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How can opportunity zone investments in operating businesses lead to profitable exits?
Dave Kunz is managing partner and general manager of Hall Venture Partners. Will Walker is a private equity veteran and advisor to Hall Labs and HVP.
Click the play button above to listen to my conversation with Dave and Will.
- An overview of Hall Venture Partners, a unique Qualified Opportunity Fund that invests primarily in operating businesses as opposed to real estate.
- The history of the Hall family, from the invention of the man-made diamond to the development of a “modern day Edison lab” in Provo, Utah.
- The appeal of the Provo-Orem area in the current business environment.
- The importance of developing and protecting intellectual property when building disruptive businesses.
- An overview of the Hall portfolio companies, which includes an auto manufacturer and an AI toilet.
- How Section 1202 can allow investors to realize additional tax incentives in operating businesses.
- How Hall handles liquidity events for its portfolio company in a manner that provides flexibility for individual LPs.
- Why multi-asset QOFs focusing on operating businesses continue to be a rarity.
- Investment opportunities for Hall’s Fund 1A, including minimum investments and target fund raise.
Featured on This Episode
- Dave Kunz on LinkedIn
- Will Walker on LinkedIn
- Hall Venture Partners
- Hall Labs
- 2021 Milken Institute Best-Performing Cities Index
- Hall Venture Partners Portfolio companies:
- Section 1202: Small Business Stock Capital Gains Exclusion
Industry Spotlight: Hall Venture Partners
Hall Venture Partners provides capital to grow patent-protected technology companies in the Utah region. With a 60-year track record, Hall Venture Partners is located at a state-of-the-art campus in Provo, Utah alongside Hall Labs and its team of innovators. Hall Venture Partners was established to address the growing demand by investors for curated opportunities in early growth technology companies.
Learn More About Hall Venture Partners:
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson, and today on the show, we’ll discuss opportunity zone investing in operating businesses and how such investments can lead to potentially very profitable exits.
Joining me on the podcast today once again are Dave Kunz and Will Walker. Dave is managing partner and general manager of Hall Labs, a family office based in Provo, Utah. And Will is a private equity veteran and advisor to Hall Labs. They’ve both moved on me recently. Dave now joins us today from Charleston, South Carolina, from New York, and Will, originally from Orange County, California is now joining us today from Palm Beach, Florida. Dave and Will, thanks for coming back on the show. Welcome.
Dave: Jimmy, thanks for having us. I appreciate it. Always a pleasure to be invited to come back on, and, yeah, it’s, you know, exciting times right now within the opportunity zone world.
Will: Yeah. Jimmy, I second the motion. With over 130 projects under management and growth potential up in Hall in Provo, with 200 scientists and engineers always at work and all the other shared resources we have, there’s never a dull moment in the operating business, operating companies world in the OZ space. So glad to bring everybody up to speed and be part of your podcast.
Jimmy: Yeah. I’m glad to have you guys back. The three of us have been working together, collaborating for a couple of years now, and I keep having you guys back on the show. The primary reason is because in terms of opportunity zone funds, yours is one of the only one that is a multi-asset fund that invests specifically in operating businesses.
So, you guys really are one of the flag-wavers for operating business opportunity zone investments as, Will, I’ve heard you say before. And it’s been a little while since we’ve gotten an update from you guys, and I wanna get to those updates in a minute. But first, for any of our listeners out there who are just hearing the name Hall Labs or Hall Venture Partners for the first time…Dave, I’m gonna turn to you. Can you give us an overview of Hall Venture Partners, what you guys do and what makes you guys unique?
Dave: Absolutely. And thank you for the chance to do that. So, Hall Labs is the family office of Hall, and it has been built as a modern-day version of the Edison Labs. It was the brain child and the dream of Tracy Hall, who was the principal of the family, who in the ’50s created the manmade diamond, which was really what set the family up to be able to create what is today an extremely unique environment where tangible technology’s created and IP is built early as the underlying moat and really creates asset value for these operating companies.
The reason why we’re able to bring these businesses through a patented, proven process is we’ve been doing it for 70 years. And just kinda got a little bit lucky, Jimmy. I know we’ve talked about that before, but the property that we’re on, at the turn of the century, was the largest employer within the Provo area. And it was a steel mill. And here we are, you know, over 100 years later bringing jobs back to an area that really had been decimated.
And these brown fields that the family decided to reclaim and use as it continues to expand across the 130 acres as well as, you know, incubating and exiting these companies. Interestingly enough, even the exited businesses that have happened over these last 70 years still exist on campus because the purchasers believed that their proximity to what was going on was still valuable as they continued to accelerate that growth.
So, when I was brought in, I was asked for the first time to look at a way to allow outside investors to partner with the family, or coinvest, because that had never been done before. And while we were building the structure for the growth venture fund, we did get a call from Provo, and they told us that our entire campus happened to be in one of the 8,700-plus opportunity zone census tracks. So, we’re very fortunate that what we were already doing allowed us to continue to do that in a way that provided a tax advantage vehicle for investors.
Jimmy: And what can you tell us specifically about Hall Opportunity Fund? What are the portfolio companies in it? How much have you raised so far? How’s the capital raise going, and what exits might be on the horizon? Maybe I’ll turn to Will now to speak a little bit about those.
Dave: Yeah. Real quick before we turn it over to Will, because he definitely has a unique perspective on that from his history, some interesting, I would say, tailwinds have happened as of late. The Milken Institute named the Provo-Orem area the number one area to do business. So, it’s not going unrecognized that the Salt Lake City area is seeing a ton of growth, and most of the large M&A deals that have happened over the last three to five years have all come out of the Salt Lake City area.
And now it’s set itself up in a fashion where people are even exiting Silicon Valley as well as other areas to come to the Provo-Orem area because it is so business friendly. There’s great talent, which allows us to continue to drive this business growth. And Will, I’ll turn it over to you to talk about maybe some of the underlying portfolio companies and what we’re excited about and a glimpse of kinda what’s on the horizon.
Will: Sure. Thanks again, Jimmy, for having us. And in my 30 years of private equity experience and surveying the landscape and kissing a lot of frogs, I’m all about transactions, I’m all about exits, I’m all about experience management, and number one I always look for is something patentable, is it licensed ability, whether it be in IT or anything in technology, which is my sweet spot. But tangible technology, like Dave touched on, is really the sweet spot for Hall. When I saw they have over 1,200 patents issued and on their projects, on their portfolio companies, and, also, they have their own patent office on their 130-acre opportunity zone campus, I was immediately taken.
On top of that, to see the number of exits that they’ve had in the private world…their last one being a company called SES, and it yielded a 17X-plus return for the investors, for the LPs. So, when I saw the type of multiple exits that the family and the campus and everything is…and the patent office has really yielded with that kind of return, and the historical return on all of this is 8.3X. But many of the private companies that have exited so far that Dave said always stay on campus because of the proven process, they’re so dramatic in the returns to the LPs.
And, by the way, what also added to it, which is rare, the Hall family and the principals here, managing partners, including Dave, all put their money in on the LP side. They’re always the largest LP investor in each of the portfolio companies, the six portfolio companies that we have in this mature high growth, high in fund…Hall Venture Partners Fund. So, all of these things kinda fit into it to really get my attention, get involved. You know, I’ve now started to work directly as the Head of Business Development there at Hall and partner with Dave and Matt Van Dyke and some of the other principals that have built this over many years.
I’ll just say, last thing, that the two goalposts that I use in the six companies that are in our very mature fund here that we’re talking about…number one is a leader already in the action sports market with Vanderhall Motor Works. And they’re now launching into the EV space and the power sports, electric vehicle power sports space, which is very exciting. So, you’ve got something very tangible, useful and profitable. It’s an in-profit company on this side. On the other side of the six companies, the other goalpost, since I know, Jimmy, you love football like I do and looking forward to football season here, is a classic example of an AI toilet that predicts 85 preventable diseases, real-time. And this is a project that Hall Venture Partners have many millions of their own dollars in as both GP and LP.
But just to give you an example, there’s 70 patents issued on this one project alone, and medic.life is a great website there to check it out. So, when you look at the diverse nature of all of these companies that really address big problems and big addressable markets, they’re heavily patented and very valuable. Many of them are in profit or about to go into revenue. Moving forward, it really is an irresistible diverse mixture for any portfolio to consider any strategy on top of some of the tax advantages that come with the opportunity zone format.
So that’s probably as good as I can make it, but I’m telling you, ladies and gentlemen, this is a rare bird, and I really encourage anyone to get in touch with Dave, myself or Jimmy and learn more and see how this can really benefit your portfolio.
Jimmy: Yeah, that’s great, Will. You’re right. I am looking forward to football season. So, the two goalposts you identified, Vanderhall and Medic, those are two of the six portfolio companies. Did we wanna spend a couple more minutes going through the other four portfolio companies?
Dave: Happy to touch on those, and I think, to your earlier question, which I didn’t answer, Jimmy, was, how are we doing? The good news is we were able to close the first fund here at the end of December 2020, but it was a rather unique time in that, kinda, everyone came out of the woodwork at the same time. Busiest December that I’ve had in a long time. And as collectively as a team, we had set a goal to raise $25 million for the fund, and we were able to get there but had a lot of interest.
And instead of asking people to hurry up and do due diligence, we’ve made a decision to open a parallel fund. That fund launched on June 15th. We’re six weeks into the capital raise, and I can say it’s going extremely well. And seems to be a perfect match for those that have already made investments into opportunity zone real-estate funds as a way for them to diversify their overall portfolio. But, to Will’s point, everything from transportation to sustainability to waste management.
We take a top-down view of smart city and a bottoms up view of solving that through individual companies to address those big problems that all will work together symbiotically and to touch on some of those other businesses. One of them is called Sure-Fi, which is in the wireless communication space. So has the ability to have censor technology, communicate effectively through any substrate up to a mile. What that means is you can open the door at the Empire State Building on the roof and not have to run cable all the way to the first floor. And there’s a ton of applications for what we’re doing with that technology, and it’s super exciting to see it grow.
And we’re doing a lot within the smarter homes. Smart Garage has a host of products to be able to give people their garage back. Everyone uses it for storage. Well, we’re getting everything off the floor and allowing people to be able to park their car back. And just one of the interesting issues they solved there was…every day I come home, I know I see a new Amazon box sitting on my front doorstep. And they were able to work with UPC codes to figure out the size of boxes and give out a one-time password for delivery people, and that way, that box could be slid underneath that garage door and into a protected environment to ensure the fact that it’s not taken off that front doorstep. And that’s just one of many projects that they have underneath that smarter home and smart garage product as well as some smart blinds that work both on a retrofit and for newly purchased, both lever and roller shades.
A company called Bacon that is working in the gig economy space. And also growing quite well and all of these businesses as…you know, I wrote the investor update here at the end of the year. It was a tough year last year, and challenging with COVID. The upsets within the supply chains that are out there and just consumer behavior in general, and proud to say that we were able to see revenue on a year-to-year basis at a minimum double on all companies. And Vanderhall, in general, put themselves in a position where they were able to go profitable for the first time. About $36 million of total revenue and a little over $5 million EBITDA.
So really a lot happening across the board within the individual portfolio companies, but for the fund as a whole. And this fund, we’re targeting close at the end of the year this year. But my guess is based upon, kind of, the interest that we’re seeing, the capacity won’t be there come December. So, we’re here. We’d love to talk to additional partners that wanna come in and be part of building something that I think is extremely unique within the opportunity zone space.
Jimmy: That’s great, Dave. Thanks for the recap there. And, yeah, impressive portfolio of operating businesses that you have in your fund portfolio. I wanna shift gears and talk about exit strategy for a few minutes here, if we can. A couple of questions for you guys now. What is the typical time horizon for exits within your fund and, assuming that it is under 10 years…I believe it is under 10 years, typically, is when you’re churning these companies for exits. What happens for the LPs who have contributed OZ equity? Are they able to get to 10 years? Just curious on your thoughts there.
Will: We have a number of options. It just really gives any portfolio strategy some options, not only from a diverse standpoint but from a timing standpoint. And I’ll let Dave talk a little bit more about 1202 and all of our companies except one…all five of the six qualify for 1202 tax code, which we’ll…I’ll let Dave talk a little bit about that. But the options that you have with operating companies and potential multiple exits on down the road also give you lots of flexibility and strategies and things like that. So, Dave, why don’t you take it on those fronts?
Dave: The thought, Jimmy, in creating this fund was to be able to provide our partners that flexibility and the potential for liquidity, because 10 years is a long time. And I don’t have a crystal ball. None of us know what’s gonna happen in the next year, two years, five years, to the extent that we could take advantage of not only the existing legislation and guidance around the opportunity zone space.
There were some older tax laws in place that we were able to capitalize on as well, and that’s the 1202 rule that Will mentioned that focuses on small business stock and owning small business stock. And as long as the company is under $50 million of revenue, it’s the first $10 million on a per LP basis that qualifies for tax free inclusion. So, it really would allow you to have an exit within a five-year period of time, which, interestingly enough, matches up with the current guides on when people would be paying their taxes on their original capital gain.
So, the way we’ve structured the fund is it’s always an LP-by-LP decision on what they wanna do. And what I mean by that is, when we have exits, we’ll always come to the LPs and ask them, do they wanna leave the capital into the fund, which, in that case, we have 12 months to redeploy that capital into another qualifying asset or assets. The LP could take a distribution at that point, and if it’s after five years, if it falls under 1202 that they pay their taxes on the original capital gain but be able to have that tax free appreciation come through.
Or there are some LPs that have said, “Listen, if the exit is sizeable enough, there might be a situation where I just am willing to pay the taxes.” Those are all good problems to have. But what it does is it provides decisions for each LP to be able to make alongside of the guidance and the partners within the fund to do what’s best for them at any given time.
So, I hope that answers your question there, Jimmy, but as far as timelines go, we traditionally look at investments that are coming into Hall Venture Partners Fund with a two-to-five-year exit horizon. Keep that in mind. This is a parallel fund. So, we started investing back in 2019. So, we’re definitely coming up on some of those goalposts. So, I would expect, based upon the hustle and bustle around campus and strategic investors coming in every day, that continues to grow. So, I would expect that, based upon the two-to-five-year time horizon that we target for exits, that there should be some exciting new coming down the pipe.
And in addition to that, the real difference between investing in these operating businesses versus real-estate is, over that 10-year time horizon, if…matches up with what we target for exits, I would anticipate being able to turn this portfolio over somewhere between two and three times. And what that means is just getting, you know, additional leverage on that capital that you put to work in the form of, kinda, tax-free appreciation over the life of the fund. So, it really is pretty exciting to think about the potential.
Jimmy: And what do the returns look like when you churn the fund over a few times?
Dave: We’ve targeted a 4X return. We’re trying to be very conservative with how we look at the companies and the businesses. And in addition to that, we…as Will mentioned, we have an 8.3X historic return on invested capital. So, if you do the math, whether that’s two times or three times even at the conservative target that we have, you’re targeted at, you know, somewhere in excess of 12X returns, which should be pretty exciting, especially considering it’s going to be tax free.
Jimmy: Yes, that’s a 4X return with the fund churning over three times. Four times three gives you a 12X return. I think that’s the math there. And, of course, all these are just projected. We’re not guaranteeing any of these, but I believe that’s what you’re stating there. Is that right, Dave?
Dave: That’s the back-of-the-napkin math, and there’s, like you said, no guarantee on the past expectations being an indicator…
Will: Very reasonable, though. Yeah. And to put a cherry on that too, Jimmy…and I would encourage everybody to request a deck of the portfolio companies, and when you look at historical backgrounds of exits…but also please get a deck and take a look yourself and see what we see in all the elements that we’ve outlined.
Also, if interested, I can line them up with a virtual tour deck, which is really…when you see the 130-acre campus and understand the shared process and proven process for exits of this caliber, or potential exits of this caliber continuing for this fund and on above, you’ll really get the full picture of what we’re talking about. So, I would encourage everyone to take advantage of that, of both those exposures, and really see what I consider a Disneyland for proven growth and exits.
Jimmy: That’s great, guys. A couple more questions before we wrap up today, and then we’ll tell our listeners where they can go to learn more. But question for you, Dave. As I stated at the top of the episode, there really aren’t a lot of funds doing what you’re doing, multi-asset, OZ funds whose focus is in operating business. Why aren’t there more multi-asset operating business OZ funds?
Dave: I continue to be surprised as well. I think there’s a number of reasons for it. One would be the original guidance that came out on the opportunity zone investments opportunity focused entirely on real-estate. So, I continually talk to investors, even today, that don’t know that it’s possible to utilize incentives associated with the opportunity zone program with operating businesses. So that’s one.
And two, like I said, we really got lucky in that we had built this machine and process over 70 years that is churning and building and incubating these patent-protected technologies that allow us to build these huge businesses. And you really have to have a consistent funnel of companies that you have to be able to diligence.
And, unfortunately, because some of the timelines that are associated with redeployment of capital, I think, in a traditional venture capital setting, might be challenging, but because we have such a breadth of businesses that we’re fortunate enough to be able to review and diligence ourselves, that’s the key to, really, our success and being able to lay out the 10-year plan is the lab is always coming up with new ideas. And even ones that we diligenced two to three years ago that may have not qualified at that time, they’re ready now. So, we’re…not for a lack of deal flow.
Jimmy: That’s good. Okay. Gents, well, let’s wrap up here in a minute or two. Could you recap for me what’s the capital raise looking like for Hall Opportunity Fund 1A? What’s the minimum investment, and where can our listeners go to learn more about you guys and Hall Labs and request additional information?
Dave: Sure. We’re raising another $25 million. So, staying in line with the idea of having a parallel fund. And that fund will invest in the same six portfolio companies as fund one. This is Fund 1A. That’s our extension here. And we’re hoping to wrap this up by the end of the year, but, like I said, we’re fortunate that we’re seeing some real success. So, for that total $25 million, we’re probably about half way there committed. But we’d encourage anyone to reach out and find out more about what we’re doing and hear the story.
But the easiest way to do that is you can go directly to the Hall VP website. That’s H-A-L-L-V-P.com. Or email myself directly, which would be dkunz, D-K-U-N-Z, @hallvp.com, and I’ll let Will give his contact information as well. But whether it’s the button through the website or just reaching out to us directly, we’d love to hear from you.
Will: Yeah, Jimmy. I’m wwalker, [email protected]. And I would, like I say, encourage anyone to see the depth and the diversity of the portfolio, the six companies that are in this portfolio, in this fund, but also to take the virtual tour. There’s so much here. We have over 200 scientists and engineers full time on campus out of 450 employees. So, when you ask why aren’t more people taking advantages, I think we are. Both Dave and I continually get reached by different large groups, even campuses, major universities around the country that really want to join Hall or join and study their process and all that they’ve really put forward here and learned and profited from in 70 years.
So, whether it be Texas A&M or Arizona State or UMass or many other greater learning areas, and certainly other areas, too, of growth and opportunity zones, they all wanna either copy or join forces with the Hall formula, Hall process. So, I encourage everybody to take a look at these and while we’re here now and take advantage of it for their own portfolios and profit.
Dave: And Jimmy, I know you get a lot of listeners that are creating their own funds as well. And in helping just grow this community, we’re…you know, Will and I are open to helping anyone talk about structure and what’s worked for us and what hasn’t. So, to the extent that we can help anyone accelerate what they’re doing as well, feel free to reach out as well. It doesn’t just need to be for the purposes of investment.
Jimmy: Oh, that’s tremendous. You guys are both amazing opportunity zone resources, so thank you again for joining me on the show today. For our listeners out there today, I will have show notes for today’s episode on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast, and there you’ll find links to all of the resources that Dave, Will and I discussed on today’s show, and I’ll be sure to link to both Dave’s and Will’s email addresses so you can get in touch to request additional information on Hall Labs, or maybe you just wanna pick their brain on how to structure an OZ fund. Dave will be there to answer any questions you have. I’m sure. So, gentlemen, again…Dave, Will, thanks for joining me today. Appreciate it.
Dave: Jimmy, can’t thank you enough.
Will: Always a pleasure and look forward to even more updates as we all move along together in this world of OZ that’s continuing to grow.
Jimmy: Terrific. Looking forward to it, gentlemen. Thank you.