Why Real Estate Funds Fail Operationally Before Investors Ever See Returns

Jeffery (00:00)
I think that one of the biggest things that I’ve seen is a lot of times newer fund managers, really they’re hyper focused on the end of the game, which is wind down and what the investors will get at the end and what the returns are.

and they feel like the investors will be happy at that point once they see X amount of dollars that they’re going to get back in their bank account. a lot of investors, and the more sophisticated, the more this is true. they experience your processes and your operations well before they ever experience any type of returns ⁓ from your funds.

Michelle Kesil (02:12)
Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil, and today I’m joined by someone I’m looking forward to chatting with, Jeffery Raju, who started Stonehill Capital, creating a unique investment management firm. So really excited to have you here today, Jeffery.

Jeffery (02:33)
Thank you. I appreciate you guys having me on and excited to talk to you guys.

Michelle Kesil (02:37)
Perfect, so let’s dive in. First off, for those not familiar with you and your world, can you share what your main focus is?

Jeffery (02:45)
so Stonehill is a fractional CFO and controller services firm for private equity and venture capital firms. Basically what that means is that we help ⁓ emerging fund managers build the financial infrastructure that billion dollar plus platforms have, but ⁓ we deliver it in a fractional package so that emerging managers can also operate at this type of ⁓ professional level.

Michelle Kesil (03:12)
Awesome. And which markets do you operate in?

Jeffery (03:16)
⁓ We

clients nationwide. I’m based in Chicago, but ⁓ we work with funds all over the country, New York, Chicago, ⁓ California. There’s a lot of concentration of funds in the East and West Coast, so we do have a number of clients there, but we work with clients all over the country.

Michelle Kesil (03:37)
And how did you get into this role?

Jeffery (03:40)
Sure, basically I spent 10 years…

working in fund administration, which is a industry adjacent to private equity venture capital firms. It’s usually one of the three main service providers that they use. basically, administration focuses on the financial statement preparation, investor reporting, all the administration and back office work that goes into running a private equity fund. So basically, I worked in that ⁓ world for about 10 years and learned a lot about

different fund structures, ⁓ financial challenges that they face, and ⁓ all the administrative aspects behind that. ⁓ From there, I went and started Stonehill, basically we try to fill the gaps between what the administrator provides, which is really like a backwards-looking ⁓ service, administration, bookkeeping, that type of thing, and we are coming in and trying to fill the gaps in terms of the financial leadership ⁓ aspect of the funds.

So projecting ⁓ capital deployment timing,

portfolio KPI management, helping with capital raising, operational due diligence, and at the management company level, providing that level of CFO services that helps them to answer these type of financial leadership questions. Can I afford to hire this person? Can I afford to pay myself this much? How much should I expect in taxes in the future? These are all the type of questions that fund admins don’t really answer, and you need somebody

with the expertise to know how these funds operate and ⁓ how to answer these questions.

Michelle Kesil (06:08)
Yeah, absolutely. And what do you feel makes most funds fail operationally?

Jeffery (06:17)
Sure, yeah, I think that a lot of times with investment managers, they’re really highly focused on raising capital, finding new investments, sourcing deals, making returns for their investors. This is like what they’re good at. This is what they’ve had experience with. With the actual operational side of the funds, there’s a lot of stuff that goes into that and along with like the regulatory aspect, the SEC is involved and there’s a lot of compliance aspects.

involved. So ⁓ it’s a lot less visibility that they have as to how the fund operates, how the returns struggle down to the investors, ⁓ those type of things. as ⁓ an manager scales, these type of things become more more complex. So if your infrastructure, your financial infrastructure doesn’t scale with that level of complexity, ⁓ you start running into a lot of problems.

time those problems become very visible to your investors and it makes it harder to raise capital for the next fund or for the next investment and that’s what we try to smooth out that process and help them to avoid those major pitfalls as they’re scaling from being a syndicator into a multi-asset fund vehicle or from fund one to fund two where the complexity starts scaling and there’s a lot of different data scattered across ⁓ multiple different data points.

Michelle Kesil (07:45)
And what would you say differentiates your firm from other firms and competitors out there?

Jeffery (07:52)
Sure, yeah, so I think that the fractional CFO world has really blown up in the last five to 10 years. There’s a lot of people out there doing similar types of ⁓ CFO services or labeled as CFO services. And I think it’s true for private operating companies as well as investment companies, but a lot of them are not really solving the CFO level problems that these managers are facing.

just

kind of another, you know, a compliance check or overall accuracy check on the financials, which really doesn’t add so much value and doesn’t add that much strategic ⁓ guidance that some of them, you know, the investment managers might be expecting when they’re hiring a CFO. ⁓ With our services, we really tried to hone in on those CFO level problems that help these funds to raise capital faster, actively manage

and maximize the performance of their portfolios and ⁓ overall have that institutional level financial infrastructure that larger, more sophisticated investors are looking for so that they can actually scale from fund one to fund two and grow their business. So ⁓ the type of things that we do that are kind of differentiators is ⁓ more than just what like hiring a CFO internally would solve because

a CFO for an investment management firm, they might not be doing the ⁓ portfolio level KPI collection system and logging that and tracking that, analyzing all the things that they want to keep track of in terms of the portfolio company for real estate asset. For example,

in commercial real estate, you might want to keep track of occupancy or you want to keep track of ⁓ cap rates that are changing every quarter for your investments.

when you have 15 to 20 different properties and you’re not collecting that data, you don’t have the narratives to give to your investors about how these assets are performing. ⁓ Another level of that is the portfolio modeling. So a lot of these funds, they create a model at the beginning of the fund and they need that to kind of do some projections of ⁓ what the future return projections might be, they’re really selling to the investors. ⁓

the outcomes but after that first model they never go back to it and update it and within six months their whole operations have changed and it’s no longer ⁓ accurate, it’s stale and it’s useless. In our system we keep a live portfolio fund model and it keeps that projection of the fund on an ongoing cycle and so this is how these billion dollar plus platforms work. They have an internal portfolio finance.

They’re tracking these models and updating them regularly, reporting this information to the CFOs and to the fund manager so they can make informed decisions, so they can actively manage their portfolio and see how the outcomes ⁓ look in the future for those companies. ⁓ So this is something that we’ve created a process for and we implement that process for emerging managers so that they have these tools available for them. ⁓

to make informed decisions, to communicate with LPs ⁓ in real time without having to say, like, let me get back to you, spend three weeks rebuilding a model, and then report again, you know. So this is just an ongoing layer of infrastructure that reduces complexity and keeps all this data at your fingertips. ⁓ this is something that I see, ⁓ that I don’t see a lot of other ⁓ service providers are doing. They’re really just coming out of audit and coming out of

⁓ maybe big four or another administrator and they’re just focusing on making sure that the reporting gets done and you know that just ultimately isn’t very exciting for fund managers and doesn’t help them move the needle.

Michelle Kesil (12:37)
Yeah, absolutely. What are some obstacles or challenges that you’ve overcome and learned from in your role?

Jeffery (12:45)
Sure. Yeah, so when I started Stonehill in January 2021, really, like the whole service package that we’re doing today, it wasn’t at the front of my mind. didn’t really know exactly, you know, how to come in and solve the problems and or really even what the problems were that needed to be solved at this level. I kind of came in trying to access the private equity venture capital world after leaving

know, tenured experience in fund administration. So I just offered my services as the financial leadership ⁓ role for a lot of these emerging managers. And basically, I was just, ⁓ you know, performing things reactively as to whatever the clients needed. Over the first couple of years and working with several clients, I started to see patterns with, you know, what type of problems that these guys were facing. ⁓

what they really needed infrastructure wise as to be able to avoid these problems. And that’s what kind of led me ⁓ to define and build a more rigid process around ⁓ preventing these things and kind of getting ahead of these things and comparing it to how the multi-billion dollar funds that I work with in my corporate experience, how they operate it versus how these newer managers that didn’t really know how

to operate and ⁓ how to look at ⁓ these factors operated in the past.

Michelle Kesil (14:18)
And what are you most focused on solving or scaling to next?

Jeffery (15:05)
⁓ At this point, we…

We’re working with a handful of clients. We’re still keeping pretty busy with that. But we’re constantly trying to improve the process. We have a lot of templates from working with lot of different types of clients. But we’re always looking to increase the automation, the speed of that, the accuracy of that, implementing AI into the process to create

more synergies and more speed in the process because really being able to keep that information available in real time adds a lot more value to the clients and that’s what we’re looking to do. On the portfolio KPI side, I’m working, like right now a lot of the stuff that we do is manual and we started it, doing it in Excel and things like that. Internally, I’m building an application.

that could ⁓ potentially automate more of this and keep it in a cloud-based system so that it’s easily accessible and all the data is there and able to be manipulated and viewed in ⁓ different ways. So we’re constantly trying to ⁓ the service, improve the product, and ⁓ the more clients that we work with, the more we learn about ⁓ what can be done better and what…

other factors the managers that we work with are looking for and what could help them more.

Michelle Kesil (16:43)
Yeah, absolutely. And what would you say for the real estate investing client? Like what type of services or support would you provide for them?

Jeffery (16:56)
Yeah, I think that again, like on the fund level, ⁓ a lot of the infrastructure and financial ⁓ compliance concerns, assurance, all of that stuff is really the same across all different types of private equity and venture capital. In general, for real estate, there’s a lot more activity that occurs between the fund and the investments ⁓ in terms of ⁓ the amount of capital that moves back and forth between the funds when distributions occur.

when an asset becomes stabilized, those type of things. we feel that our services helps real estate funds more than others because of this increased level of activity and needing to ⁓ understand when they can time distributions to investors and a lot of times syndications ⁓ or fund managers, they started with syndications, which ⁓ is a lot simpler when you have one asset.

it, you liquidate that one asset and it goes back out to the investors. Whereas in a fund you have several assets where you’re you might be investing, deploying capital into new assets. At the same time, you have older assets that have become stabilized. They’re now producing cash flow, sending money back to investors. And then you might have another layer of investments that are maturing and getting to the point where, you know, they’re getting packaged into a portfolio and getting sold. So there’s a lot more complexity that arises.

at that point and being able to navigate that, communicate that to all P’s and have that financial leadership is where we come in to ⁓ really smooth out the process and provide clarity as to ⁓ how to operate and what to look out for and preserving a future capital for new investments, expenses, and not over allocating into new investments. A lot of times in real estate,

you know, they’ll do an initial capital injection into, let’s say, this ex-multifamily property, and then, you know, the property hasn’t stabilized by the time that they originally expected, so, you ⁓ know, they need to inject more capital into that. So within our fund models, we will go through each of these investment decisions with you and create an overall commitment to these ⁓ properties so that in the future,

if it does need additional capital you haven’t already deployed it all out into a bunch of different investments and you have some kind of dry powder available to continue managing this asset and get it to the point that it’s ready for ready for stabilization.

Michelle Kesil (19:42)
Yeah, definitely. And what are some things that like impact the fundraising process?

Jeffery (19:50)
Sure.

I think that one of the biggest things that I’ve seen is a lot of times newer fund managers, really they’re hyper focused on the end of the game, which is wind down and what the investors will get at the end and what the returns are.

and they feel like the investors will be happy at that point once they see X amount of dollars that they’re going to get back in their bank account. a lot of investors, and the more sophisticated, the more this is true. they experience your processes and your operations well before they ever experience any type of returns ⁓ from your

the day-to-day ⁓ interactions that you have with them, that’s how they’re going to

be judging you throughout the life cycle of your fund or throughout the syndication. the more touch points that you have with the investors, being able to communicate the progress of different projects, the ⁓ point in the life cycle that the fund is at, ⁓ giving a lot of clarity as to what’s happening, when it’s going to happen, and ⁓ just being able to give a clear view of what’s going on and how that’s

going to look for them in the end, that provides a lot more value to the investors over the life cycle and builds stronger relationships with the investors. ⁓ that’s where ⁓ a lot of funds, they kind of discount that ⁓ infrastructure aspect in the front end, but managers that ⁓ understand that this type of infrastructure, the touch points, the life cycle throughout the life cycle, they tend to have stronger relationships with

investors and then those investors refer others into their universe and grow from there. So having a kind of a level of importance behind that really helps with galvanizing their mission.

Michelle Kesil (21:54)
Absolutely. Thank you for sharing.

Well, before we wrap up here, someone wants to reach out, connect and learn more, where can people find you?

Jeffery (22:03)
Sure, I’m on LinkedIn, Jeffery Raju at LinkedIn, but there’s also our website, Stonehillcfo.com, and we have a lot more information about ⁓ the services and our differentiators there. ⁓ We have other client testimonials, things like that, but you can always reach me at [email protected] as well.

Michelle Kesil (22:26)
Perfect, well appreciate your time and your story. Thank you for being here.

Jeffery (22:30)
Thank you, Michelle. Appreciate you guys having me.

Michelle Kesil (22:32)
And for the listeners tuning in, you got value, make sure you have subscribed. We have more conversations with operators like Jeffery who are building real businesses. And we’ll see you on our next episode.