Origin Investments was one of the early adopters of Opportunity Zones in 2018. They have since raised $585 million across their first two Opportunity Zone funds. And now they are gearing up to launch OZ Fund III.

Michael Episcope, principal co-founder at Origin investments, joins the show to discuss Origin’s story, where investors can find value right now, and whether Opportunity Zones are still good deals, given current macroeconomic conditions.

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Episode Highlights

• The origin story of Origin Investments, and what attracted the group to Opportunity Zones.
• Some of the biggest lessons that Michael has learned throughout his career.
• The recent challenge of getting deals to pencil, given the rapid increase in debt costs, and where investors can find value right now.
• With fundraising volume down, whether or not Opportunity Zones might get a second wind.
• Trends across the broader private equity real estate industry.

Guest: Michael Episcope, Origin Investments

• Michael Episcope on LinkedIn
• Origin Investments

About The Opportunity Zones & Private Equity Show

Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones & Private Equity Show features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones and the broader private equity landscape.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones & Private Equity Show.” I’m Jimmy Atkinson. Origin Investments raised 575 million in their first two Opportunity Zones funds, and now they’re gearing up to launch OZ Fund III. Here to discuss Opportunity Zones and more with me today is Origin Investments Co-CEO, Michael Episcope, and Michael joins us today from Chicago, Illinois. Michael, great to be with you here today. Thanks for coming back on the show.

Michael: Jimmy, thanks for having me. Really appreciate you, you know, doing this today.

Jimmy: Yeah. Always great to hear from Origin Investments and you personally, Michael. As our listeners and viewers may know, Origin Investments you guys are really a leader, not just in Opportunity Zones, but also in the broader private equity real estate industry, and I’m sure that most everybody listening or watching this today has probably had some level of familiarity with your firm. But for anyone who might not be familiar with you, can you tell us a bit about Origin Investments and what is your role there?

Michael: Yeah, I’ll give you a sort of the 20,000-foot level view. I’ll try to keep it under two minutes. You can yank me if I go over that. But we are a real estate investment manager focused exclusively on multi-family. We have three strategies. We do ground-up development, we build, and it’s really a build-to-core strategy where we’re doing ground-up development to hold for the long term, very tax-advantaged on that side. We have a lending arm as well, that’s been the focus for the last kind of two years of our organization. So we land in the form of preferred equity.

A lot of that is to ground-up development projects. I can get into why we like that space for lending as well. And then we have a value-add and core plus bucket as well, depending on which fund we’re sourcing deals for. Now, candidly, we haven’t bought anything in three years. 2020 was kind of an odd year, you couldn’t price assets. I think by the time we could, we said, “Look, we wanna stay out of this euphoria.” We used it as a time to sell assets and get into the credit side, protect ourselves, and really stepped aside from the market because when you don’t know what’s going on, you just sort of, you know stop investing. And then that’s what we say.

We have 54 team members, about $1.5 billion in equity under management, represent close to 3,500 investment partners across our various funds, and our fastest-growing segment is really in the registered investment advisor space. There’s 70 advisors who we work with closely right now, and we’re adding, yeah… And it seems like kind of one to two per week. And I’ll say like, I’m in Chicago. We do not invest here. I’ll just get that, you know, kind of out there. We’re only in the Sunbelt markets, we’re in the Southeast Texas, and Southwest markets.

And our sourcing is really, you know, I think one of our biggest competitive advantages. I always say two things that we’re obsessed about are returns and client service. And in terms of returns, it always starts with sourcing, right? And especially in this market, how do you find value in a market where everybody’s talking about how unaffordable housing is right now? And we use a combination of human…I would say…it’s kind of at the intersection. How do I wanna say this? But data science and then human capital and that intersection. And data science is really, we created something internally called Origin Multilytics which focuses on rent growth in our various markets around the United States.

And it can process more than $2, $3 billion…or 2, 3 billion pieces of data monthly. And our team on the ground uses that as a tool to sort of understand where they need to go, how they need to hunt. And it removes the bias from the investment decision-making because you can love a place like Austin, but you don’t know what it looks like over the next kind of six months to a year to two years, it’s no different than loving a stock, right? You have to love the PE ratio relative to growth. And that’s what we’re looking for in these markets.

So where can we go and still find value in the market? And that’s the secret sauce to, I think, any organization and putting yourself in so you can make money on the front end, but then let it grow over the long run as well. So, hopefully, I did that in under two minutes.

Jimmy: Not close enough. And I wanna dive into a few of those topics that you touched on. We’re gonna talk about your new credit fund. Maybe we’ll talk about Origin Investments Multilytics a little bit more. We’re definitely gonna talk more Opportunity Zones. And as you’re gearing up to launch Origin Opportunity Zones Fund III, we’re going to talk about all those topics within our conversation today, Michael.

But first, I kind of wanna back up and hear more about your personal journey, Michael, a lot of people in the private equity real estate industry look up to you, I’m sure. You’re kind of an unofficial leader in the space to get to where you are today. But how did it start? Can you take us back to the beginning and walk us through your career journey? When did you first start doing, how did you get into real estate investing in the first place?

Michael: Yeah, happy to. It was very non-traditional, which I think was both an advantage. It was a huge advantage, but there were points in my career where it felt like a disadvantage as well. So all the way back to the beginning, my grandfather was in real estate, and as a kid, I used to help him. And he bought buildings out of tax sales and he was scrappy in updating them and things, and he had to be. And I used to work for him in the summer, and we’d go to these buildings and we would scrap and, you know, use these parts and buildings that were being demolished. And I sort of learned a little bit about the hands-on element to it then, and then I was out of it for a long time.

And I went to college, and during college, I became an employee of a group at the Chicago Mercantile Exchange. So, fast forward, I had a trading career for about 10 years which really, that’s where I built my wealth originally, and I was down at the exchanges for 17 years in total. And when I started trading, I didn’t have really two nickels to rub together at the time. I had amassed more wealth than I ever set out to. So I was blessed, and when I was done trading, I was also married. I had two kids, I had another one on the way, computers were coming in, and I knew that I couldn’t forecast the future, nobody can. But I was able, I knew what Edge was, and I was losing that as computers came in because they leveled the playing field.

So I said, “Hey, what’s next? I don’t really wanna be trading and leveraging my positions 300 to 1,” so I ended up retooling and I went back to graduate school and got a Master’s in Real Estate. And I said you know, this is the new career. And it was really about how do I protect my wealth? How do I grow my wealth? How do I create these passive income streams? Because as I was trading, I was also investing. And what I realized about third-party investing and being an LP in that, and, you know, you can find some good managers, but nobody’s gonna be a better steward of your own capital than you are, and especially in real estate investing. And it is the great wealth creator, and it’s incredibly tax-efficient, and it creates passive income, but you have to be with the right manager. And I just wasn’t finding them.

And by the way, this goes back to, I mean, long time ago, right? We’re talking about 2000, 2001, 2002, way before the Jobs Act, way before things were transparent. And Invested with big guys, the little guys, and it was like two steps forward, one step back, and sometimes it was three steps back, and you just felt like an idiot for the people who you gave your money to and entrusted and everything looked great on paper.

And so my partner and I got together about… Well, we had met in about 2003, worked together on a nonprofit, and really, were just like-minded and we were sharing ideas, and I think it was in kind of 2006 we’re like, “Look, if this is what the world has to offer, like we can do this a lot better. Let’s pool our money. Let’s put something together, create a company.” And it was more like a family office in the beginning. And that’s how it started. And I didn’t have the pedigree in the beginning, I didn’t come from a Blackstone or Carlisle or any of these groups.

And so as we were growing and we were adding individuals, we were adding individuals who had this kind of background to augment what we lacked, right? As an organization. One thing that was clear though, was our passion for doing the right thing, representing individual investors like ourselves, making deals fair. And we didn’t really syndicate deals till, I would call it ’09, ’10, ’11 around that point. But we attracted individuals like ourselves, all we wanted to do in the beginning was just do good deals. That was it. Make money on our money, and I would say that we were kind of augmenting the fee structures.

And we always said, “Look, our investors are paying, you know, 1.5% on management fees, and we’re paying like 4% or 5%.” We would get a performance fee and we’d make it up there. But what I was talking about earlier and alluding to, the disadvantage of not being, having that pedigree being from an institutional background, is as we went out there to grow and raise capital, and our team wanted us to grow as well, and at that time, we have 8, 9, 10 people. We were talking to institutions and they were just like, “Look, you know, we love you guys. You guys are doing awesome. We have two funds that…they’re in the top decile,” but for whatever reason, we never got the real answer, but we weren’t having success there.

And so we said, “Hey, let’s stop this.” You know, we’re having a lot of success on the individual side. Let’s go all in here. We love serving these people, we are already getting great emails, love letters from our friends, our network, things like that. And we did, and we went, I would say the inflection point was that was about 2015, and we had already launched two funds at that time. We were launching our third fund. We had about 95 investors at the end of 2015. By the end of 2017, we had 500.

And so we knew we struck a nerve with the community, and really, the other thing is that the incumbents in the market, the non-traded REITs, the high fee structures, these are also the people who we were sort of rallying against and trying to be incredibly efficient and go direct to investor and keep our fees and our products at an institutional level. And so, you know, I’ll just kind of fast forward, but we ultimately got the product mix down right. And so today, we have what I’ll call a low, moderate, and higher risk product type for people who want just income, income and appreciation, or put the pedal to the metal and just focus on appreciation. And that is really what has helped us grow. And that’s how we’ve gotten, you know, from where we were to now servicing 3,500 investors.

But, again, it’s back to being obsessed with those two things, returns, and client service. And when you’re growing that fast, you have to be able to deliver the product on all fronts. And we’ve done that. We, you know, had certainly a period there where we were building the plane while we were flying it. Sometimes it feels like that today, there’s a little bit of a lull in the market, and we look at this as a healthy correction and a great time to just build our foundation and continue to do what we’re doing great. So that’s the sort of history up to where we are now.

Jimmy: No, that’s a great story. And I think what you guys got right early on is you really built it around the investor from the get-go because you and your partner, David, were LPs in different funds leading up to that point, and you thought, hey, how can we do this a little bit better? A couple of things you said that really resonated with me that we like to tout a lot here at WealthChannel and at OpportunityDb is we like to help investors protect and grow their wealth with alternative investments, real estate investments, tax-advantaged investments like Opportunity Zones.

You guys are doing the same thing. And just the way that you guys are doing that and also creating passive income streams for your investors too, very much aligned with Investors, incredible story, great growth that Origin Investments has seen and experienced over the past few years. Going back to your really early days with your grandpa, I’m wondering if you have any lessons that you learned from him early on in your career that has kind of helped shape you, get you to where you are today?

Michael: Oh, yeah. He was such a hard worker, you know, and I remember him just being hands-on. And I think in any business, and I’m sure there’s a lot of business owners learning today, you have to understand the details, be in the weeds, and surround yourself with really good people. I think one thing I’ve learned throughout Origin and the stuff he did is that you also have to love what you’re doing. And he loved what he was doing. We deal with a much higher quality tenant, a much higher caliber. And I remember going to the West side of Chicago and getting out of the car and going through a steel door behind a bulletproof glass window. And, you know, like it was some really rough stuff.

You know, it’s hard for me to point to one thing. I know he rubbed off on me, you know, during that time. And it was definitely a learning experience, and I’m sure that in many ways, it’s why I’ve gravitated towards real estate. Jimmy, I do wanna comment on one thing because it was interesting what you were talking about and what we were just talking about, the growth of Origin because I had lunch with our investment management team yesterday and one of our newer employees, she was asking me something about the profitability of the company and I said, you know, David and I, we never really thought about the profitability of the company and building, you know, EBITDA and things like that.

You know, this is all the stuff that you think about. And by the way, we weren’t a profitable company. That’s just not a metric that we focused on. We were always reinvesting into the company. And I don’t even think it was till like 2019, so think about that. We started the company in 2007. We didn’t really turn a profit and maybe this was 2020 when fundraising really took off because we always believed in investing ahead of growth and believed in what we were doing in that time. And so, you know, revenue solves all problem. And you were talking earlier about, yes, you focus on the product and the rest takes care of itself, and that creates the demand. And, yes, you have to have margins and things like that. And I know a lot of people here probably, you know, saying, well, no, you have to poke it, but, you know, it worked out either way.

I just remember, who was it? It was Jeff Bezos talking about Amazon one day and they asked him about profitability in 1999, and he paused for a second. He said, “Yeah, that was a mistake.” You know, and there’s a guy because every single dollar, right? Amazon didn’t make a profit for years and years and years, even decades because everything went back into the company. And that’s what we did as well, is we just kept reinvesting into the platform, getting people, and it was never a matter of money because we started and we had our own balance sheets and it was our reputation on the line, and we wanted to build something great.

Jimmy: No. Well, I think another factor that plays into that is that you and David are Origin Investment’s two biggest investors or consumers of the product that you’re building, right? So why not build the best product you can for your own personal wealth? Is that right? Can you speak to that a little bit more?

Michael: Yeah, it goes back to what I was saying. We built this firm to invest our own capital, to protect it, to grow, and to build passive income streams. And I’m proud to say that today, you know, even as big as we are, we’ve got $1.5 billion and nobody has invested more than we have. And that’s paid off handsomely in all of our funds. We do sidecars, things of that. I mean, there are times where, you know, I have a lot in the illiquid space, both at Origin and outside. So there are times that I might be, you know, running on fumes in terms of liquidity, but it’s hard to pass up a good deal. So I’ll always find a way.

But as a manager, we are ranked as a top decile manager in the investment space, and it’s for the consistency of our return. So I would say that, yes, we did it. It’s not a check the box, it’s actually the way that we manage our own wealth. And we’ve been rewarded as a result. I just don’t think there’s a better place for my own capital than the funds and the deals that we’re investing in it. And it makes a huge difference when you’re creating products, when you’re creating structures, when you’re writing about or creating the PPM, the fees, the terms.

And the litmus test I always use is, if I didn’t work here, would Invest here? And unequivocally, absolutely, yes. I mean, I see, you know, our team and painstakingly how we deal with risk management and how we just protect and grow capital, and we’re not afraid to say no to a deal. And I said earlier, we haven’t done a value-add or four-plus deal in three years, and that’s okay. And we’re not really looking at a lot of ground-up development right now either. We had a Growth Fund IV that was 100% ground-up development, and we’re not gonna launch a ground-up development fund for another kind of maybe six to nine months if we don’t see the calculus change in that stuff.

Jimmy: Yeah. You are launching a third OZ fund here pretty soon. And let’s talk about deal flow a little bit here now, and getting deals to pencil debt costs are way up, it’s much harder to get deals to pencil than it might have been a year or two ago. Where is the value right now? Where are you finding value for your OZ fund, or for any of your other products?

Michael: Yeah. And I should say, we have another fund, our income plus fund that has a sleeve of ground-up development, so we don’t have enough in our pipeline to support an entire strategy of ground-up development by itself. So there are interesting deals out there, but when you have interest rates go from 0% to 5%, when you have cap rates go from 3.5% to 4.5% on class A, capital markets are locked up, transactions are down, land hasn’t repriced that much, and construction costs haven’t really come down as well, it’s incredibly difficult, you can imagine the pipeline going from this to this, right?

It’s not to say there aren’t deals out there, but instead of, you know, there being 10 deals a year, maybe there’s three or four deals a year. And so it’s being a sniper in the market versus the shotgun where two or three years ago everything worked, right? And most everything penciled out in the right markets. And I would say a really interesting deal we just found, it’s got some nuances, there’s two actually, there’s one in Texas and there’s something in Texas called a PFC, a public facilities corporation. And this is basically supercharging your returns.

And essentially what happens is you buy the land, you develop the property, you donate the land, then back to the state, and for that, you get a waiver on your taxes. And the biggest risk in Texas real estate is your property taxes because Texas is a no-tax income state, so they make it up on the property taxes. And when you can do this, you’ve juiced your returns immensely. Now, there is an affordable housing component that you have to adhere to, but the reality is in a lot of the neighborhoods that we’re dealing in Texas, you’re already sort of at that affordability level with market rents. So it’s not that hard to qualify.

You’re not trading $3 rents per $1.60 rents, you’re trading $1.80 rents for $1.60 rents. And so the math is off the charts on those deals. They’re very hard to find, and, you know, the state of Texas is limiting what can be done in that. But we’ve been able to tie up a couple of deals in there that we’re super excited about. And then in East Charlotte, we have a deal that a group, a long-term partner, they’ve been working on this deal for four and a half years with the city, essentially, we’re getting the land for free. And I was down there a few weeks ago and I said, look, I get more concerned about free land than I do paying $30,000, $40,000 per unit because you scratch your head and you go, something’s gotta be wrong here.

I was blown away by the quality of this site and the path of growth, and you just see it and feel it. And anybody who would go to this site could see that it’s palpable. It’s inside the ring road, it’s five minutes from the nearest market rate construction right down the road about a mile and a half. And then you have, you know, just all these tax incentives at this property as well. And we can be 30% below the rental rates right down the road, and it all feels good and checks out and the right partners.

So there’s always exceptions to the rule, and this is what we’re looking for in the market rate side and the OZ side. And I’ll just say like from an underwriting perspective, we don’t look at deals any differently in OZ. If this deal weren’t in an OZ area, we would do this in our income plus fund and this would be a sleeve inside that. I love the deal that much. Love to find 10 of these, they’re just hard to find out there. But we’ve got four people in the market, we’ve been doing this for four years in the OZ and we know every site out there, and everybody knows that we’re a sponsor who can close on deals, and we do.

Jimmy: It’s just these days you have to be a sniper instead of a shotgun. I like that analogy. That pipeline has gotten a lot narrower over the last 12 months or so, right?

Michael: Yeah, it has, definitely. You know, what I think is really interesting about this market, if you think about 2021 and 2022, I would say that those were the most uncertain markets, the most volatile we’ve ever seen. And so when you’re thinking about vintage, vintage does matter. And so if you’re in an environment where you think, you know, revenue is gonna grow by 5% a year and it doesn’t, you’re going to suffer. Your returns are going to suffer.

If you’re in an environment like this where you’re underwriting to a market that is less volatile, where you know what land prices are, where you know what construction prices are, you know what interest rates are, the genie is out of the bottle, right? You’re underwriting the risk in the market today. And if a deal can pass all of those tests and get through the funnel, chances are it’s a really good deal. In 2021 and 2022, you know, that vintage is gonna be a little bit dicey. And the big thing is the metric to which you underwrite to.

When you underwrite ground-up development, you’re generally looking at a return on costs. That’s a fancy way of saying it’s a cap rate in the future. So when cap rates are 3.5%, your margin is going to be, call it 35%, which is going to get you to a 5.2% return on cost. So you’re looking at the NOI that the property can produce and you’re dividing that by the total project cost. Today, that metric is closer to a 6% return on cost because cap rates are 4.5%, and that’s what the new bogey is in the market.

So you have to produce a lot more income on that property for the relative cost, and that provides a buffer too. So if you’re wrong and it comes out to a five, six, you know, you’re still doing okay and you have that margin. But when you have that narrower margin, when you’ve underwritten a deal to five, two, cap rates go from three and a half to four and a half, your margin has largely disappeared. Now you’re only developing to 10% versus 35%. So it’s not to say that those deals won’t work, they’re just not gonna work as well as they looked on paper.

Jimmy: You have to be a lot more selective in today’s market, but then when you come out the other side, a decade or more down the road, this vintage, the 2023 vintage will probably be looking pretty nice at the end of the 10 or so year…

Michael: It will, I mean, certainly not as good as the 2019 vintage because we have this massive growth. And, well, I think one thing that people have to consider is that if you have a 10-year hold period, the development process is only about two years during that hold period. And, yes, you’re going to create value, but beta matters more than what you’re gonna create in the development process.

Certainly, you want both, but if you don’t get that and you’re in the market for 7, 10, 12 years, you want to be in a market that’s going to grow at 4% a year versus 2% per year because when you think about the compounding effect of 4% year over year over year over year for 15 years, and you’re in a leverage piece of real estate, the wealth creation in that is going to be far more important than what you make on the original development margin.

And that’s really what we look for, and why we’re positioning ourselves in those Sunbelt markets is to get that bait over the long term. And we saw this firsthand in COVID. I mean, it was growth brought forward. So if you had investments in Sunbelt markets and you were bringing five years of growth forward, those investments more than doubled or even, you know, tripled in value when you’re including leverage and in places like Chicago, you’re probably up 20% or 30%, right? Very, very different, right? When you bring anemic growth forward, you’re gonna get anemic returns. When you bring high growth forward, yeah, you’re gonna get great returns.

Jimmy: Sure. So we’ve talked about transaction volume, and the pipeline, and getting deals done within a fund. Well, I wanna turn our attention now to fundraising. Fundraising has slowed down considerably as capital markets have kind of freezed up a little bit over the last 12 months or so. This is particularly true with Opportunity Zones. Opportunity Zones seem to be facing a lot of headwinds. If you look at the numbers that Novogradac has released recently, I think it was Q1 of this year is way down from Q1 of last year. There’s a couple of headwinds that OZs, in particular, are facing. One, we’re closer to the deferral period. Two, the basis step-up bonuses have all gone away by now. There’s some legislation pending that might extend the program but might not if it never gets passed. Given all that, given the current macroeconomic conditions, do you think OZs will get a second wind? Is there still time for OZs to kind of rebound and attract more capital?

Michael: So, yes, fundraising is down across the board. For us, though, our OZ fund has really been a consistent source of capital, and it’s been this just month, by month, by month on people coming into there. So I don’t think we’ve suffered as much, and I think there’s two reasons for that. One is sort of the market has changed significantly since you and I got into this market in around 2018. And at that time, hundreds of sponsors announced that they were raising an OZ fund, and most of them are out of the market today. And so you’re left with very few sponsors.

And the second reason is we’re one of the leaders in that space and we’ve attracted the most capital. And I think people are much more discerning about who they are investing with today. They want to know that they’re going to be in great deals, they’re gonna be with sponsors who are aligned with them. They wanna be with sponsors who they know are gonna be here in 10, 15, 20 years as well. And so I’m positive that we’re trending above the average. I just don’t know where we are. And I think fundraising in general in the real estate market has been down, and it makes a lot of sense.

We’ve been saying this for years, we’re expecting negative rent growth. We haven’t bought an asset. You have negative carry in the market, it’s just not a good time until that fundamental turns around and people are earning 5% of their bank accounts. The Fed is doing their job and it’s working, and it’s really pulled a lot of money out of the system. And I think this is a healthy correction, and it’s kind of a nice pause to see inflation go away, to see, especially in the ground-up construction, people become more competitive in the bidding process.

For a while there, it was just name your price, name your price. And in the real estate market, especially in multi-family, we have to allow time to allow this supply to get through the market. We have about a million units coming to the market over the next 6 to 12 months, and that is going to put some downward pressure on rents in a lot of these markets. So, you know, nobody’s immune from this fundraising, what’s happening out there, but this is temporary in nature, and I just view this as a great opportunity because long-term, multi-family is an asset class and just housing, there’s a shortage in this country and it will continue on its upward trend, and it is what it is, right? All these sectors are cyclical and we’re just part of it. We’re seeing a cycle right now, and it’s been a long time, and we’ve had a good run since, I would say 2010.

Jimmy: Yeah. Basically, it’s that low-interest rate environment that’s been in place for the last 12, 13 years or so before the hikes of the last 12 months. So what’s the investment thesis? What do you tell someone who has, let’s say, a six or a seven-figure or higher capital gain, they’re looking at OZs, but they’re not sure, are the deals still there? Is this still a worthwhile tax incentive program for me to get invested in? What’s the overall investment thesis? What would you tell that person?

Michael: Yeah, When I talk to investors, I say two things. Look, A, you have to want to be in real estate, right? You never let the tail wag the tax dog. And so if you want to be in real estate and you’re okay taking ground-up development risk and you have capital gains, there’s no better program to be in than this, hands down, right? I mean, every capital gain, if I have the choice of going into market-rate development, with, say, market-rate capital or after-tax capital versus capital gains, I’m going to choose QOZ all day long. And so that’s how we talk to investors about this. I believe in the program. I think it’s great.

I don’t think there’s a chance now that they’re going to extend the program. I remember we were talking about this a year ago. We were talking to Ashley Tyson, and his comments were, it’s not a matter of if, but when, and I was hopeful that that was going to happen, but that was gonna be first quarter, second quarter, you know, it just hasn’t happened yet. So it could be a small chance that it does, but that’s kind of how we approach when we’re talking to investors about this, is you have to have those criteria lined up and then dig in and, of course, find the right sponsor who you wanna be with. Hopefully, that answers the question.

Jimmy: It does, indeed. It does. And your Fund III, it’s gonna continue along the tradition that you’ve set up with the Fund I, and Fund II, it’s gonna be class A multi-family in the Sunbelt Southeast primarily. Is that right?

Michael: Absolutely. Jimmy, it’s a carbon copy. We’re going through the final. You would think that we’d get lower legal costs as a result, but for some reason, no, all the terms are the same. Everything’s the same. And I will say this, that every fund, and, by the way, this fund is also gonna be about $300 million, and we size the fund to the market opportunity, and that’s why we don’t have a billion-dollar fund. We don’t want that. And at every stage, we have to make sure as a manager that we can fulfill the demand of our OZ investors. And there’s always a chance, and we did this in Fund I, where we shut off on fundraising for a while. We’re like, look, we have to make sure that we can find the deals. We’re still in discovery phase. We found some early deals.

And I do believe that there are the opportunities out there to be able to put out $300 million, but the same thing will happen in this fund if suddenly we have a rush today where $200 million of demand comes in, we would’ve to shut the fund down and wait until we actually found the product to be able to satisfy the demand and then open it back up. And it’s really important that any manager sizes his or her fund to the market opportunity. And a lot of the activities that took place in Fund II, all the pipeline activities, looking at deals, talking to sponsors, joint venturing on tying up land, you know, those benefit all of our investors in Fund III.

And so like the deal I was telling you about in East Charlotte, we’ve been working with that sponsor for over a year and a half talking about this deal. Had the deal been, you know, further along, it would’ve wound up in Fund II, but it’s not. Fund II is already spoken for, all the capital in there. It’s just so happened that this is going to be one of the anchor deals in Fund III. So between that and our PFC deals, I’m excited about the first two deals and this fund, and I’ll be investing in it as well.

Jimmy: Of course, you will. Of course. You’ve got a couple of other products that you’re working on rolling out this year, a strategic credit fund, which is launching tomorrow. We’re recording this podcast on May 31, that’s launching on June 1. And then you’re also planning a 1031 exchange product, a Delaware Statutory Trust. Could you talk to me about those two products briefly and what you’re trying to accomplish there, and why you’re launching them to your investor group?

Michael: Yeah. Well, I’ll start with that last question first, why we’re launching them. So we cater to the high net worth individual, ultra-high net worth family offices. And so our product mix is very simple. You have income, income and growth, and growth. And that was something that was missing from our lineup, was the strategic credit fund, something incredibly conservative that just pays a high yield. And we have a sliver of that, quite a bit, actually, of preferred equity and credit in our income plus fund, but this is a standalone fund just on the credit side only.

And so we launched our first credit fund about two years ago, and that fund is fully funded now. That was a closed-ended fund, and that was all in liquid securities in what we call case series, these are Freddie Mac bonds, but the underlying collateral is multi-family. And this is what we know, this is what we understand, it’s all we do. So we’re an inch wide and a mile deep. This new fund, though, will be open-ended with the target of around 10% to 12%, where 90% to 95% of that will be paid out on an annual basis. But we pay that out monthly. And that’ll be a combination of liquid securities and case series, what we call MCOs, CLOs maybe, everything, though, the underlying collateral is multi-family and then also private originations and preferred equity, bridge loans. And this is what we know, this is what we do every day.

We love this market, we love credit, we love being protected with the uncertainty in the economy today. And I think we’re getting overcompensated, we’re finding credit opportunities where we are protected on today’s pricing, where we’ll have 20%, 25% of equity subordinated to our position, and we’re making 13%, 14%, even 15% returns.

You’re not gonna do that in equity. So I view it as, look, we’re making equity-like returns in a protected position. I will take that all day long. The only downside is it’s not as tax efficient as some of our other funds and being in real estate because it is pure credit, but it’s part of rounding out that lineup in between the strategic credit fund, the income plus fund, and our growth funds and QOZ that really satisfies anybody’s need no matter what your risk tolerance is, your time horizon, whatever your investment criteria are.

Your second question around 1031 exchanges is easy. There’s two reasons for that. Number one, we get inbound inquiries all the time from our investors, hey, do you have anything in the 1031, especially because we’re doing the QOZ side as well? And the answer is always, no, we don’t, we don’t, we don’t, we don’t. And so they’re forced to go elsewhere. And what we’ve found, and this is the second point, this market is dominated by what I’ll say, I’m not gonna name names, but high-fee investment managers with subpar investments who have moved from the non-traded REIT world where they could extract massive fees and report in non-transparent ways to now the 1031 exchange markets.

And the more I learn about this market, the more we’re just like, we have to go in here. You know, these groups are just not doing a service or providing a good service to the people who need it most. And so those two reasons, it’s kind of core to our mission, and this is what we wanna do, is create a great product. Not a better bad product, and you can find better bad products, but a good product out there where people can do a 1031 exchange, and swap, and get into a great piece of real estate that they can have faith in with a manager who’s gonna have their best interests at heart.

And so, I really think this can be one of our largest product lines at Origin. And it makes so much sense because we deal only with the taxable investor, and if you are an institutional manager, you’re not gonna do this because institutions don’t need this service. And that’s what we’ve always held ourselves out at, is an institutional manager for the individual investor.

Jimmy: That makes perfect sense. Roll out a 1031 DST product like that, I’m looking forward to seeing how that continues to evolve under Origin Investments. I mentioned a few minutes ago that you and your Co-CEO, Co-founder at Origin Investments, David Scherer, your largest investors. You guys obviously have a lot of your own skin in the game. Michael, a lot of your personal net worth is tied up in illiquid assets, and alternative investments at Origin Investments. I’m curious, what is your personal investment thesis?

Michael: Yeah, that’s a great question. You know, honestly, I’m probably like a lot of people. I do have a wealth manager and things to keep kind of the guardrails around me, but I’m looking for unique opportunities in sectors I wanna be in and managers who have an edge and a competitive advantage and who have a proven track record. And I do invest, I would say 75% of my net worth is in illiquids. And so, I have to manage the liquid part of my portfolio because I have, you know, bills to pay as well just like everybody else.

But I’ve also been rewarded because I do believe that’s where you can gain alpha. The stock market is really good. I give that to a wealth manager, I don’t wanna look at it. It’s too volatile. I think that, you know, people talk about efficient market theory. I don’t think the stock market is efficient. We can look at where it was in 2021, where you had companies trading at 20 times earnings or 20 times revenue, and today they’re trading at less than the cash value on the books, and the whole market is being moved by five companies now. And so I don’t love the volatility, and maybe that’s a farce, but the stock market reacts on a lot of emotional behavior. I think you can find better equivalence in the market. And it’s really, like we talk about the liquidity premium, all that means, though, is that when things go haywire, you have the ability to get out. Yes, you need liquidity and you have to manage that.

My best investments have come from being locked up, locked up where I couldn’t get out of the investment. And some people, by the way, had dinner with one of our investors the other night. He’s owned Apple for 15 years, right? Awesome. I can’t do that. I know myself, I know my own limitations. If you can do that, and you can buy great companies and hold them forever, kudos to you. But I think we all have to find the investment strategy that suits us best. And maybe it’s because of my trader days where I just, you know, I have to get out or maybe it’s just because of, you know, that’s human nature, and I’m not immune to that either. When I look at that, I mean, the majority of my portfolio is in illiquid assets with good managers and high-quality investments.

Jimmy: Well, Michael, it has been fascinating discussing this stuff with you today. Really appreciate all the knowledge that you’ve given me and our listeners to chew on. We are running outta time, but wanted to ask you kind of a high-level, broad question before we go. I’m curious to hear, what do you think are some of the biggest trends that are gonna play out over the next few years across the broader private equity real estate industry?

Michael: Jimmy, that’s a good question. The broader private equity industry, I think it’s gonna be… Look, there’s so much transparency in this market today, so much more than there was 10 years ago. And you’re gonna have a continued consolidation into the best managers. And that’s what I’ve seen. And you’re gonna see fees continue to come down because of the transparency, you’re gonna see more direct consumer offerings versus going through the broker-dealers, the wirehouses of that nature.

I see that just continuing. And I see the private equity market, more and more people, especially on the wealth management side adopting private equity, whether it’s through real estate, or true companies, or venture, or seed. And this is gonna become much more important as part of a portfolio strategy than it ever was in history. And I go back to, you know, David Swenson sort of proved this out, and he was the Yale Endowment chair for 20 years. And he blew the doors off of every single endowment because he was the first one to really adopt alternatives at scale for the portfolio and understanding what they could do for long-term returns.

Now, he had advantage because he didn’t pay income taxes, but the same thing applies to the individual portfolio. There is a place for real estate, private real estate in the portfolio. There is a place for venture, for seed, for private equity, for all of these other, you know, categories within a portfolio. And I see that more and more, there’s gonna be a mass adoption of alternatives into the 60/40 traditional portfolio and I think it’s a good thing for high net-worth investors who have access to those managers and those opportunities.

Jimmy: That’s the story we’re telling here at WealthChannel and OpportunityDb as well, that there’s a place for the 60/40, but there’s more out there where you can get more alpha and more diversification and really have a lot more of your wealth continue to be protected, and grow, and find passive income streams as well in these alternative asset classes, and Opportunity Zones being one of those alternatives and, of course, it being highly tax-advantaged as well. That’s kind of our thesis here at WealthChannel and OpportunityDb, at least.

So a lot of what you said just resonated with me. Michael, we’ve run outta time. Really wanna thank you so much for sharing your insights today. Before I let you go, though, where can you tell our audience of high-net-worth investors to go to learn more about you and Origin Investments?

Michael: They can go to the website, origininvestments.com. We make it super easy for people to connect with us there. You can also email me, [email protected]. Shoot me a note, I always love hearing from investors, prospective investors, and that’s, you know, the thing about Origin, even with as many investors as we have, we pride ourselves on the client service being able to have that personal relationship with investors, and we hear from them all the time. So that’s how you can get in touch with us. And, Jimmy, thank you so much for having me on the show today. Really appreciate the partnership we’ve had over the last few years.

Jimmy: Absolutely, Michael. And for our listeners and viewers out there today, of course, we’ll have show notes available for today’s episode as always on our website, opportunitydb.com/podcast. And there, we’ll have links to all of the resources that Michael and I discussed on today’s show. And please be sure to subscribe to us on YouTube or your favorite podcast-listening platform to always get the latest episodes. Michael, again, thanks so much.

Michael: Thank you, Jimmy.