What Every Investor Wants

WHAT EVERY
PRIVATE INVESTOR WANTS

BY PAUL ANTHONY THOMAS, PRINCIPAL

Since we work in the world of private investment programs where the owner has a direct
ownership in the purchase, buildout and management of hard assets that continuously
cash-flow and grow in value, this article is a discussion of what investors in alternative asset
classes want in investments and the people who manage those investments.

A Program That Consistently Makes Money

Private investors want to make money and their managers want to make money. Investors
want to own assets that generate income while they sleep and require the least amount of
effort to manage. In a perfect world, these assets will carry very little, if any, debt, they will
not be open to the whims of the market, and given the proper care, the investment
will consistently generate a return on the investors capital, making everyone happy.

The types of investments we will be discussing here are not generally found in the public
stock or bond markets, but in core, real assets like real estate, energy, infrastructure,
manufacturing, leasing and certain segments of medical marketplace.

Every investor wants to know when they go to sleep at night, their investments are secure
and performing. That they understand what risks they are taking and that they are
comfortable with those risks. In our investing world, the management of risk is the key
element to success.

Programs That Are Recession Resistant

One of the direst circumstances for any investor is to have an economic recession hit during
an investment cycle that totally wipes out your equity and cash-flow. This can be
devastating to a retirement account, bank account or family portfolio, causing extreme
distress at the most inopportune time. We saw this occur in 1929 and most recently in
1986, 1993, 2001, 2008 and in the oil and gas business beginning in 2014. There are few
truly recession resistant investments in the investing world. We do our best to find and
participate when we do uncover recession resistance.

The typical 60% public stock/40% bond portfolio was a total bust in 2001 and 2008. Also, I
have examined many Long/Short strategies that don't live up to their “recession resistant"
moniker either, as evidenced in 2008.

Our recommendation about private investing is supported by the Yale Model of allocating
50% or more of your portfolio to asset classes that make money come rain or shine
regardless of what the economy, the government, wall street or the banks are
doing. Examples can be found in CORE markets like commercial real estate, medical
equipment and services, utility infrastructure, manufacturing and the energy markets. In our
opinion, assets that the developed world require to survive, known as CORE assets, are a
key component of a good income based allocation.

For example: an income producing real estate portfolio is one requirement to include in your
hard asset, cash-flow allocation as is medical supplies, social infrastructure (water,
wastewater) and solar/hydrocarbon based energy.

A commercial real estate sector that we particularly like is self storage, which has proven
itself many times to be very recession resistant, even increasing in value when economic
hard times occur and the good news is it makes money in good times as well. Another
small portion of your income generating allocation should be a mixture of commercial retail
with national clients like Walgreens and CVS.

On the energy side, a 10% allocation to income producing oil and gas production and
transportation with a minimum portfolio size of $50 million managed by professional oil and
gas people is a recommendation as is a 10% allocation to income producing solar
generation and electric transportation. Select businesses that continually support these
investment sectors like infrastructure, are also generally a good investment, if they don't
carry debt. Pipelines are of particular interest given the correct structure.

In the medical arena, medical supplies are especially attractive as money makers, given the
retirement rate, medical needs and population growth over the next 30 years in the
developed world.

Many people ask me why I don't include Tech in my hard asset allocation side of the
portfolio. Generally speaking, any tech allocations are going to be "soft" assets including
stock in companies with heavy management expenditures. The other 50% of the portfolio
allocation is dedicated to those type investments.

On the Hard Asset side of the ledger, we want things that we can own directly as a partner,
that write us checks monthly and that carry significant tax advantages.

Demonstrated Expert Management

Every private program investor wants a manager who has “been-there and done-that” and
made all the mistakes with his own money or other people's money, not your money.
Investors want a program that is repeatable and scalable that can take advantage of
economies of scale as it grows.

Investors want an asset manager who has made payroll; negotiated a hundred purchases
and sales; built, managed, sold hundreds of assets; closed dozens of deals and been
successful in returning significant profits to his partners. This manager will understand the
legal and tax implications of the investment because he has done it and paid the taxes and
lawyers to make it work. The key is finding the manager who has the experiences to show,
the track record and the success.

Our advice is to take a field trip to view the programs, records and organization of the
prospective manager. While in the office, discuss current research and deals that are
underway. The right manager will be able to articulate current private investment programs,
their economics, their reasoning and their opportunity set in an organized and coherent
way. He will be able to produce research, maps, and demographics. The right manager will
have many opportunities that he has executed upon and even more that he has yet to
execute.

The right management team will be:

1. led by a generalist on the overall economy with an in depth understanding
of where the team fits in the investment hierarchy and where his partners
will best benefit from his services, and

2. consist of an expert in one or several market segments having executed
with success in several different investment vehicles.

An example, when you walk into the offices of Berkshire Hathaway, if you can get an
appointment, you can have a general discussion of the economy and where the principals
believe it is today and their outlook for the next few years, or you can talk about the furniture
business, insurance business, constructing and selling mobile homes, coke or oil and
gas. The choice of topic will be yours for the choosing. What is even more important for
you to uncover is what the managers understanding of what s/he does NOT know and
where s/he is not an expert. This is not to say that this manager will not go to places where

he is not an expert, but he acknowledges that he must have team members who are expert
in the field of investment where he wishes to delve.

An Investment Where The Odds Are In Their Favor

Every investor wants to do everything s/he can to put the odds in their favor for making
money on their investments. It is up to a good manager to make this happen.

We frequently meet customers who ask for guarantees that they will receive all their capital
back. Our typical response is “there are no guarantees when it comes to Private
Investments, but we do everything in our ability to stack the odds in our favor when we
make an investment. If you want a guarantee, put your money in TIPS and hope the
government learns how to calculate inflation.”

A Managing Partner Who Is An Open Book

Good news or bad news, investors want to be informed. If, during your due diligence, you
ask to see the financials of a recent program and the manager balks, beware.

Although financials in certain segments of the business world can be quite daunting, take
the time to understand what you are seeing. Ask questions and listen to the answers.

We have a partner who spent several days in our offices a few years back. He
reviewed financials and looked at properties for hours. He asked questions and we gave
him direct answers.

He invested with us several times and later he told us that his reasoning was that we were
an open book about our business. We answered all questions truthfully, good or bad. That
meant a lot to him as an investor.

A Manager Who Is Inquisitive About Business

You are paying your alternative asset manager to uncover and generate good deals in
which to invest. If in your time together, your manager does not talk about deal after deal
after deal, ask questions and inquire about what you know about business in general and
what you expect from your investments, then you need to find another manager.

The people we like to deal with have lives, but their lives are consumed with deals, making
deals, finding deals, uncovering opportunity. They are bored to death by the thought of
wasting time sitting on a beach, unless they are monitoring traffic patterns of the tourists.
They rarely take vacations that don’t have some type of tax write-off and look for opportunity
everywhere. THEY ARE INQUISITIVE.

Inquisitive About Your Needs & Wants

If you are going to have a good relationship with your asset manager, you must be forthright
with him/her. You must expose your financial situation to that manager so that s/he will
know the lay of the land. Your manager must know if you, the investor, are on the edge of
collapse and looking for a savior or if the investments you are making with him/her are truly
a chosen portion of your total investment allocation. This is critical to your relationship.

If your manager does not understand the total investment mix you are seeking for your
portfolio, then their contribution to the mix will be skewed and their expectations will be
elevated, causing unwelcomed confusion and poor relations among the team.

An example of what I am talking about…once upon a time, there was an organic farmer in
Texas who was approached by a well know star to start an organic food farm on his ranch.
This organic farmer jumped at the chance to run a well funded operation. He arranged to
make the first planting and began the work of an organic farm…but then he began to stick
his nose where it did not belong. You see, the well known star had not made it clear what
the farmers role was in the whole scheme of things. Well, quickly the farmer began trying to
run the entire ranch, not just be the farmer. He started running the retail store, the
restaurant and the animal operation. Very quickly, things got out of control because the
hard headed farmer did not know his place in the hierarchy of the farm. His role was not to
run the entire operation, his role was to farm, grow produce and let others do their part.
Needless to say, the farmer and the well known star soon parted company, to the dismay of
the farmer.

A Good Reputation of Fair Dealing

Because many times there are winners and losers in business, if your manager has been
around, not everyone will believe your chosen manager is an angel, but in general, a good
reputation of fair dealing from a majority of people is generally a good sign in an asset
manager.

One of our strongest supporters is a gentleman with we have worked for decades. We
routinely provide services for him and he is an excellent reference for our business. We
asked him once why he liked working with us and he told the following story…

“Upon our first meeting 20 or so years ago, I was having permit issues on a development. I
called your troubleshooter to help me smooth the way on a permit I needed and he said he
would do what he could to help. A few days later, he called me and said the permit was
issued and faxed me a copy. I said, send me a bill for $25,000, its worth it to me. He said,
I’ll send you a bill for $8,000, that is all the time it took. I considered this to be the fairest
dealing person I had ever met, and I still believe this 20 years later.”

That is the type of manager you want working for you.

A Manager Who Cherishes Your Relationship

Investors want to trust the person with whom they invest. In my recent paper, "Compelling
Reasons To Hire A Small Asset Manager" I discuss the fact that it is better for you as an
investor to have a manger who cares about your capital as much as they do their own. This
means you are not going to hire someone who is covered up with capital, but someone who
will manage your capital with the same care that they manage their own money, making
sure it is safe throughout the investment process. You want a manager who keeps his finger
on the program and is able to explain all aspects of the investment. You want a manager
who cherishes your relationship, returns your calls and knows your voice. This is the
manager that will put your best interest in front of his/her best interest when times get
tough.

Our advise is to make a field trip to the managers office, get to know him/her on a personal
level, not just over a meal. Meet the team. Learn their first names. Meet his or her family
and start a personal relationship. This is what you want in a manager, someone who will
take the time to know you personally and recognize your name and voice when you call.

Tax Advantaged Investments

Investors, as a general rule, don't like to pay taxes. They generally view our form of
government as a "good" form of government compared to other choices, but they view

North American governments as generally wasteful and poorly managed. There is extreme
support for this belief.

Although it is generally viewed as poor decision making to make an investment solely on its
tax merits, Investors in hard assets want tax advantages and their managers want tax
advantages as well. The smallest of tax advantages generally comes in the form of
depreciation on real estate, with some of the largest tax advantaged investments in the
energy sector.

Our recommendation is to rarely, if ever, make an investment just because you need the tax
write off. Seek out investments that are going to make you money in the long run and
provide the tax advantages you want this year.

A Manager Who Makes Money, ONLY When The
Investor Makes Money

As a private investor, you want a manager who is motivated by money, but not
greedy. Because the manager is dedicating a portion of his life to your success, you must
pay the manager enough to live comfortably while he is working for you, but you don't want
him to get wealthy until you make the profits you are expecting. This is why the 2% and
20% program has worked well for many years for small managers. On funds below $100
million, it takes every bit of 2% of the capital to efficiently and effectively run a money
management shop and adhere to all the rules and regulations. This is generally enough
money for the manager to hire top tier professional staff and offer them substantial benefits
and perks, encouraging them to be around awhile.

In the properly incentivized program, the bonus 20% portion is the managers goal. This is
where he makes his wealth. As an investor, you want your managers to get wealthy,
because if he is getting wealthy, then you are making exceptional returns on your
investment, which is your goal.

Frequently we will put in place a tiered bonus schedule based on cash returns to the
partner. An example is a 10% profit share in the beginning and if the investor receives a
15% annual rate of return, our percentage profit share increases to 20%. If the investor
receives a 50% annual rate of return, our share of the profits above that amount increases
to 30%, so if we hit a home run with an investment, we will receive a nice bonus for our
performance.

Don't begrudge your manager his fair share of profits when they occur.
We were once hired by a partner who wanted to acquire and build real estate. We worked
diligently for most of a decade to invest over $100 million of this investors’ money, only
receiving modest fees for our services while making the investor tens of millions in
profits. Upon the sale of the asset base, at the end of that program, the investors staff all
pitched in and paid us a profit share from their profit share stating that these profits would
not have been possible without our diligent work and expertise. The owner did not split any
of his profits with us. Unfortunately, our attitude towards working for that particular investor
is very poor.
We are open to new programs and ideas continuously. Give us a call to discuss.
Thanks for reading,

Paul Anthony Thomas, Principal
Custom Private Equity
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Abilene, Texas

(c) Copyright 2016 - Paul Anthony Thomas, Abilene, Texas

558 Ambler Avenue
Abilene, Texas
79601
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