Rocket Your Dollar Ep.10: A New Model For Diversification

Dan Kryzanowski hosts Marc Rankin, a Principal at Adventum Funds & Advisory, a women and minority-led investment management firm focused on investing in growing companies en route to investing in real estate. Marc shares Adventum Funds formula to mitigating of risk and maximizing of profit in an individual's portfolio. Long gone are the days of 60/40.

Transcription:

Dan Kryzanowski: Welcome, everyone, to Rocket Your Dollar, the podcast from your friends at Rocket Dollar. In this show, we discuss the power of self-directed investing. My name is Dan Kryzanowski, executive vice president. Thanks for joining us. Let's jump in. On today's episode, we're going to talk about 21st century diversification. I'm excited. On the show today, we have Marc Rankin, principal at Adventum Funds. Marc, welcome.

Marc Rankin: Thank you so much, Dan, for having me.

Dan Kryzanowski: I'm sure folks probably have already Googled you as one of our esteemed guests, and you're extremely well known in Austin. Right off the bat, I think Adventum is amazing kind of from what you focus on, the team. I'm going to get off my high horse. Tell us how Adventum differs from what you'd say the others out there.

Marc Rankin: Thanks, Dan. I think that it really comes down to an evolution of my own investment thesis over the past 20 years, the companies I've been a part of, the companies I've invested in, the real estate I've invested, and ultimately came to a point where the thesis was that I'd like to lead a team or a fund investing into companies where we could also invest into the real estate related to those companies and that you can lower the risk profile of the investment by mitigating risk through the real estate by creating value through the real estate, but also to be part of the excitement of investing in a company and helping that company grow and be profitable and see kind of exponential returns on that side of the investment where we can lower the risk profile from real estate.

Dan Kryzanowski: That's great. So, if I'm hearing you correctly, it's almost a two for one special. You're investing in a company, the operations, but also have the benefit of the brick and mortar, of the dirt, the building, the real estate.

Marc Rankin: Absolutely. I think if anybody's seen the movie The Founder, Ray Kroc, who started McDonald's, he ultimately created most of his wealth, not through the franchise, but through the real estate related through all the McDonald's properties that he owned and ultimately leased back to the franchisees. So, everyone knows somebody that has invested in a piece of real estate and also the business. They've seen it, they've had it in their family. They might have been a business owner themselves and they're an owner occupant and they see the real estate related to their business as an additional form of wealth creation for themselves, separate from the business, but they didn't realize that there is actually an an investment strategy that someone could take and say, "That's specifically what we're going to do."

Dan Kryzanowski: Got it. So, why can't a lot of folks... For our Austinites here, I know a lot of people, especially with kids, go to central market. They like the Hyde Park area. I try to go to [Hugo 00:03:14] For my juice in the morning. It was closed yesterday and I thought, "You know, if they ever own the real estate, just the appreciation alone probably would've kept them years and years." So, why doesn't, even you say, a sophisticated investor have this idea for the operations in the real estate?

Marc Rankin: Well, it's capital intensive. Obviously, it's much less of an ass to invest a few hundred thousand or a few million dollars into helping a company grow, whereas the real estate related to that company might be million, 15-million, 20-million. And so a lot of the times, it feels too out of reach. A lot of the times, the real estate is not available to invest in because the company's already committed to a lease to a shopping center or to an office building or to an industrial property that they don't have an ownership in, where we see if you have the opportunity to have a plan in place for owning the real estate related to the business, you can seek out locations for your business where you can own the property or at least have an interest in it.

Dan Kryzanowski: Exciting. I'm about to take out my self-directed checkbook, of course, and write you a check here. But before that, take me back. Take me back a few decades kind of growing up and especially the late '90s and early 2000s.

Marc Rankin: Sure. So, I grew up in South Texas, eventually found myself to have been graciously awarded a scholarship to UT and fell in love with Austin, and was offered an opportunity to start off at Dell in tech sales right out of the gate in the late '90s. I kid that my paycheck said "Dell Catalog Sales" when we sold through a catalog before the internet. And so that was a really fun process, getting a chance to be part of a company that was evolving itself and that was obviously forming a new way of doing business and getting to see how a large enterprise, handled the day to day and the growth of that company.

Ultimately, I decided that tech sales was not going to be my lifelong passion. At 26, I started my first company. It was a consulting firm, a marketing consulting firm that eventually led me to my first executive role at Horseshoe Bay Resort where I was thrust into a leadership position at a very young age and had to really find my way as being a leader and an executive and running a large business. I fell in love with real estate while I was there at the resort. And the resort, it's huge real estate play in whether it's building the hotel or the lakeside villas or the shopping or the apartment complexes or the residential subdivisions, it's a big real estate play.

And so I learned a lot about real estate while I was there, land planning and engineering and figuring out connectivity and all of the things that really are fun about the creative process of real estate development. So, as I continued my career, I gravitated towards a real estate finance company based in Austin who I first started as an executive in the marketing role and then transitioned into more of an investor relations role and started learning about investment analysis and the nuances to the financial side of the investment. I went and I earned a CCIM. I felt that was important to achieve that designation and really fine tune my skills as it relates to investment analysis.

During the downturn, I was very fortunate to be backed by a very substantial billion dollar investor in San Antonio that helped me launch a private finance company myself here in town. And so I got a chance to lead my own business and company and be well capitalized, and I saw how that really, really obviously makes for the best chance for success. And ultimately, that company that we started was sold. And during that process, I started to think about what was going to be the next step. And so I went back to consulting. It was something that was easy for me to do. I liked helping lots of other companies evolve and grow, and I came across an opportunity to use my skill set in real estate and finance and capital markets to help companies and real estate developers find capital to do projects or to grow their company. So, I spent several years doing that as a consultant, helping companies pull together capital and finance, either real estate or their company's growth. And that's what ultimately led to several really great consulting opportunities and then to fund being my own investment thesis that I would lead myself.

Dan Kryzanowski: Wow. That's dynamite. That's a great story. I love what you shared very nonchalantly, but I just think back to 2009-2010, such a different world. And what made you have the foresight to pick up the private funding also while as a consultant kind of in the driver's seat? And were there a lot of folks like you doing that at the time, and do you feel there's a lot of folks like you today?

Marc Rankin: Well, in 2008, as the market was really churning and gleaming and you had all kinds of issues in the financial markets, I felt like private financing was going to be an opportunity to pursue. And so I had several high profile investors that really liked my style, my diligence, the way I went about business. And so several of them approached me and said, "We'd like you to manage our capital and deploy it into a certain type of investment. At that time, in vogue was vulture funds, distressed debt, distressed real estate.

And so when I did that, I found out that there was thousands of other people like myself across the country representing thousands of other high net worth investors trying to go after the same types of deals. And what I quickly found out was that the 10 or 20 million that I was looking to deploy was nothing in comparison to what the transactions were really happening, and they were happening in the hundreds of millions or 250-million at a time, and that's where the discounts were during the downturn. They weren't... Here locally in Austin, they weren't in $10-million deals. The investors here locally had the foresight to see that Austin and Texas was going to come out of the recession in a much different way than other parts of the country.

And so as that was happening, I retreated back and I said, "Well, the easiest thing to sell is something someone wants to buy," and I had my largest investor who wanted me to focus on a strategy and would provide all the capital in the hundreds of millions. And so that is what the ultimate strategy was and what I focused on for those next several years, and that grew and we ended up selling the company, and it evolved into these other opportunities.

Dan Kryzanowski: Fantastic. So, I'm sure at this point here, folks can picture you from Dell meeting with a lot of great folks and really having a great eye for great investments. I'm sure I'll be asked or Henry will be asked, "Hey, what's in Mark's portfolio?" If you could share a little bit, even directionally, what's in your personal portfolio? What excites you? Where do you feel comfortable from the risk return profile?

Marc Rankin: I have a little bit of everything. I have real estate and I've got investments in companies. What I tell a lot of people that are new to investing in real estate is start with something that is very tangible, that is easy to check on, that is close by, that you have a little more control of because it feels a little more secure. And so what I have is some residential investment real estate, which I recommend for everybody. It's very easy to start off there, whether it's investing yourself or in the case of self directed with someone that you trust that can help with the acquisition and the management of the property. So, I have residential, kind of single family units. I've had apartment complexes I've sold recently, and then I've also invested with others that are doing larger real estate.

And over the time, as you become more and more comfortable in investing in real estate, you understand that there's all these different nuances to how you can invest. You can invest as an LP equity partner. You can infest as a participant on the general partner side. You can participate in mezzanine debt where you're a secondary lenders to the first lien mortgage holder. You can obviously as a first lien lender. And then there's several even pieces in between that provide different levels of risk and return within the real estate capital stack. On the company side, I'm invested in companies where I'm a principal and I am a leader in the company, not the the day-to-day. I'm invested in companies where I have a very small piece of millions of dollars, right? It's just my little small piece. And then I'm an advisor to several companies that I opted to help out and grow and instead of taking pay, they've awarded me advisory shares. And so a little bit of everything, kind of like where ultimately I am with my investment thesis.

Dan Kryzanowski: Awesome. Awesome. We have a lot of friends at Merrill Lynch, maybe even some family, a lot of folks we know from our past lives there. What would be the first step that you would suggest? Would it be real estate? What would you advise them as they tip toe out, maybe even your old Dell friends that have been there for 20 years now on their own, probably sitting on a very sizeable, not only retirement, but also personal dollars? What is the first step? And then what is also that second investment?

Marc Rankin: So, I'd say the first step is invest with someone you really know and trust or invest in something that you have some control over yourself. Having control might be having control of the due diligence and because you know the property or you know the area or you know and understand what it's going to take to help this property grow or this company grow. Invest in something you know. That's the best first step, and to dip your toe in the water. As you become more experienced, you can start to invest in larger deals where you're a smaller piece. But again, it comes back to trust, and you have to have a certain level of confidence in the folks that are leading the deal. If you're not the leader, you have to have a certain level of comfort in the market that they're in.

As it starts to get further and further outside of your own experience and understanding, it becomes, to me, much higher risk profile and it becomes more speculative and with higher risk and higher speculations should be higher returns. And so I do segment a very small portion of my portfolio for that type of investment because I've been recommended a deal by someone I know or trust. I don't know that industry well or I don't know that market well, but someone I trust does. And so I do have a small part of my portfolio that I associate with projects like that, but ideally, someone might set aside a certain portion of their money that is not invested in traditional securities, that is an alternative investment in real estate, and they start to categorize the risk profile of that money. Do I want 50% of it and higher premium return investments that have no cashflow and half of it in a cashflowing low risk? You have to find your balance and then start to identify opportunities that fit that profile.

Dan Kryzanowski: What do you think is going to be the soundbite, the rule of thumb? I mean, we grew up, all of our financial advisers, even today, they talk about the 60-40 stock bonk split. I'm sure you and I have been at these high net worth family office shows where folks are pretty up front that they have less than 10%, some of these family offices and stocks and bonds and funds. Looking, say, from the 2020s on, 21st century diversification, where do you see kind of the traditional stocks, bonds, funds maybe versus real estate versus startup? How is the pie chart going to look, going forward?

Marc Rankin: Well, I think that they're... It's evolved. Obviously, there's much more access to private investments today than there was even 10 years ago through whether it's crowd funding portals or through mini funds. So, I would say that you want to categorize your investment portfolio into whether or not you need cashflow. That's number one. And obviously, in a self-directed account, you can't access the cash flow anyways, so you might not, in that particular account, need cashflow. So, you want to start to look at whether or not you can cashflow and how much cash flow. Then you want to look at the time horizon of the deals that you're investing in. Do I need to access that capital and have liquidity within one to two years or is it something that could live on for five to 10 years and I don't need to worry about it?

And then from that standpoint, you would start to categorize by risk. And I would say that in the old traditional format you're describing, 60-40 equities to bonds, equities would be higher risk profile. Bonds would be lower profile risk. So, it might still be that you have a 60-40 split between higher risk, possibly dividend yielding, cash flowing investments versus bonds. They're looked at in a different way. And so even if you did pure real estate, you could have single tenant net lease properties with high credit that are yielding five to 7% in part of your portfolio, and you could have another part of your portfolio that's in redevelopment apartment complexes that are yielding 15 to 20%. And you could have another part of your portfolio that is low risk, no cashflow-like covered land plays where you're buying land in a highly sought after area. It has no cash flow, sometimes negative cash flow, but you see appreciation and it's a very low risk profile, because it's a highly sought after area of town. You really start to look at some nuances and then kind of go from there.

Dan Kryzanowski: So, I love how you mention access and the cashflow, time horizon, and risk. I think that's a great thing to grid out, looking at investments. Let's take that to Adventum. Tell us about, first, how somebody can access... What is a typical journey payout? And I think at this point, you get pretty specific to some of the folks here and you know how you guys differ.

Marc Rankin: So, generally speaking, we're styling our investments to have a five to seven year lifespan because that's... We're trying to stay within the spectrum of what people are accustomed to and used to. So, we're not trying to go too far out of the box. So, five to seven years; people will say, "Okay, I can accept that. That feels about right." We're trying to have a two to one ratio of real estate to operating company, capital exposure. So, we want to weigh it heavy on the real estate side, which mitigates risk for us and we want to generate a premium yield. 15 to 20%, that's our target, while having the basis for the investment, having a lower risk profile, because that's the ultimate scenario. How do I produce yield while mitigating risk? And everybody can produce low yield with low risk. How do I produce... I can produce high yield with high risk.

So, the magic is when you try to get a more premium return while mitigating risk, and that's where our expertise and our background, our experience, the way we structure our deals, all of the diligence we do, we try to mitigate risk.

Dan Kryzanowski: Sure. How's growth been for you? Are you guys at capacity? Are you accepting new investors?

Marc Rankin: Yeah, we're early on in our evolution as a company. We've used this strategy before on individual deal basis, but now it's all come together. We've got a really amazing team. We have a really strong deal that is kind of presently in front of us that we're doing. We're rounding up a significant amount of capital, 20, $25 million. So, we have some larger commitments and we have some smaller commitments. The beauty of that is the larger, more sophisticated institutional style investor, it really drills down on us to have all the T's crossed and I's dotted and the smaller investors benefit.

And so, absolutely, we're certainly interested if someone has capital that they're trying to figure out if this is the right fit for them and we can talk to them, and we can determine if this is something that they want to explore.

Dan Kryzanowski: Is your geography strictly central Texas, Texas, US? How far will you go?

Marc Rankin: So, generally speaking, we're focusing on Texas-based companies, but that their real estate could be anywhere in the US.

We have been approached by a few companies that are in other parts of the country that have some real estate in Texas. And so kind of, obviously, we want to have a Texas standpoint, a basis for for what we're doing because it's important to us, you know? But no, I think limiting it to the US is kind of where we're at now. We're not going into Canada or Mexico, we're not going internationally. We're just sticking to the US.

Dan Kryzanowski: Got it. Great. And do you feel a lot of your audience folks that come to you are relatively sophisticated, meaning they're aware of multiple sources of funding outside of maybe their checking account or some money they inherited?

Marc Rankin: I think that we've got the full gamut of investors that have approached us from the fund to funds, the institutional investors that are managing large pensions. We've got high net worth family offices and then we have the individual who's got a hundred thousand or 250 or whatever it is that they're wanting to deploy. And it really is a scenario in which someone is maybe looking for a little lower risk profile when they're attracted to us, because they're obviously being offered early stage venture companies and they're being offered redevelopment plays, multifamily, and they're being offered help build this new condo project. Those are plentiful, and they're being offered to those folks. And so when they come to us and they say, "Hey," and this is just an example. "I see that you're helping to do the next 10 Chick-fil-As," and your fund is going to invest in the next 10 Chick-fil-A's and you're going to participate in the revenues of the business and you're going to own the real estate where those Chick-fil-As are.

Dan Kryzanowski:Yes.

Marc Rankin: And in case Chick-fil-A ever goes out of business, then you would own that piece of real estate.

So, that's our model. When people see that, they say, "Oh, that feels a little more tangible and lower risk profile than investing into some company who's going to revolutionize the way you solve some problem."

Dan Kryzanowski: Got it. So, before we shift gears and moving into close here with a few minutes, on the Adventum side, how do folks get in touch with you?
Marc Rankin: So, the easiest thing to do is just to email me directly, Mark, M-A-R-C, @adventandfunds.com, or they can jump on the website. I think there's a Contact Us form, adventumfunds.com. That's the easiest way.

Great. So, we're here today at capital factory, the Mecca of downtown Austin. You've been very kind with your time as a mentor and advisor to a lot of companies. For folks that might not be as familiar with the dynamic startup scene and folks that you've helped over time, and I know that they'll probably be going to your LinkedIn, be swarming you after this call, but is there one company that you can talk on that you advise that you feel this is something that's really good that they're doing and could become commonplace?

Marc Rankin: Sure, yeah. I mean, growing up in South Texas, me being Latino and leading one of the few women in minority-led investment funds in the US, I'm naturally attracted to help out women or minority-led companies.

And so I was introduced by several different folks to home ads, and I believe in their business plan and we helped actually pivot to some degree and evolve their business plan. So, homeads.com, it helps people find, really, the neighborhood that's best for them, and then it provides them access to inventory for homes and rentals. They're trying to allow for someone to do a social search as opposed to a generic real estate search, three bedrooms, two baths, this price point. They allow someone to search based on their social needs; do I want it to be close to hike and bike trails? Do I want it to have access to a school that is appropriate for my kids? There's some things that people really actively are looking for when they're looking for a piece of real estate, and I think home ads is solving that problem.

And so it's been fun getting to advise them and help them. And because they're a real estate based company, I was naturally... Said I can help this company.

Dan Kryzanowski: Great. I'm on board with them. I met the founder. She's dynamic. And as a thank you to our shared community, folks that want to learn more, of course, once again, go to...

Marc Rankin: Adventumfunds.com. So, that's A-D-V-E-N-T-U-M, funds.com.

Dan Kryzanowski: Wonderful. And as a thank you for folks that may choose to ultimately invest with a self-directed account, as a courtesy, you can enter code Adventum19 for $100 off, or visit rocketdollar.com. So, with that, Marc, thanks once again, and hope to have you back soon.