JF2608: Lessons Learned from $25M to $250M AUM in 2 Years with Brian Adams #SituationSaturday
When Brian Adams went from $25M assets under management to $250M in 2 years, his biggest challenge was managing that growth. What fell through the cracks was his investor experience, and he ended up with some not-so-happy investors. Today, Brian is sharing his biggest mistake with his investor communication and his business model, what his investor journey looks like now, and what you should be doing today to scale efficiently.
Brian Adams Real Estate Background:
- Full-time in commercial real estate
- 11 years of experience
- Portfolio consist of 2.7M square feet; $400M gross asset value; 14 markets
- Based in Nashville, TN
- Say hi to him at: www.excelsiorgp.com
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Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Brian C. Adams. Brian is joining us from Nashville, Tennessee. He was a previous guest on a number of episodes. So if you Google Joe Fairless and Brian Adams, his episodes will pop up.
Brian, we’re glad to have you back. Thank you for joining us, and how are you today?
Brian Adams: I’m doing well, Ash. Thanks for having me back. I really appreciate it.
Ash Patel: Yeah, it’s our pleasure. Today is Saturday, so Best Ever listeners, I hope you’re having a great weekend so far. Because it is Saturday, we are going to do a Situation Saturday show, where we discuss a specific situation that our guest has encountered. The goal is to give you the knowledge should you encounter a similar situation. Brian is a full-time commercial real estate investor and has 11 years of experience. His portfolio consists of 2.7 million square feet and over $400 million of assets under management.
Brian, before we get into your particular situation, can you tell us a little bit more about your background and what you’re focused on now?
Brian Adams: Sure, happy to. So I am originally from New York. Met my wife in college in Connecticut, we both went to graduate school at the Northeast; we eventually moved back to Nashville 15 years ago. My wife’s family has a single-family office that has invested in the commercial real estate space for the last 25-35 years. I practiced law for a number of years, and then through exposure to different sponsors and GPs via the family partnerships, I became enamored with real estate as an asset class and as an industry.
I started the company with my partner 11 years ago, and – we’ll get into this, I think in the conversation, but we had an earlier iteration of the firm that we grew to about $250 million gross asset size. Made a lot of mistakes, hopefully learned from them – I think we’ll get into some of those errors – and then re-launched the firm about 3-4 years ago as Excelsior Capital, which is a pure-play syndication platform for individuals and family offices. And we really do three things – offer people direct access to co-investing deals, provide a double-digit cash-on-cash yield annualized that we send in monthly distributions, and that we focus on all the tax benefits that come from direct real estate ownership. And we do that by investing in anything from office, to industrial, to flex, to medical, to retail, mostly in the Southeast, the Midwest, secondary and tertiary markets.
Ash Patel: Awesome. Let’s get into your situation. And I don’t know what it is, but you were laughing when something came to mind, so… I’m dying to hear it.
Brian Adams: Yeah… Laughter mixed with tears. And I think when we’ve talked in the past, we’ve alluded to the fact that you learn a lot more from mistakes… Because I think we all have a pretty good sense of what we should do, what the ideal is, and we understand what that looks like. But not stepping in that pothole, and having somebody draw that picture for you of what defeat looks like or failure or mistakes, not only can you avoid that singular mistake, it saves you a lot of time. Because unwinding that mistake can take up a lot of capital. I don’t just mean investment dollars, I mean, social capital, political capital, physical capital, emotional mental capital.
So my story – because people always learn better from stories – and my experience is… When I came onto the show earlier, we talked about how to raise capital from individuals and families through an empathetic lens. And you can link that to the show notes, I’m not going to go over that pitch again. But I had essentially discovered how to raise capital in an efficient manner, and I knew exactly what individuals and families wanted and how they wanted it.
So when we started pivoting away from funds to doing deal-by-deal syndication, the company grew really fast, and this is probably a pretty good lesson for a lot of folks, because if like half the stuff I see on LinkedIn is real, there’s some managers and GPs that have had really big years, which is exciting. But managing that growth can be a real challenge. So for me, we probably grew from $25 million to $35 million of gross assets under management to 250 in two years, and it was a lot of fun to acquire those deals. And the deals were all sound – the underwriting, the investment thesis, they’ll make a lot of sense.
What I did was fall into a trap of being a deal guy, as opposed to being a private equity asset manager, and not understanding that I was building a small business and company around these investments. So what happened was, we grew really fast and all of a sudden, I had 100-150 investors, and was managing a pretty good-sized portfolio, and I had no CRM, I had no investor relations software, I had not done a good job of being transparent with the investors on the frontend of what they could expect on a daily, weekly, monthly, quarterly basis, and I didn’t have a true in-house controller; so we were still third-party managing the accounting and the bookkeeping etc.
So the next thing you know, we decided to start doing monthly investment updates on every deal, and we’re talking about 20-plus deals. And it was just a total nightmare; we used a system where we would assign a grade to the property and it was totally arbitrary. So we would get together, we would say, “Okay, this property is doing pretty well, let’s give it an A.” And we would do a really short synopsis based on kind of what the property managers and leasing brokers were kind of telling us. But we didn’t have any way to send people financials or to document what was happening on the property level.
So you pretty quickly realize every 30 days comes quickly, and it’s too fast to really have any perceptible change in these assets. So we end up just kind of writing the same thing every month. And that arbitrary grade assignment loses all meaning, and you’re just constantly taking phone calls, fielding emails, somebody’s CPA or somebody’s wealth management firm misunderstands the evaluation of the portfolio holdings. Mr. Smith is in five of the 10 deals, and Susan is in five other of those 10 deals, and you’re constantly just playing defense and scrambling to get people the information they want. And even if you have the motivation, there’s only so many hours in the day, and even if you’re not hiding anything, people will go to their darkest, worst fears about what’s happening with their money, and they will get scared. And when people get scared, they get aggressive. And when they get aggressive, you as the GP sponsor become defensive.
I think Hemingway put it really well in terms of going broke, “It happened really slowly, and then all at once.” So these things were just kind of simmering and accumulating, and we didn’t know what to do, really; we were early 30s.
So finally, it all kind of just stopped, and we had to have a really hard decision internally about what to do. We eventually recapitalized that entire portfolio with a private equity group, and it was a good outcome for everybody. But even during that process, the transparency and the communication was lackluster, at best.
So all that being said, when you find yourself in the situation where things are moving really quickly, you have personally hit some milestones of success that you thought would, quote unquote, “change everything for you.” And you realize you’ve just kind of created more problems and more issues.
The worst thing you can do is punt and hope for time, that it will solve these problems. Kicking the can is the worst choice here. And we can go into the right thing to do and we can talk about how we do things today, but that’s my story of how things kind of went sideways. Even though on the outside, all of my GP and sponsor friends were saying, “Man, look at this AUM, it is crazy, the square footage, blah, blah.” But internally, we were scrambling, because we just didn’t know what to do or how to handle that type of success.
Ash Patel: Brian, what did your team look like at this point?
Brian Adams: It was myself, my partner, we had an acquisition’s guy who was also our asset manager… And we had one utility field player who was helping on multiple fronts. And then we had third-party accounting and bookkeeping. So we were just understaffed, and we didn’t realize that we could leverage technology to help us solve a lot of these problems. Like I said, we didn’t have an investor relations portal, we didn’t have a CRM to help communicate with people, we had no real social media presence… And we had no cadence or a content calendar in terms of how we were going to report to investors. And we didn’t manage those expectations at all. So there were wildly divergent investor expectations based on what they had seen with other sponsors or GPs, versus what we were doing… And we didn’t even know what we didn’t know, honestly, when it came to that part of the business.
Ash Patel: I’m going to play devil’s advocate here, and I’m going to give you a hard time. You were an attorney, you’ve done a lot of deals, and you’ve got, at this point, $250 million of assets under management. For all intents and purposes, you were a pro. I’m sure you’ve been a passive investor before, and you see the communication that comes down… So there had to be something that just inundated your mind to where you couldn’t grasp all of these things. Was it that you were flying high because you were growing so quickly? Did you just assume that the investors are going to make a lot of money? “We’re good.” What was it that took up space at the forefront of your thoughts?
Brian Adams: Looking back on it, the biggest challenge that I had was not understanding that the knowledge that we had internally, that was in my head, about what was happening with the portfolio or how we were operating things, was held exactly there, in my head or internally. And we weren’t transferring that knowledge or information, and that transparent communication that we now practice, to the investors. And when you don’t have that clarity, it creates miscommunication, and miscommunication leads to frustration, and frustration leads to all these other negative emotions.
And you’re right, looking back on it, we certainly could have done a lot of things differently when it came to the communication component of it, and others. But I’m not going to defend myself so much to say, we didn’t have a lot of peers that we could lean on, that were growing at that kind of scale and speed. And literally, didn’t know who to pick up the phone and call and say, “Well, what are best practices here?” And at that point, I wasn’t listening to podcasts, I wasn’t reading books, I wasn’t utilizing social media the way I do now, to understand what best practices are. And ultimately, I take full responsibility for that, but those are some of the reasons, I think, behind it.
Ash Patel: Yeah. And having gone through that, you must be incredibly self-aware now about your communication to investors. So what does that look like? If I’m an investor in one of your deals, what do I get? Is it weekly, monthly quarterly?
Brian Adams: Yeah, so I’m very militant about it now. And we think a lot about the investor journey, and what that experience will be from when you enter into the funnel, because you hear me out a podcast or you connect with me on LinkedIn, and you go to the website you say, “I’m interested to learn more,” everything from that until you come into one of our opportunities, right, one of the investments. So now we are very transparent about setting expectations with our investors, and what you can expect is having access to Juniper Square, which we think is the best in class investor relations portal that gives you 365 24/7 access to all of your investments, including monthly financials, quarterly asset level and market-level commentary, recorded videos of the third party property managers and leasing brokers we work with, giving you their own thoughts in audio and video of what’s happening in the property, and your K-1’s will be delivered early to you, and you will receive monthly distributions after the first quarter of ownership of the property. So those are all the things that you can expect. If you call or email, somebody will respond to you within 24 hours, except if it’s on the weekends. Unless it’s an emergency, obviously, [Inaudible [15:44] to deal with but we might not have the answer, but somebody from the team will give you a warm call or an email response. Those are the types of things that we guarantee now.
Ash Patel: Brian, $250 million. At that time, I would imagine you have some of the same challenges as somebody that has $2.5 million or $20 million.
What advice would you give that new syndicator that is in that moment inundated, they’re the deal guy or girl, and man, they think they’re doing okay, they may not realize that the investors are getting angry, aggressive, and just the lack of communication is a problem? What would that five-minute conversation with that individual look like?
Brian Adams: It would start by saying, you have to realize that you’re not just an acquisition’s person, that you’re now a small business owner. And part of your responsibility is not just finding attractive opportunities and running them. It includes marketing, investor relations, tax, audit, accounting, bookkeeping, HR, and you need to put time and money and energy back into the business to afford you the opportunity to scale efficiently because you will be cutting off your nose to spite your face if you just go out there and gobble up a bunch of assets and think that performance will take care of all of these issues and problems or cover up your weaknesses as a small business.
And frankly, I’d be pretty honest and say, small businesses in America fail. I think it’s like 85% fail within the first 12 months. So good luck and think about this the right way. But to go back to how to pitch and how to raise capital, be empathetic. If you had imparted your hard-earned capital with somebody, what would your expectations be? If you dropped your money manager a text, would you expect a response? What would you want the reporting to look like? What would the cadence of that reporting be? Would you want fancy graphs? Would you want a weekly statement, a daily statement, a monthly statement? I think being a passive LP in other people’s deals is a really good way to learn. And I think the industry as a whole and financial services does a really poor job of it, because LPs haven’t really demanded it, but that’s changing. So you better be at the forefront of leveraging technology and communication techniques because you’re going to be quickly left behind.
Ash Patel: The investor portal that you mentioned, do you send out communications? Or do you just send a link, expect your investors to go there at will?
Brian Adams: You can choose, like, you can receive an alert that, “Hey, this quarterly update is now in your profile,” or you can actually get the email sent to you directly. It’s your choice, right? And we’re all about empowering our investors, and being mindful and efficient with their time and energy. So that’s one of the things that we do is we give them that optionality.
And frankly, to be honest, if you give them everything, like if you’re just completely open and you’re doing a really good job of staying on top of the monthly financials and the quarterlies, and the distributions, you send them market commentary and macro commentary, the degree to which they will engage with it, will be lower, but that means you’re doing a good job. So I wouldn’t get hung up on your click-through rates or your metrics or KPIs when it comes to that because if you’re doing it the right way, people trust you and you built that relationship. They may not look at everything but don’t take that personally, it’s just because they feel comfortable with you.
Ash Patel: Yeah, so you’ve overcome a lot of your bottlenecks and growing pains. What’s your pain point today?
Brian Adams: Pain point today would be how to make sure we don’t suffer from style drift. So we’ve done six acquisitions so far this year, under contract on three more, we’ve been oversubscribed in all of them. As a manager in a GP, it’s really easy to fall into a trap of, “Well, if we can raise them a $10 million deal, let’s do a $20 million.” But if that’s not your niche and that’s not your strategy, and that’s not where you feel like you can create alpha, that’s probably the wrong move. But it can be really hard to pass up that capital or those opportunities. And so I think making sure we don’t suffer from style drift. At the same time, making sure we’re doing a really great job providing people the deal flow that they want, right? I mean, there’s a lot of appetite for it. Well, not going too far afield in terms of what we’re good at and where we have core competency.
Ash Patel: And how have you grown your team over the last year?
Brian Adams: We’ve hired two asset managers, an internal marketing person and a staff accountant to help our controller.
Ash Patel: And back to the newer syndicator, is it okay to outsource a lot of that in the beginning?
Brian Adams: It’s okay to outsource a lot in the beginning if you have tempered expectations of the product you’ll receive in return. And if you’re transparent with your investors that, “I’m just starting this business, I can’t afford Juniper Square. What I can afford is X,” or, “What I can do for you is Y,” right? It’s okay if you understand you’re not going to be delivering a best-in-class experience to them. And if those LPs sign off on that, they understand where you are, as an entrepreneur and a business owner, I think that’s okay. But you need to reinvest in the company early in order to be able to scale this.
So I do think it’s okay to outsource some third party initially. But there are some critical functions that the minute that you can afford it, and you can flip the switch and bring a controller in-house or have a really robust investor relations platform, it will be painful to invest that money in the company because you’ve just started being profitable. But in the long term, it will prevent a lot of headache and heartburn for you.
Ash Patel: Yeah, it’s definitely a struggle that’s real for a lot of people that are rising and going through these growing pains. But Brian, I appreciate you sharing a lot of your time and that intimate story of a growth pain that you had and overcame. It was great having you back on the show again, man. Thank you.
Brian Adams: Yeah, thanks so much for having me, man. Appreciate it.
Ash Patel: And Brian, once again, how can the Best Ever listeners reach out to you?
Brian Adams: Sure. I appreciate that. I’m active on LinkedIn. So if you just look up Brian C. Adams, Excelsior Capital, shoot me a note, connect with me. I’ve had a lot of people reach out from the show already from previous episodes, and it’s great to talk. And I’m happy to help anyone, I can give you a bunch of advice, talk about all the other mistakes I’ve made. This is only a 30 minutes show. So we could do another one about different problems. I’m happy to go through with that, and then if you’re interested in the investment side, checking out the website, excelsiorgp.com, is the best way to learn more about the investment opportunities themselves.
Ash Patel: Awesome. Brian, thank you again. Best Ever listeners, thank you for joining us and have a best ever day.
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