Managing Investor-Operator Relations

There’s class A shares for someone who’s investing between 50,000 and X amount of dollars and then maybe over 250,000 different class of share and the terms will be better when it’s a preferred return or both for the investors that are obviously investing more money in it. It’s meant to incentivize someone to invest more money. Part of that is going to be dictated by the network of the operator and how realistic it is that they actually have larger, individual investors. Part of it has come up as a result of a recent phenomenon, which is that more and more investor groups are popping up. As those groups have been trying to negotiate better terms, you’re going to find that there may be a million dollar minimum, for example, now, that's not necessarily meant for an individual investor, that’s actually meant for a group to incentivize and to get to a certain level that could be maybe co-investing in the deal (that is a generalisation, there will always be exceptions).

One thing that you may find as well is that we’re discussing this in 2019. In my opinion which is just one person’s opinion I think we’re at or near the end of a cycle. This is when there is the most amount of capital available, which means that there’s the most amount of demand or supply cash for syndicators to access. What that also means is that this gives them the best opportunity to get the best terms possible for themselves. If we have a downturn and we do experience that, then what’s going to happen is that there is going to be less cash available to invest. People are going to be more scared. Their networks are going to be lowered, their stocks are going to be lowered, and they just want to have as much cash to invest. Then the terms are probably going to get a little better for investors, because there's going to be a lack of supply of capital that the syndicators are dealing with. The reason why I'm bringing all this up is because you may find that there is a higher propensity to have different classes of shares now to incentivize people to invest more, because the syndicators can command it. In other words, the ball’s in their court.

If they accept a $50,000 investor because they're giving a $250,000 investor better terms, they can probably afford to do that right now theoretically. They can't afford to do that when there’s less capital available. You may find that you're going to find less and less of those come up over time, and then maybe it’s cyclical, so to speak. I just want to point that out too, because some people may not have thought about that.

I tend to be hyper diversified. So I purposely put small pieces across a lot of things for my own diversification. With that, it's extremely rare for me to hit the higher class of shares because I’m only normally investing between 50 and 100, sometimes a little more which means I don't get to benefit from the higher class of shares, and at times it does bother me. It wouldn't stop me from going into a deal as long as I agree with the terms of the class A shares. I will say too that if I see class A being 50,000 and then class B being a million, all that tells me is that there is some larger group has negotiated terms and I’m kind of okay with that, because at that point they really are bringing a lot of leverage to the table.

That is this phenomenon of either an operator who’s very experienced and commanded differences or end of cycle. Then you have a really rich cash flow, say at the 10% preps. That’s a little more unusual. That to me is more likely a phenomenon of end of cycle where an operator can command that, but what is also possible again is the concept that it could be a more experienced operator who has access a lot of capital. I rarely see a 50,000 to 100,000, I got to tell you. Normally, the spread is 50 to 250, because there's not that much difference between 50 and 100. If I saw 50 and 100, that would bother me more as an individual investor, because I feel like that person is forcing me to decide. I don't invest in a seven-prep. I invest in an eight-prep or better. That person may had just sold me out of their deal, no matter what the deal is. That would bother me, because that's telling me that for that little incremental difference, they’re willing to just do away with me and I don't know if I want to build a relationship with that person.

Listen to the Full Podcast Episode Here: https://lifebridgecapital.com/2019/10/ws369-the-fine-line-between-operator-performance-and-communication-with-jeremy-roll/