wall street at the end of the day is a is the Salesforce. I mean, they are they’re pitching product and they’re very, very, very good at it. They’re very creative.

But again, if they’re so smart, why do they continue to need bailouts by the fed and the government? And the retail investor, folks like us, seem to be holding the bag a lot of the time. Now that being said, I agree with you there, illiquidity and risks. And we think about risk in private equity and alternatives. I think it’s helpful to define it, right? So I view risk as permanent loss of capital, which is different than volatility, right? Things may go up or down. Some deals may work short-term. They may work long-term. But when I think about risk in my portfolio, and as a family, I’m thinking about things going to zero, and we certainly have had that in our venture and private equity portfolios.

Luckily, not in real estate yet. It’s proved to be a very resilient asset class. So that’s how I think about this. In terms of a J curve, it can be a challenging

concept. The way that I think about, and we have raised blind pool funds in the past, it’s this wonderful concept that once you start creating and accelerating return of capital, in other words, once I’ve, once I’ve given all of your original capital commitment back, and that investment continues to perform that hockey stick keeps going up, right. That’s that wonderful, infinite return concept that you get, potentially. But it does come with some risks that you mentioned.

[00:11:40] Eric: So one of the challenges in public markets, and I think we’re going to see more and more public companies go private. I really do, because it’s so onerous to deal with Sarbanes, Oxley and Dodd-Frank and all of the other regulatory hoops that you have to go through to be a public company today. There’s also this enormous pressure that every quarter, you have to hit your earnings and you have to make sure your multiples are right and everything else. And so you wonder why some of these companies seem to blow themselves up. It’s because in my opinion, it’s because CEOs are driven by the need to have a great quarter every quarter, and eventually you’re not going to, and that’s where the parachutes happen and that’s where people hold the bag. Am I missing something? Or is that sort of the, the trying to have immediate results every quarter is eventually not going to work.

[00:12:31] Brian: No. I agree completely. We internally pursued, potentially doing a re roll-up, recapitalization of, of part of our portfolio and spend a lot of time talking to other sponsors, other publicly traded C-suite folks, investment bankers, et cetera. And I being a public company right now is really challenging. And we know the statistics in terms of there are much fewer public companies today than there were 10, 20, 30, 40 years ago almost in a, in a exponentials sense and it feels like private equity and venture capital understand this. And that’s why you’re seeing these companies stay private longer and potentially never go public because they don’t want that, they don’t want that scrutiny, you know. It’s interesting because you look at WeWork. At some point when you run through all of the largest investors in the world, there does need to be some ultimate liquidity. And so public markets still offer that to many folks. But when you look at the performance of these companies, post IPO, they’re really pretty poor.

We, in our minds, I think say, oh, the S &P and Dow Jones and these indexes and these big quote, quote-unquote blue chip companies. But the turnover in the S&P is about 20% a year, right? I mean, you look at general electric, you look at Kodak, you look at all of these companies that were true blue chip value firms and things change.

Right. Sometimes it doesn’t have anything to do with the underlying business. It could be the whims of the market. And I think there’s a lot more going on in the public markets than people realized sometimes. And at least for me, I do have exposure in the public markets, but it can seem like a bit of a casino at times.

[00:14:33] Eric: Well, and, and I, I tend to be I’m, I’m not a fan of traditional index funds. I do like passive investing for the most part, because I do think cost matters. And I do think turnover can create expenses and taxes depending on the type of investment. And so when it comes to, you know, large cap US companies, I tend to believe that if we can pick the 400 of the 500 of the S&P that we like and just hold onto them, We’re probably better off than the mandated purchases and sales every time somebody leaves or, or, or joins the index itself.

You mentioned in our open, you mentioned that bonds weren’t going to, weren’t going to be the solution. I think bonbs are, are a time bomb right now in a lot of different ways. Not only because interest rates appear to be on the rise, but also because yields have been so bad for so long. And so it’s difficult to find a place to hide when cash is paying nothing. We’re not on the gold standard anymore. Bonds are paying next to nothing and have market risk and timing risk associated with them. And people don’t want to hold a hundred percent in equities and that’s where alternatives have to play a role. So we’ve started looking at private debt and private credit as well. Do you do any of that work in your private equity funds, too? Do you also do some private lending?

[00:15:42] Brian: We don’t do any in my day job at Excelsior, we are only doing common equity, but on the family side, interestingly, we actually, the liquidity event that created the family partnership was my father-in-law in addition to his, his day job at Vanderbilt being a trauma surgeon, took a company public in the nineties.

In the business debt, finance space back when that was a esoteric asset class. And so we have always had exposure to private credit, mez. And I think right now private credit is really attractive and it’s solving the same problem that real estate solves, right? People are cash heavy. They don’t want more exposure to the market. They need yield even if the fed says that inflation is transitory. If anybody listening has paid for private school, health care, or a home in the last 10 years, you know inflation is real and you, you need to keep up with, you need to fight that dragon of inflation through yield, through real, you know, monthly distributions and income and bonds are just, are just a losing proposition and have been for a long time.

[00:17:01] Eric: Well, and, and people talk about the golden age of bonds and that it’s been a 30 year bull market for bonds, which is kind of a bizarre notion since they’re, they really aren’t paying anything. I I’m old enough to remember when CDs in the bank were paying 11 and 12% and when mortgages were 16 and 17%. And, and so I think we have an entire generation of investors now, Millennials but definitely gen Z, but also millennials who don’t remember what inflation is cause they’ve never really seen it as adult humans. So, so when we start talking about the amount of money that it will take to reach financial independence, You know, we, we, we espouse that that to graduate into retirement means to have financial independence at any age, whether you’re 33 or 83. But in order to get there, especially if you’re a young person is going to require an amount of capital right now that on paper looks obscene it’s so huge.

But it’s because of the devaluing of the dollar, not only from a general inflation, but also from the government printing money and spending like, like it’s like it’s a Halloween candy being handed out. What do we tell young people? What are you telling young people, young investors, especially who are trying to figure out just how much it’s going to take to reach that level of abundance where work is optional. When inflation’s on the horizon and they’ve never seen it before, how do we, how do we communicate that?

[00:18:25] Brian: It’s a challenge. I’m 39. I’ve never experienced it. But talking to my father who, you know, when he bought his home, I think his mortgage rate was 14%. That honestly is unimaginable to me. I cannot conceive of an investing world where that type of inflation is happening and it’s going to be very challenging. But I agree with you. It seems like the white house that whatever party is in the white house has, has realized they can use their bully pulpit with the fed. And instead of going through natural cycles of recessions and recoveries, they realize they can just turn the printing press on and we don’t have to go through protracted recessions any longer. We can, we can solve this problem through modern monetary theory, which I think is a total joke. At some point, you need to pay your debts. And now the fed is in a trap because if they raise rates 200 basis points, we can’t pay our own debt.

Right. We become insolvent and you know, right now, treasuriesare clipping, you know, those sales are going through and, but the fed is buying them and, and we’ve, we’re in a real pickle, I think. So I am very bearish on the dollar. Very bearish on bonds long-term. I’m bearish on, on us debt in general. I still think it’s a wonderful place to invest.

I still think we have the most dynamic economy in the world, especially when you compare us to Western Europe whose demographics are really poor and in

Japan, which is going in the wrong direction. But I think a stagflation scenario is very likely and the fed is so worried about deflation, that I’m afraid they’re going to err on the side of, of inflation.

[00:20:28] Eric: So w we just, we just threw out a lot of jargon to a lot of people. No, no, no, no, I’m not. I’m not asking for an apology. I’m saying both of us have done that. So let’s, let’s bring this back to to a level where everyone can sort of wrap their head around a 14% more. ’cause you know, right now, if somebody gets three and a half percent, they feel like they’ve been taken advantage of because they saw somebody else get three and a quarter or two and seven eighths or something crazy.

So this is such a good time to be borrowing money long-term. It’s a disastrous time to be lending money loans. Which is what you’re doing when you buy a bond you’re lending money, potentially long-term. What are the banks and the financial institutions and intermediaries going to do when they’re paying 6% on certificates of deposit and they’re collecting two and a half percent on, on other types of debt. I guess they’re going to have to monetize and sell it, but they’re going to sell it at a loss aren’t they?

[00:21:21] Brian: There’ll be a lot of consolidation within that market where, you know, just like with 08, there’ll be a wash out. The well capitalized balance sheet folks, like a Goldman will gobble up some of these groups, but I agree with you. It’s a terrific time to be a real estate investor. We’re getting 10 years interest only on a lot of our commercial assets, which is wonderful for me as a sponsor and for my investors, because they can get that wonderful yield.

But for the bank, who’s originating the debt and for the secondary market. They sell these bonds to other investors who are maybe getting a 200 basis point premium on that. In 10 years I think they’re going to really regret these deals, but there’s so much pressure from the fed to put that money to work that they, they, they can’t sit on cash. And so they’re also in a bit of a trap.

[00:22:21] Eric: So up until 2007, There was a notion that real estate prices could only go up. And and so, you know, a lot of speculation, particularly residential speculation and flipping, and all of this was, was being discussed in every cab ride I took in every city I was in, I was hearing about the, the flipping of houses.

It reminded me of 1999, where cab drivers were bragging about their tech stocks. I mean, literally. And so we learned that in fact, real estate prices can change, especially in places like Florida, where it’s a lot of second homes where

folks are more likely to just say, here are the keys I’m out. And it created this, this enormous issue. On the commercial side 2008 and nine wasn’t as disastrous for commercial, but COVID has played a real, a real difference in office space. And I’ve heard some folks say the office space of the future will be totally different than it is today because people can work remotely. And I’ve heard other people say, well, wait, there’s going to be a need for more space because people are going to want more, more square feet per, per employee for health reasons. Is, is the traditional office cubicle farm over, are we done with that?

[00:23:36] Brian: Who knows an unsatisfying answer to a hard question. [00:23:41] Eric: That’s why I’m asking you. You’re supposed to have a crystal

ball,

[00:23:44] Brian: right? A must have left that on the plane last night. But yeah, if we all suffer from recency bias and we think the way we live the last two years, this is how we’re going to live the next 10 years. And that’s just simply not the case. Right. And so I personally believe there’ll be winners and losers in the office world. And I’m speaking from a place where we have $200 million worth of suburban office, mostly in the Sunbelt, Southeast, and it’s, it’s done decently well. But there is a lot of wait and see by these larger employers.

Things were really gaining momentum heading into the summer. And the Delta was a, was a bit of a break on that momentum, but it’s picking back up. And to your point, I think the way we use office will change, but I don’t think you’ll see a secular decline in office as an asset class. I think COVID in quarantine and lockdown has taught us that we can be efficient remotely, but we really lose out on the dynamism of teamwork and creativity and that energy of being together. That communication is not transferable to being a hundred percent remote. And so I think you’ll see maybe some groups that don’t have a single mothership in San Francisco or New York, but they’ll have a distributed workforce across multiple markets in smaller settings.

And you’ll see office used as a place for team meetings and group sessions, and then also places where people can really focus and get work done. I think a lot of people who are prognosticating about the future of office are 65 year old CEOs, but the millennials and gen Z’s that I work with who are living in apartments, they don’t really have a dedicated workspace.

And they like to work. They work hard. So I think you’ll see this bifurcation where there’ll be these, these settings where you can get group work done. And then you’ll see some, some really kind of focused work areas where people can

actually get product out the door. So that’s my 2 cents, but it’s hard to know. I would be really concerned if I owned a lot of office in New York city or the bay area. I think that will be a very challenging time for them.

[00:26:20] Eric: So there’s lots of different ways to invest in real estate and lots of different sectors. And it’s beyond the scope of the show to break down, you know, all the different ways to do this in terms of do you want industrial properties and warehouses and distribution centers? Do you want retail? I can’t imagine that there’ll ever be another shopping mall built again, maybe I’m wrong. But, but it sure seems like it, it was dying anyway and COVID killed it. There are other spots where that’s not true. Multifamily, certainly still interesting. There are lots of different ways to look at this, but for the general investor, for the general listener, what is the best way to learn about these types of asset classes? Some of them can learn certainly from their financial advisors. We certainly do our best to educate our clients on various things. But where can someone who maybe doesn’t have that dedicated advisor learn more in a, in an objective general way?

[00:27:13] Brian: And that’s what’s exciting about what’s happening right now is we alluded to this earlier. This information is all out there and it’s free, right? Wall street used to have gates up. And, you know, you couldn’t really access private equity. You couldn’t learn about these things unless you got invited to the JP Morgan conference or you’re in the conference room or et cetera, but now it’s, it’s out there in the ether, right?

Podcasting, blogs, books, webinars, social media means that you can find me on LinkedIn. Shoot me a note. Hey, I want to learn about X, Y, Z, what you do. Well, sure. Let’s set up a quick call, right? It’s out there for people to learn about. And my advice for folks who are just getting into the space is invest in something that you know. Invest in something that you feel comfortable with.

Have an allocation going into the year that you want to put a hundred dollars to work. And you want to invest in four opportunities? So ballpark one a quarter, and if you live in apartment and you live in austin, Texas. Well, see if you can get in on some Austin, Texas apartment deals, right? Go to your backyard, go to what you’re familiar with and listen to your gut. I mean, real estate is hyper- local and so that’s where I would start. I wouldn’t try to just pick the winners. I’d be very cautioned about over allocating to one opportunity because now you really can spread it around. Minimums are lower. Some of these larger conferencing websites I think have challenges from their business model perspective, which we can get into, but I think they do an excellent job of creating educational content and giving people access for very low minimums

and you can start to learn, okay geez, I did this development deal and it went sideways. That’s too risky for me. I can’t stomach that. I want to go something more, stabilized, more cashflow oriented with maybe less upside, but I just, I feel more comfortable there. You can start to learn what you like, what you don’t like. And so I would just have that be part of your homework assignment is a few hours a week listen, to shows like this, go online and then start to build some of these relationship with some of these sponsors or investors like myself.

[00:29:35] Eric: Brian, I think you just said that this was the homework assignment. I got to tell you we’ve promised all of our listeners, there would be no homework, just extra credit. So I think you’ve just given us our extra credit assignment for the episode. If you have another one you want to give us, this is the time cause we’re, we’re running out of time and I want to make sure people know how to get in touch with you and how to learn more. But. Is there other than the investing in something, you know, and are comfortable with and that’s hyper-local and, and known to you, is that your extra credit assignment or did you have another Pearl of wisdom for us on the way out?

[00:30:04] Brian: I’ve got something else. My homework, my extra credit assignment for folks would be, especially considering the orientation of this show. Think about your journey into retirement or whatever term you want to use there and do what family offices do, which is okay. I’m trying to create multi-generational wealth. And even if you don’t consider yourself a multi- generational investor, you can still have a set time horizon, right? I’m going to live until I’m 90, or I want to achieve this by the time I’m 60, 70, whatever. So you’ve got to set time for. You have a spend rate, right? You have overhead. So let’s peg that at 4%, 5%. You peg inflation at 2%, 3%, and you go and look at what stocks and bonds are going to give you, which we touched on.

Right? So if you say bonds are going to be 2%, the market’s going to give you four, you put all these things together in a very simple spreadsheet, and you realize pretty quickly to maintain your quality of life which is what we’re talking about here, right? And considering your overhead, well after taxes and expenses, you have your nut, which you need to cover, right? Your net returns. And in order to get there, you have to be exposed to private equity, to commercial real estate, to alternatives, because you’re not going to be able to get eight to 10% annually by just going into the S &P index fund.

[00:31:46] Eric: Sage advice, brian, I I’ve enjoyed our conversation. I’m sorry it’s ending already. There’s a lot. I know we could all learn from you and your experience. I’ve thoroughly enjoyed it. How can folks learn more about you and about Excelsior if they’re interested in knowing more?

[00:31:59] Brian: Yeah, absolutely. I appreciate the opportunity to come on. Like I mentioned, I’m very active on LinkedIn. If you want to look me up Brian Adams, Excelsior Capitol, shoot me note. I’d be happy to connect and go to the website. Excelsior gp.com and we have a lot of resources. And encourage people to reach out if they want to learn more and always happy to help however I can.

[00:32:20] Eric: Brian, thanks for being on the show. You were a great guest. I’d like to thank all of you for listening. If you like what you hear, please subscribe to our podcast and leave a review on apple podcasts or wherever you listen to your favorite shows.

Please also check out our books, workbooks and online financial literacy resources at brotmanmedia.com. We’ll be back next week with another installment of office hours and in two weeks with another engaging guest. This is your host, Eric Brotman reminding you: don’t retire. Graduate.

[00:32:48] Narrator: From this day forward let us begin changing the way we view retirement. Today I implore you. Don’t retire. Graduate. Visit our website at brotmanmedia.com to subscribe. And please like us and post comments on social media . Securities offered through Kestra investment services, LLC Kestra member FINRA SIPC investment advisory services offered through Kestra advisory services, LLC. Kestra AS and affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with Brotman financial or any other entity discussed.