Our Next Event: Alts Expo - Oct 4th
Family offices have historically used alternative investments to protect and grow their wealth, but alts are now going “mainstream” with many more self-directed High Net Worth investors.
Ben Fraser, managing director at Aspen Funds, joins Andy Hagans to discuss how everyday accredited investors can invest like a billionaire.
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- An overview of Aspen Funds, and the story behind the company’s founding.
- Details on Aspen Funds’ macro-driven approach, which emphasizes the importance of timing and market tailwinds/headwinds.
- How the team at Aspen Funds was able to find value in the distressed debt sector, and later establish a successful income fund.
- Why Ben believes commercial real estate may experience a “reset” in the next twelve months (but not necessarily a “reckoning,” much to Andy’s chagrin).
- Where value can be found in the multifamily sector, even during this period of dislocation and relatively compressed cap rates.
- How to find and subscribe to Aspen Funds’ podcast, Invest Like A Billionaire.
Featured On This Episode
Today’s Guest: Ben Fraser, Aspen Funds
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
Andy: Welcome to the show. I’m Andy Hagans, and today we’re talking about how to invest like a billionaire, with alternative investments. Joining me is Ben Fraser, who’s managing director at Aspen Funds. Ben, welcome to the program.
Ben: Hey, thanks so much for having me, Andy. Looking forward to the conversation.
Andy: And we have a lot to talk about today, with different asset classes within alternatives. But since you’re managing director at Aspen Funds, could you kick us off with a brief introduction to your company?
Ben: Yeah, yeah, absolutely. So, those that aren’t familiar with Aspen Funds, we’re a private equity sponsor. We operate in multiple asset classes. We actually started 10 years ago, coming out of the Great Financial Crisis, and finding a very unique opportunity in distressed debt, as there was a lot of it back then. And continue to operate that business today. Been operating several funds for about a decade. And then several years ago, we started expanding the offerings that we’re doing for investors into more traditional real estate asset classes, and even energy, oil and gas deals, and I can talk about that in a little bit, but really our whole approach is what we call kind of opportunistic or macro-driven alternative investing, right?
So, you have kind of your big subset of investing in stocks, bonds, mutual funds, and then alternatives kind of get this, you know, bucketed into another category. But we take it a step further, and we really wanna invest in what we kind of call the economic tides. And so, as investors, we’re kind of taught that as long as I just invest, you know, dollar-cost average, and just invest every month into my, say, mutual funds, eventually I’ll come out with a, say, 8% to 10% return on stock market and that’ll be great, right? But the challenge is timing matters, right? And the asset classes that you choose to invest in, and the economic cycles that you’re investing in, really matter. And so being able to pick, you know, the economic tides, and understanding where things are going is as important as understanding how good a deal is, how good a sponsor’s track record is, right?
And so we can talk more about why we think that, but ultimately, that’s kind of how we first look at all of our deals and determine, you know, where we want to be positioned, really. And so it’s kind of, we call kind of a more family office approach, where we’re not just picking one vertical, say, multi-family, which has had a great run, and we’re still somewhat bullish on certain multi-family deals, but it’s changed, right, from two years ago. And, you know, versus a sponsor that kind of picks one asset class, and they just do that, you know, until they’re blue in the face, and, you know, things can change, we first look at what are the things that we think are gonna perform well given the current economic environment, and then position accordingly into those asset classes.
Andy: Yeah, I love that, because, I mean, as you point out, well, first of all, when you mention the tide in, tide out, it’s like, immediately jumping into my mind. I’m like, well, is the tide coming in or is it coming out? But it depends on the asset class, right? And I think you’re right. Like, if I’m a self-storage sponsor, or if I’m a, you know, whatever, a farmland sponsor, I have no choice. Like, I kind of have to be optimistic about that asset class. Like, what am I gonna do?
Say, like, “I hate farmland. By the way, that’s all I offer is farmland.” You know, like, obviously… Now, that’s not to say that you can’t have a core conviction in an asset class and focus in on it, but the opportunistic mindset, that macro-driven mindset, that really resonates with me because even as an entrepreneur, you know, I was talking with an investment banker last week, and he asked me about timing, and he asked me about some of the businesses that I built and exited. And he said, “Andy, if you could build that business again today, and start it today, would you do it?” I was like, “Oh, heck no.” Like, it wouldn’t work. And he was like, “Why?” And I was like, “Well, timing, because we built that 15 years ago, and we had all these external factors that are ultimately out of your control.” You know? So, you know, what you just said about your philosophy, it really resonated with me. It just sounded, like, honest, like, we understand there are all these things outside of our control, and a big one is timing, right?
Ben: And timing’s so important. I mean, intuitively, as investors, we know that it’s important, but for some reason we think we can’t time things, right? Because the mantra is “you can’t time the stock market,” right? And I think there’s this conflation a lot of times of the stock market and the economy, right? A lot of people, “you don’t know where the stock market’s gonna go.” And that’s very true to an extent, right? Because the stock market is really, you know, going up and down based on sentiment and, you know, more short-term reactionary things to what’s going on. But the economy, like, you can look at these, we kind of differentiate between waves and tides, right? Waves are kind of just this kind of constant ebb and flow in a given day. And a tide is really what are the longer-term things that are happening, you know, underlying and underpinning what is economic activity, that you can have a pretty good sense and a pretty high level of confidence is gonna go a certain direction, right?
So, I’ll give some examples. Like, one trend we’re following right now is reshoring and re-inventory. So, we’re very bullish on industrial right now for that reason. You know, after COVID, there’s been a massive shift of manufacturing and warehousing, you know, big Fortune 500 companies that are shifting it back to the U.S., and nearshoring into Mexico. And to reduce the reliance on the kind of supply chain issues that we all discovered in COVID, right? Another one we’re looking at is oil and gas. There’s a massive shortage of production, and decreasing production. Meanwhile, energy and oil and gas demand is projected to increase over the next, probably likely several decades, as we’re kind of transitioning to alternative energy. And so there’s these kind of big trends that you can see. Maybe the current market pricing doesn’t reflect all that, but you can understand, you know, where the tides are going, and position yourself accordingly.
And we all, like I was saying, intuitively understand how important that is, right? It was a really, you know, bad time to be investing in single-family real estate in, you know, 2007, right at the peak of the market. But in 2010, probably a pretty good time to be in single-family real estate. You know, similarly, before that even, you know, going into kind of the whole tech space. So, my father, who is one of the founders of Aspen, was in tech. He started a tech company in the late ’90s. Really good time to be in tech, right? Anything with a .com at the end of its name would just skyrocket, right, from venture capital, and valuations and everything.
2001, very difficult time to raise money and to be publicly-traded as a tech company. And I would argue, you know, slightly, to a certain degree, multi-family, especially, kind of, value-add multi-family, several years ago, we’ve seen a massive cap rate compression, or a massive increase in values over the past several years, bought with bad debt, that, you know, there’s gonna be some level of reckoning in some of those deals. And so it’s, timing matters, and you can’t always be exact, you know, peg in the bottom and exact peg in the top, but you can have a pretty good sense of these cycles. Because, in private equity, you know, one of the knocks it gets is it’s illiquid and slower-moving, but that also benefits those that are paying attention, to where you can be able to kind of time some of these things.
Andy: Yeah, you’re right. You’re never gonna time it perfectly, but it reminds me of a Warren Buffett quote, that I don’t remember, you know, the exact quote, I’ll probably butcher it, but it’s something like, “I’ll take an average manager in a good business, or a business with good underlying economics, versus the world’s best manager in a business with bad underlying economics.” You know? And like, the same…
Ben: Yeah, 100%.
Andy: The same thing with timing, you know? Like, it’s okay to be lucky, but, you know, you have to realize you can’t force all of these external factors. Like, they are what they are. And some of them, it’s almost like you see them playing out in slow motion. And because they’re in slow motion, you know, you almost tend to shut them off, or not account for them, or… Like, that, you know, the nearshoring trend that you mentioned, and, you know, we can kind of see this happening in real time. We know it’s not going away. Like, for a variety of reasons, we know it’s not going away, right? And so that’s an example of some… It’s not gonna flip tomorrow, and suddenly reverse tomorrow. Like, we can price that in for the next probably 5 or 10 years.
Well, I love that mindset, and I wanna ask you about your podcast, because I think this is interesting. You know, your company has a podcast, and we’re talking ideas here. So, your podcast is titled “Invest Like a Billionaire,” which I think is an awesome name. I mean, we started “The Alternative Investment Podcast,” and a short time later, I found your guys’ and I saw you were covering a lot of the same stuff. And immediately, I was like, “Well, they have a way better name than my show.” I was like, “That’s no contest.” But so, I’ve listened to several of your episodes, and I don’t actually listen to too many podcasts, just because of time limitations, so I think that’s a pretty strong vote of confidence.
I love that you talk about ideas, and theses and, you know, you’re transparent about it, like the way we’re talking now, about timing. And not every asset class is a great asset class all the time. The timing matters. Why did you decide, as a sponsor, you know, as an asset manager, as a fund manager, why did you decide to launch a podcast? Because I think a lot of fund managers might be afraid to commit to that, or afraid to do that, or afraid to be that transparent.
Ben: Well, I appreciate the shout out, and definitely depends on the day on how glad I am we did it or not. Because it is a lot of work. I mean, we are, you know, an active operator. I could turn the camera around here and show you a lot of our team members here that are doing deals, and managing deals, and finding deals, and put them together. So, it’s a lot of effort for us, but we made a decision a long time ago, because we kind of saw this early trend that kind of plays into the theme of your show, alternative investing, right, where, with some of the recent, you know, regulation changes, and just the ways that things were moving and allowing more access to these, you know, private equity type deals, we really wanted to commit to going after and helping the retail high-net-worth investors be able to invest in these asset classes that, you know, the billionaires, the family offices, the endowments, the pension funds were already investing in, for decades and decades, with great success, right?
And so, the whole premise of our show is to educate, kind of, the retail investors, and say they have a net worth of, I don’t know, $2 million to $10 million. So, they’re too small to be, like, a family office, where they could hire, you know, full-time staff to manage their portfolio. But they have some, you know, additional net worth, and some investible assets that they want to get, you know, better returns, better diversification from just being in stocks and bonds. And so, yeah, our whole goal of our show is to just educate investors around these types of investments, really from an operator’s perspective, and, you know, from the things that we’re doing and seeing, kind of boots-on-the-ground level, but then also bringing in a lot of the economic, you know, theses that we have, and, you know, trying to help set that stage for, “where do I put my money?” right? And we’re not advisors, so I can’t give you any advice, and I gotta give the caveat, right? It’s, you know, purely informational and educational, but that really is our goal, is very aligned with you, is we wanna help people become better investors.
Because, you know, there is a lot of murky waters. There are some bad actors out there. There’s a lot of I think just hesitation for investors to feel confident in making investment decisions in this world, right? Because, so much of the time, if you’ve been doing stocks, bonds, mutual funds, you have a financial advisor, it’s, you know, you can feel a conflict because, well, I don’t know much about this. I don’t know what they’re doing. And you can feel at a loss of understanding and having confidence to be able to make decisions for yourself. But the reality is, it’s not terribly complicated as you start to peel back the layers, right? There are some of these kind of core concepts you have to understand, like timing. You have to understand, you know, is it a good time to be in this asset class or not? What are the big tailwinds or headwinds that that asset class is facing? You know, how do you do due diligence on a good operator? You know, what makes a good operator? How do you make sure they’re a good operator? How do you know they’re not a Ponzi scheme and, you know, a big scam? And then, you know, really, the deal-specific stuff. How do you know it’s actually a good deal? Right?
Everyone says they’re underwriting conservatively. How do you really know that? Right? And there’s some kind of core things that you can begin to understand, and just get a sense of confidence. So, that was a very long answer, but, yeah.
Andy: Sorry to interrupt. That last one, I think, is super important, though. This is the thing that I think is really interesting about your podcast. You know, is this a good deal? How do you do due diligence, as an LP, as a high-net-worth individual investor? If I’m not a multi-family sponsor or operator, it’s really hard to underwrite a multi-family deal, right? And I think a lot of times, what we tend to revert to, like, I think this is okay, is to do more of the due diligence at the sponsor level, and, like, you know, realistically.
No, in a perfect world, don’t get me wrong, in a perfect world, you know, I’m underwriting every deal you put before me, that Aspen Funds puts before me as an LP. I’m firing up a spreadsheet, and I’m testing every underwriting assumption, and I’m recreating an entire…you know, but in the real world, 99% of LPs aren’t doing that. But what we can do is look up your track record. How long have you been around? How many deals of this type have you done before, you know, with your existing fund? You know, what’s been the result for LPs in your existing or your prior funds? That type of due diligence at the sponsor level, I think, is really important.
And back to the podcast, I think the interesting thing, what I was gonna ask about, I think it’s a really intriguing strategy in the sense that anyone who subscribes to your show, they’re listening to you, you know, week in and week out. I think it’s over a year old now, I believe. It’s, you know, you guys have, like, 80 or something episodes. Anyone’s who’s listened to consecutive episodes over time, you’re building trust with that listener, with that investor. Like, you’ve never even met them, right? But they may have heard you speak, for hours now, about different asset classes. Do you find that that builds trust with prospective LPs? Like, have you actually gotten, you know, new LPs or investors who found you through the podcast?
Ben: Oh, yeah. I mean, absolutely. It’s definitely a positive, you know, benefit of it, right? And I think so much of what you’re saying is exactly right. Where, how do I know these are good operators to invest with, right? And part of it’s that trust curve, and how do you kind of get up that trust curve and feel confident, you know? And I think there’s no better way. Like, if they’re listening to me talk about our investment thesis, and hearing how we do things and how we look at things, you’re gonna get a pretty good sense of, do I like these guys or not, right? And so I think it inherently builds trust because we’re explaining very, you know, transparently, here’s what we’re doing, here’s how we’re doing it, here’s how we look at things.
And we’re also investors ourselves, right? You know, part of the reason we do our own approach of this kind of more family office model is we’re deploying our own capital, into every deal we do. And, you know, the lion’s interests, it puts us in that perspective of, you know, do we wanna write this check that we’re asking investors to write too? And so, you’re exactly right. I mean, it helps build trust, and, you know, when I think about it, hear the positive responses, it definitely makes me excited to keep doing it more. But as you know, these podcasts, they’re a lot of work.
Andy: Oh, yeah. They are a tremendous amount of work. To me, it’s just such an interesting and welcome, I guess, effect of the, let’s call it the 506(c) revolution. And really, it’s even broader than that, you know, some of the deregulation, and removing barriers to access, you know, the intermediaries between the sponsor and the ultimate retail investor. And if the investor wants to do everything through an advisor, or through particular institution, that’s great. You know, that’s fine. But it’s also great if they want to have that direct relationship. And so, it’s a very efficient way, you know, to communicate. It’s a more enjoyable way to, you know, communicate. I mean, I think a lot of investors, you know, that self-directed, high-net-worth avatar, you know, they enjoy that kind of content and, you know, not just, “we like this asset class,” but why? And let’s talk about it, you know. It makes you feel almost like you’re part of the tribe and you’re part of the story as an investor.
Ben: No, yeah, absolutely. I think, you know, so much of the time, like, what we’ve found, and we work with a lot of advisors that send clients, and we work with them, so it’s, you know, nothing against advisors, because I think it’s more just a function of the overall financial system where, just, investors feel at a disadvantage, where they don’t feel like they actually have the ability to make good decisions, right? They just feel like this is, you know, too complicated for me to understand, and I’m just gonna trust somebody else. But what I think you kinda alluded to is this 506(c) revolution, the self-directed investor. Like, we call them the do-it-yourself investors, right? Or people that want to have more involvement in their own, you know, managing of their assets.
And, you know, I think about, like, how hard people work to build up their nest egg, right? How hard people work on building their career, on saving that extra couple bucks, you know, and, you know, trying to maximize their income and minimize their expenses. And they spend their whole life doing that, and then they just pass off what they’ve worked so hard to, just, blindly to someone else to manage for them, right? And I don’t think there’s anything wrong with that model, but I think you should be expending the same amount or more energy, focus, intention with managing and growing your portfolio, your investments, as you do making the money to go invest with it, right? And so I think that’s a mindset shift that is really changing a lot.
And we’re seeing a lot more investors realize, “Hey, I actually can do this. Actually, I like getting involved. I like talking with the sponsors. I like hearing what they’re doing and seeing their process.” And I think people surprise themselves with, it’s not actually that complicated once you start doing it. You get a couple reps in, you do a couple deals, and, you know, start small, start slow. I always tell people that, you know, you’re probably not gonna do the same deal you did as your first deal you will, a year, couple years down the road, right? Because things change and your perspective change, and things that are important to you as an investor. So, absolutely. I think it’s, you know, it’s important for people to take that ownership, take that mindset of I want to really be involved in it. Because the more you do that, the better results you’re gonna have. Absolutely.
Andy: Yeah. And, you know, I’m right there with you. Like, I value financial advisors, and to me, that’s just a personal decision. It’s not one size fits all, whether a person’s 100% self-directed or they work with an advisor, or even a team of multiple advisors. But at the end of the day, it’s your money. Nobody’s gonna care more about your money than you do. You’re gonna care… You know? It’s like, kinda like no one’s gonna love my kids more than I love my kids. They’re my kids, you know? So, I’m not saying money is like my kids, but you have the most skin in the game. You have the highest…
Andy: …stake. Well, the concept of your show, the hook that pulled me in, like, I saw the hook, like I said, I was like, that’s a stroke of genius, “Invest like a Billionaire.” Well, begs the question though, how do I invest like a billionaire? Now, I think, you know, a big part of that is invest in alternatives, alternative investments, some of the largest family offices. And I know in your show you cover a lot of alternative investments. But, you know, you cover these macro events and macro theses. Is that a big part of investing like a billionaire, kind of that accounting for timing, and really thinking through the current environment when evaluating asset classes?
Ben: Yeah. I mean, I’m a little bit biased because that’s kind of our whole approach, right? Where that’s kind of how we started. And that’s really, I mean, the more that we’ve looked at how the billionaires invest, how the ultra-wealthy invest, they’re paying attention to these things, right? Because, sure, I can stuff money away into a low cost ETF, and just dollar cost average, and I can get decent results. Like, that’s something that’s proven to work. But eventually, if you’re trying to get into the, you know, couple-million-buck net worth, you wanna get more diversification, right? If you’re 100% in public equities and bonds, you know, correlations, over time, have gone pretty close to one. Like, you know, we just saw last year, I think 2022 was the worst, you know, performance of the 60/40 portfolio in the past 100 years, right?
Ben: And not to say that it’s not gonna work this year or next year, but, you know, diversification, to really get true diversification, you have to go a mix of public and private. And what we’re seeing with all these ultra-wealthy is they generally have at least 50% plus into private equity, real estate, venture capital, and hedge funds. And so, that’s really kind of core to how they’re doing it. And, you know, I would argue, you know, the higher net worth you have, the more you can allocate over there. And if you’re just at, say, a million dollars, you probably don’t wanna put 50% of that probably into private equity deals, especially if you’re starting out.
But as you kind of continue to go up that spectrum of net worth and growth, you know, having higher allocations makes more sense. But again, going back to some of the thesis behind it, you know, I think what the Warren Buffett quote that you, you know, said, whether it was butchered or not, was right, in that, you know, I’d rather be in an asset class that has tailwinds supporting it, with an average manager, an average sponsor, than an asset class that has every headwind imaginable with the best operators. Because when you have tailwinds, when you have economic tides behind your back, you know, a rising tide lifts all boats, right, it creates margin.
You know, when we’re underwriting deals, we’re trying to be as conservative as we can. We’re adding a lot of contingencies, we’re doing all these things, but ultimately when you’re doing and operating a deal, things don’t always go according to plan. And I would rather be in an asset class that has a lot of tailwinds, that creates a lot of margin, so that it’s gonna cover over, you know, the things you can’t plan for, right? And so it helps create a lot of, you know, more upside potential, more capital protection, and ultimately I think it’s more fun too, to pay attention to these trends going on, right?
Andy: Yeah, 100%. It’s, you know, I’d rather be lucky than skilled, I guess, maybe, is another way to put it. But it’s not luck. I guess, you know, what you’re talking about, it’s not luck at all. It’s thoughtfulness, and it’s flexibility. It’s not, you know, let’s say you hit age 35 and you’re a millionaire, and I’m gonna invest in alternatives now, because, you know, now I can. Well, don’t just pick an asset class and say, well that’s my, you know, I’m gonna invest in multi-family for the rest of my life because that’s the one I like, or, you know… I mean, you could do that if you want. It’s your money. But, you know, I would advise folks to seek value, you know, and look at different sectors, different asset classes, see where the value is right now.
And I wanted to ask about some of your specific asset classes that you guys are in. One of them, you know, I’ve had several guests on lately in private credit, or in income, and I’ve made the comment, it seems to me that the value in income funds, in private credit, private debt, it’s a very strong value right now, right? Like, the spread that it represents and the amount of income that you’re getting relative to the amount of risk, you know, again, depending on the product, depending on the sponsor, there’s a lot of products out there that have very strong underwriting, that are asset-backed, that have very strong yields. And, you know, it’s not a free lunch, but it’s the closest thing maybe, or one of the closest things you’re gonna find. So, why don’t we start there? And I know Aspen funds, you’re in several different asset classes, but your original fund was an income fund, is that right?
Ben: Yeah, yeah, absolutely. So, like I mentioned, you know, Aspen Funds was started 10 years ago, and really, coming out of the Great Financial Crisis, saw an opportunity in distressed debt. And so really, we’re buying these mortgages from banks, hedge funds, and other sources, at discounts to what they actually owed. And so we started doing that and having some great success, and then eventually created our Performing Note Fund. So, we would, you know, buy these distressed notes that are not being paid, or called non-performing notes. And inevitably, you know, certain percentage of those, they get back on track, they get caught up, they wanna, you know, figure out, work out a deal. And because you have so much margin, because you’re buying it usually about 20 cents on the dollar, so a pretty big discount, you can really help people get them into really…
Andy: So, Ben, this… Sorry, I was thinking private credit with an income fund. It sounds like this is something far different. This is more…
Ben: No, I’m getting you there. So, I’m giving you the genesis.
Andy: Okay. Okay. Fair enough. No, this sounds exciting. I heard 20 cents on the dollar. I’m like, well, that excites me in a different way than private… But okay. Go on, go on.
Ben: Yeah. So, we still do that. I would say right now there’s not a lot of distress in the system, while, you know, that remains to be seen if this year or next year we’ll start to see some of that, but…
Andy: Fingers crossed, right? Fingers crossed.
Ben: Yeah, you always feel bad to be hopeful for that, but in our position.
Andy: Hey, I don’t feel bad. I mean, you know, just, as an investor, just speaking as an LP, whatever, with a microphone. Personally, I just think that whatever you wanna call it, a reckoning, a reset, it’s due. But go on. I’m sorry to interrupt. Go on, Ben.
Ben: No, no, I’m getting you too excited about that, or not what I’m trying to say, but ultimately we started seeing these performing notes, where these are, you know, really, you know, good, performing mortgages. These are single-family properties predominantly, with really good equity positions, and really consistent payment streams. And we’ll buy those. We started that 10 years ago, and that fund has grown now to close to nine figures in equity, and just very consistent, very boring, in a lot of senses. And we, you know, have never missed a preferred return payment in 10 years monthly. Yeah.
Andy: So, these start out as distressed, and then a portion of them end up being higher quality, and it’s the higher-quality subset that go into that fund?
Ben: Yeah. So, we have two different funds. So, we don’t buy any non-performing notes in that income fund. But in our other funds, we could buy from our other fund, and then we have other sources. We have about two dozen sources that we buy these notes from, whether we’re the ones that are reperforming them, or another hedge fund is reperforming them. We also will purchase, you know, bridge debt, originate bridge debt. So, there’s different kind of categories within that. But the point is, these are all performing mortgages, and generally pretty healthy equity positions, and we pay out a 9% return. So, it’s nothing crazy, but from an income standpoint and a consistency standpoint, it’s pretty attractive. Right?
And so, what I think is interesting right now is I think private credit is, should always have a portion of your portfolio because, you know, you’re lower on the capital stack, meaning you’re taking less risk for the returns that you’re getting. And, you know, capital loss, capital preservation is generally, you know a lot more likely there. And especially right now, I think why private credit is getting a lot of attention is because people are concerned, right? There’s gonna potentially be some, as you said, a day of reckoning in some of these deals, and people concerned about losing some capital, and so they wanna go further down the capital stack. And that’s something I think, you know, is one of a core principle. It’s pretty basic to understand.
But as you, you know, do more of these deals as a LP, understanding where are you investing in the capital stack? What does the capital stack look like? And the capital stack, in my opinion, is probably the biggest driver of a deal’s performance, right? If you have bad debt on a property, it doesn’t matter how good the deal is, right? It’s a bug heading for a windshield, basically. So, you know, all that to say, yeah, we have, this debt fund has been going for 10 years. It’s been a great, great fund, and people are starting to get more attention, right, as people are more concerned about capital preservation instead of just getting the maximum level of returns.
Andy: Yeah. And, you know, one thing I like about you guys at Aspen, and looking into some of the other asset classes that you’re involved in, just that flexibility that you’re not all equity, you’re not all debt, I feel like it almost keeps you more honest, or you just, you kinda, you know you don’t always have to force the square peg into the round hole or whatever, because a lot of times there’ll be an opportunity in one part of the capital stack in a deal, but not on the other, you know, or you might like one position and not the other. So it just gives you a little bit more freedom to, you know, analyze different deals or participate in different deals. You know, in a way, you might hate to be in equity here, but with a specific kind of debt, asset-backed or whatever, “Oh, I actually like that risk-reward profile.” So, that being said, you have the income fund, or two income funds, but you’re also, you’ve expanded into some other asset classes. So, tell me about the other asset classes.
Ben: Yeah, we really have kind of three core offerings. One is our debt fund product. And then we have our real estate fund, that invests in multiple asset classes and multiple strategies. And then we have an energy fund. So, that’s really focused on oil and gas, and we can get into that if we have time. But on the real estate side, you know, we’re seeing unique opportunities, and, you know, to kind of balance out this, you know, lowest-in-the-capital-stack, you know, debt fund, which I think is great, everyone should have some private credit and debt in their investment portfolio, we’re actually pretty bullish on development deals right now, in both industrial and multi-family in the right markets. And that sounds counterintuitive, right? Oh, we were talking about capital preservation and, you know, being lowest in the capital stack, and now you’re talking about development deals. But what’s been really interesting over the past kind of, really, 18 months, alluded to earlier, you know, value-add deals of yesteryear, they’re not working right now, right?
And a lot of times, because these were purchased with bad debt, you know, bridge debt with floating interest rates, with short maturities, that are forcing a lot of sponsors to have to basically not finish their business plan. And, you know, it’s a good asset, but they have purchased it at a bad basis, with bad capital structure, and they might wipe equity out, right? Well, what’s really interesting is, especially in multi-family, for example, you know, there’s a massive shortage of housing. And we’ve had this issue for a long period of time. It’s, you know, something that’s pretty clear if you study the data at all.
And right now, you know, multi-family is going through a little bit of turbulence. But what was really interesting is, a lot of these value-add deals, the cap rates compressed, meaning that the values went so high, to where you’re basically paying for the future value of this asset, taking all the risk, achieving the business plan, and you’re paying all that now, right? And that’s what was, you know, head-scratcher a little bit the past couple years of underwriting deals. But development, you’re actually getting a lot of the benefits of a value-add strategy, but without the additional risk. So, we kind of have this, you know, chart that we show sometimes on the podcast of basically risk versus return, right? Because as an investor, you have to normalize everything, the returns you’re getting, according to the risk you’re taking, right?
So a 20% IRR deal doesn’t mean it’s better than a 9% debt fund deal if you normalize by risk, right? You have to normalize what is the risk I’m taking to get that higher return. And, you know, development right now has some very, very attractive characteristics. Well, because these cap rates have compressed, the value-added deals aren’t as attractive as they were. And the older vintages, you know, the class B and class C deals, are becoming less attractive. Eventually, over time, right, the institutional buyers that you are generally gonna pay a premium for these assets, those assets become higher maintenance, they’re not as attractive. And right now, ultimately, we’re just seeing a lot more potential upside in development, from the kind of yield on cost as a key metric, relative to what these cap rates are going for. Just talking about margin, again, you have a lot more margin.
So, you have this kind of underlying trend of, so there’s a housing shortage, and there are some additional risks you have in development, but there’s not that many additional risks you’re taking if you compare it to other types of deals, and you have shorter-term hold periods, generally a much more attractive product at the end of the day, that are gonna trade for much lower cap rates. You can get more attractive financing. And, again, you’re building a lot more conservatism in, especially right now, and you can still get deals to pencil, and your ultimate stabilized product is gonna be much, much more, you know, attractive than a value-added deal. So, that’s just one example of where, you know, the trends matter, and the strategies need to adjust based to where you’re at in the cycle.
Andy: Yeah. And if I’m hearing that correctly, if I can go back to an earlier metaphor you used, maybe that housing shortage is the tide. You know, it’s the macro wave, I guess. The dislocation, you know, the value-add deals that are in trouble this year, like, that might be a wave. But, you know, ultimately, you know, you make a lot of your money on the buying side, right? So, it just sounds like those deals are just penciling better. That’s your margin of safety, margin of error, you know, if you just get in at a more attractive price, you know, whereas if you’re buying at a 4% cap, it’s hard to see how… You almost have…either things need to go perfectly, or prices need to go even higher… I mean, everything needs to go right to make money, right. There, so, that’s where I’m kind of at, which is just, if prices clear a little bit, if cap rates expand a little bit, everybody has a little bit more margin of error, or ultimately, as an LP, I feel like investors get paid a little bit more reasonably to take on the risk that they’re accepting, you know, for putting equity into a deal.
Ben: Hundred percent. Hundred percent. Yeah, I think, again, that whole risk-adjusted concept is so paramount when you’re looking at equity deals, right? Because I think right now is actually, in the right deals, you know, I mean, there’s gonna be some really good shining stars, even though it feels like these kind of headwinds, you know, in certain areas, but there’s gonna be good deals to be had that gonna come through, because this shortage is not going away. And actually, right now, we’re seeing a pretty big drop-off of new development starts, meaning new construction, right? Because as the credit cycle tightens, as we’re seeing right now with banks, you know, they’re getting a lot more conservative, and just taking a lot of potential off the table from the new development deals, developers get a little bit more picky in what they’re doing, right?
But if you can get a deal to pencil, you get a bank to underwrite it and approve it, and then move forward on it, and you’re in a good market, a stable market, with still some pretty strong tailwinds, you know, just those, in and of itself, make for a good deal. But then you have the, I mean, it’s estimated there’s a shortage of 5 million to 7 million homes in the U.S. right now. And that’s only gonna keep growing. And right now you look at the lifestyle, you know, changes that the younger generations are, you know, preferring…sorry, I lost the word. They’re preferring to, you know, rent longer. Household formation is slower, and taking longer as they’re waiting to have kids for later. So, these things, they’re not going away. And in these kind of little ebbs and flows of the broader asset class cycle, you can still find unique opportunities. And that’s what we’re seeing right now there.
Andy: Yeah. I love it. I love the thesis that, you know, and Ben, you’re just very sober. I hope I can use that word. You’re very sober, you know, in talking about multi-family, it’s actually refreshing to hear a sponsor say, we are investing, here’s how we’re investing, but we actually see a lot of red flags. Like, as an investor, that’s actually, you know, almost comforting to hear. And, you know, for our audio listeners, who don’t see him on video, he has a crystal ball behind him. Ben, you have a crystal ball. So, I wanna ask about the macro picture going forward. And I think that’s on everybody’s mind right now. Are we in a recession? Are we gonna be in a recession the second half of this year? Into next year? You know, in regards to the real estate market and cap rates, you know, I keep expecting expansion, but it’s like, we’re not seeing it. We’re not seeing enough. You know, it’s like we got a little bit, but I’m like, really? Is that it? Is that all the construction that we’re gonna get?
Ben: Yeah, I mean, I wish I had a really big crystal ball. I think, you know, it’s something we pay attention to. We actually just did a series on our podcast, it’s called Investible Megatrends, and we talk about some of these things that are happening. It ultimately, it’s a mixed bag, right? We see a lot of yellow flags, we see a lot of red flags in the economy. And there’s definitely concern, but then you always gotta balance it out, right? Because right now, well, I call them the perma-bears. The permanently bearish, and everything, right? You know who I’m talking about. These are the guys that are always talking about the next, you know, doom-and-gloom thing that’s happening. And ultimately, you know, I think it’s always funny to go back and, you know, use the stock market as a proxy for, you know, how the economy does. Seventy percent of the time, the stock market’s going up, right? If I take a step back, and I’m gonna be a permanent bear, I’m gonna be wrong most of the time, right?
Andy: Yeah. You’re betting against America, too. It’s just like, you know, it’s hard to keep America down, our entrepreneurship and our economy, for very long.
Ben: A hundred percent. So, I think they’re kind of having their heyday right now, talking about all the doom and gloom and things that are happening right now, and things that are about to happen. You know, one, I would say, don’t buy it all hook, line, and sinker. I think they’re pointing out some things that we need to be aware of and be cautious of, but you kind of need to balance it out with the other really positive things. Right now, the consumer is actually in a really good condition. You know, wage growth is very, very high, and we’re seeing very low unemployment right now, because there’s just a labor shortage. We’re seeing, again, wage growth. So, people’s incomes are rising, which is really good for the economy, really good for spending.
We’re seeing a massive amount of cash on the sidelines. There’s $5 trillion of excess savings on the consumer’s balance sheets right now. You know, the stimulus packages, you know, during the COVID days, those were really nice, and people just cashed up, paid down debt. And so we’re seeing some kind of tick-ups in, you know, credit delinquencies, and we’re seeing some tick up in, you know, reduction, debt service coverage ratios or debt to income, right? But they’re not massive, to your point. It’s like, okay, we should be aware of that, but it’s not this massive concern. So, our expectation right now is that we’re gonna see a reset, to your point, but I don’t think we’re gonna see a reckoning, if you wanna use the words you said earlier.
Andy: Shoot, I wanted a reckoning.
Ben: I know.
Andy: I guess I’ll settle for a reset.
Ben: I think a reset’s gonna happen. But again, if you look at, like, I had this conversation earlier today, we’re seeing a lot of the interest rate increases putting a lot of pressure on cap rates, right? Because, effectively, if you’re going and buying something at 5% cap and you have a 7.5% interest cost to buy that asset, that’s called negative leverage, right? That doesn’t sound like a very good thing to do. But what we’re seeing, because there’s so much demand, from an equity standpoint, for these different asset classes, and because inflation is expected to be around with us for a little bit, I’m on the camp that inflation’s gonna be sticky, and gonna be stubborn, and it’s gonna be hard to stamp down to that 2% that the Fed keeps saying they wanna hit. And if that’s the case, that’s actually a massive tailwind to most commercial real estate, and even residential real estate asset classes.
Andy: So, you can buy at that lower cap rate, but you’re gonna have rent growth and NOI growth. And so, real quick, you know, four years from now, when rents are way higher, because the money printer goes “brrr,” then, you know, the 2023 cap rate may not matter quite so much. Is that kind of what you…
Ben: That’s exactly right. So, because there’s so much equity on the sidelines, institutional equity, I’m talking about, not just kind of the retail money, there’s a huge amount of pressure that’s keeping cap rates lower, right? So, most of the expectations, if you look at, you know, kind of any economist, or these kind of big CRE, you know, data firms, they’re projecting that cap rates might have a little blip up, but they’re not gonna go massively up for a long period of time, right? I think it’s gonna stabilize pretty close to where it’s at, or if not, even go lower, as a lot of expectations. Because, one, it’s very inflation-protective. Two, there’s a lot of demand still for these assets.
I think that the big bug on the windshield that we’re seeing is all the deals that were purchased with short-term debt, that had floating-rate interest rates, right? And we kind of keep hearing the stories of these deals, these portfolios that are going belly-up because they had floating-rate interest rates, and they have short-term maturity. So, a lot of assets that were purchased in the past two to three years were purchased with bridge debt, which is never meant to be a long-term solution. They generally have three-year maturities, generally are floating-rate interest rate products. And I think the most recent number I saw was, in 2023, there’s 25% of the CMBS loans, so the commercial mortgage-backed security portfolios, in the U.S., are scheduled to mature this year. So, 25%. No, I’m sorry. Of all the maturities that are scheduled this year, 25% will not meet the requirements to get refinanced. Because they haven’t grown, they’re a net operating income. They bought it at a bad basis, with, you know, too much leverage. And, you know, those deals.
Andy: That’s our cliff. That’s our cliff. But it’s the cliff for a reset, unfortunately, not the cliff for a reckoning.
Ben: Yes. So, it’s…
Andy: Those institutional buyers, they ruin everything, you know, with their bags full of money, you know?
Ben: Oh, I know, I know. I just, I wish I was them sometimes. But, no, yeah, I think that’s probably what we’re gonna see. I do think, you know, interest rates are gonna remain higher for a longer period of time, and inflation’s gonna be around for a little longer, but what works really well in inflation is real estate. So I think it’s a good place to be at the right deal, with the right debt structure, in the right asset class.
Andy: Words to live by. I love it. And Ben, before I let you go, and I want you to give a plug for your website and everything, but I wanna plug our viewers and listeners to “Invest Like a Billionaire.” It’s a great podcast. I really have listened to several episodes, and I don’t listen to much investing content, so I think that’s meaningful. If you go to the Apple Podcast app, or Spotify, if you search “Invest Like a Billionaire,” it pops right up. I think it also pops up if you just search “Alternative Investments.” Like, my show pops up, and Ben, I think yours does… We’re usually one and two. Sometimes I’m one, you’re two. Sometimes you’re one, I’m two. But it’s a great show, and I did wanna make sure to plug that, but then I also wanna ask where our audience of high-net-worth investors and family offices can go to learn more about Aspen Funds and all of your offerings.
Ben: Yeah, I appreciate that. The podcast is thebillionairepodcast.com, and then our private equity firm is Aspen Funds. It’s aspenfunds.us.
Andy: Lovely, lovely. Thanks again for joining the show today, Ben.
Ben: Thanks so much, Andy. It was really fun.