A Little Extra
On 7/11/2014, we lent funds to build the Fresh Thyme Grocery Store in Centerville, OH. The developers sold the store quickly and have paid us off entirely as of today. The loan term was for 18 months and even though they paid us off in ten months, we are entitled to a full 18 months interest. Thus, while we were projecting returns in excess of 11%, net of fees, the actual returns will be in excess of 17% for 10 months. This translates to an annualized return of over 21%.
I think it is important to understand the difference between the investment’s return and your return. The investment’s return is calculated from the day we collectively (the fund) make the investment to the day we sell out. This is a great gauge of the returns you are getting for the risk you are taking.
Your returns are based on when you (individually) send us a check and when we return it to you. Using the example above, most of you sent us a check June 1, 2014. As the closing of the development was delayed, we did not invest the money until 7/11/2014. By the time we deposit the check we received today and roll it into the next deal, another month could easily pass. Thus, we earn little to no money in the first month or the last month. Now your return is 17% on an annualized basis, not 21%. Not bad, but this is 4% below the investment’s annualized return.
Democratizing the Private Equity and Alternative World
A 4% drag on returns is not ideal, but most investors have small amount in total, spread around a number investments. Most funds, to eliminate this drag, call the funds a few days before they are needed and then deliver them back quickly to keep the returns high. They then charge an incentive fee on these returns. That is just not practical given the low dollar amounts we let investors in at. Our goal is democratize these investments, which are hard to find and come by, and generally require high minimums.
Putting A Little More Money in Your Pocket
On these Series 2 investments, we do not charge a fee when the funds are in cash, yet we do include the time it was in cash in our incentive fee calculation, which means we leave a little more money in your pocket, and less in ours. Most of our client’s have a fair amount in cash outside their investments with us so where the cash is held has little bearing on their overall net worth. You are free to look at this any way you prefer, but unless you were going to do something else with the cash, we advise looking through to the investment to judge the investment’s merit.
Why? We can return it quickly and get the higher incentive fee or let it sit in cash, which makes things easier from an administrative standpoint, but lowers our incentive fee. We are happy to earn a little less, and have you keep a little more, to make things easier to manage. In the end, you are actually slightly ahead.
Put another way if you put $100,000 in and take $117,000 out, your profit is $17,000 no matter what. If we calculate it over a year the return is 17%. If we calculate it over ten months it is over 21%. That is why we say look through to the investment, unless you really had other opportunities for that cash.
That being said, we are managing cash much better now to reduce this drag. Now in our 3rd generation, we are balancing the various aspects to boost returns, manage risk, and keep clients better informed.
The Next Step
You have the option to take the proceeds from this investment in cash or roll it into the income or growth series. We will be following up with you to discuss the best plan of action for your particular circumstances. We have another Fresh Thyme deal coming up, as well as some growth investments.
As always, we appreciate your business. Please do not hesitate to contact us with any questions you may have.