In this video, we delve into the strategic ways entrepreneurs and investors can turn challenges into opportunities when faced with fundraising shortfalls.
Navigating the intricate landscape of business and investment requires adaptability, and we’re here to provide actionable tips and proven methods to not only overcome financial hurdles but to transform them into avenues for growth.
Whether you’re a seasoned entrepreneur or a budding investor, join us as we explore the innovative approaches to capitalize on fundraising setbacks and emerge stronger in the world of business and investment.
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Transcript:
Chris Bounds 00:00
I would imagine, especially given the the economic climate right now, and especially with real estate and interest rates, there’s probably a bit more of those opportunities popping up. And I, we’ve talked privately on with the short term debt, there’s a lot of multifamily over the past few years has been bought with bridge debt, which is two, three years with one year extensions up to five years. A lot of times, but those extensions aren’t guaranteed they’re usually performance based and in whatever reason, then at some point they’re gonna need to sell or refinance usually refinances.
Actually, lately it’s been selling has been the strategy because the market tailwinds. But refinance is usually the primary objective. So they can finish out their their business plan. So have you seen any uptick lately? Or are you are you anticipating any uptick in these type of GAP funds coming available on ongoing projects or new projects that are not able to raise because of market conditions?
Ethan Gao 01:04
Short answer, yes. longer answer, though, is I don’t generally prefer to be invested in distressed situations. I think if like somebody like you, that’s, you know, raising a fund right now. And if you can put in a flexible mandate, I think it’s quite possible that you’re going to see a bunch of deals that are distressed over the summer, where maybe they bought it a couple years ago, and now they’re cashflow negative, because it didn’t buy a rate cap, nobody anticipated rates going up, or maybe they just operated poorly. So they’re totally fine losing all of the investor money, or almost all of it, and they just want to sell it for the loan amount. And that might be a great opportunity for you to sweep swoop in and say, okay, cool. I’ll buy this at, you know, like 20% off of retail. And then now you and your investors can make all that money. I think those will exist. I haven’t seen them yet. But everybody says they’re coming.
And it’s quite possible they’ll come. For me personally, you know, most of the stuff I look for are these fundraising shortfalls. So if you just look at my opportunity set, and you just look at the stuff that people refer to me, which is not representative of the market at all, you would think like not like 99% of people can’t raise their money, like can’t raise enough money for closing. Because that’s what people know me as. And that’s what they refer to me. So like, almost all of my situations are like, Hey, dude, I got a great deal. But I’m short XYZ and I have you know, between zero to seven days left, right, so that that’s kind of the situations I look for. Another one, I guess I should mention, that kind of dovetails with this is, I’ve seen occasionally, with rate raises going so quickly. I’ve seen lenders actually come back right before closing and say, Hey, Chris, remember when I said, and I put it on a term sheet that I was going to lend you $50 million for your deal? We meet we actually met 13.
So go find an extra $2 million. That’s your problem now. And now it’s like way too late. You can’t get another lender. And even if you do get another lender, they’re gonna say the same thing. So now so this is when you call Ethan and you say, Hey, man, I need to close this right now. I got to just raise two more million after closing like he helped me. Yeah, and I don’t know if you want to talk about the loan guarantor KP side at all, but that’s also something that I do. And I get a lot of opportunities like that. And that’s where I see the other portion of deal flow. So for folks that aren’t familiar with being a key principle, where a loan, guarantor, you know, in a typical commercial deal, the lender requires that the lead sponsors show net worth that exceeds the loan amount, and they’re shown liquidity that exceeds 10% of the loan amount.
So for certain teams that either don’t have the net worth or don’t have the liquidity or don’t have either, or sometimes they might not have enough experience, then they need to bring in another person onto their sponsorship team. And that’s where I can play a role. I keep a very high percentage of my net worth liquid in my life insurance. Well.
Chris Bounds 04:01
I mean, ultimately, it’s a great option just just to have available not not to use it a lot. But I don’t know if this is the best example. You’re like, you’re like the rich uncle that doesn’t want to do any deals, but the one that you just really need them on and if it makes sense, yeah, you will consider it. That’s
Ethan Gao 04:17
generally the way I like to position myself and then I like to tell people, you know, I’ve made tons I made a good number of GAAP loans to sponsors that had famous KPS. And I was always a little bit surprised that they’re famous KPS that were willing to sign on the debt. We’re not willing to get fun them. But but that’s because, you know, maybe their business model is there. They don’t have that much liquidity for them to do that. Or it’s all restricted. Or they don’t even pay attention to the deal. They’re on. They’re on 50 with their students or whatever. So who cares? But I’ve always found that interesting. So you know, whatever always scares me.
Chris Bounds 04:50
I see that a lot too. And it’s like, you don’t have experience. They have tons of it, but like, who’s really running this Yep,
Ethan Gao 05:01
exactly, exactly. And I’m not trying to fault them at all. I’m just saying it happens. So whenever I get, you know, if I’m talking to somebody seriously about the the loan guarantor, and and I kind of just sense maybe they’re considering something else I just straight up tell him like, hey, the benefit of using me is if we’re short on fundraising, I’ll just fund the gap. So you have certainty of close right out of the gate, you pick some other loan, guarantor, I have no idea what they do, you know, they, they might do the gap, they might not have enough cash, they certainly won’t have as much cash as me. And then maybe they’re not willing to do it, or they don’t know how to structure or they don’t care. So it’s very different versus, you know, I professionally make DAP loans to teams. Yeah.
Chris Bounds 05:42
And that provides a lot of value to operators that, like when they’re presenting offers, like funds typically can get better terms than someone who’s going to syndicate because that the seller knows, hey, you’ve got cash in the bank. So if I was an operator, I would want to work with you, even if I wasn’t gonna work with you on every deal, but just don’t have that relationship and knowing that, hey, this is possible and potentially leverage that to get better deals. Absolutely.