Investing in Alternatives, Capitalizing on Inflation, and Building Recession-Proof Businesses with Ben Fraser – EP 108

Interview with Ben Fraser

C.L. Turner

Investing in Alternatives, Capitalizing on Inflation, and Building Recession-Proof Businesses with Ben Fraser

Today, I’m talking with Ben Fraser, the Managing Director at Aspen Funds and host of the Invest Like A Billionaire podcast.

In this episode, you’ll learn why the ultra-wealthy (billionaires, institutions, and family offices) allocate significant portions of their portfolios to investments outside the stock market and in alternatives like real estate, private equity, and hedge funds.

Join us as we talk about the world of alternative investments, strategies for navigating a recession, and our thoughts on the future of the US economy.

Featured on This Episode: Ben Fraser

✅ What he does: Ben Fraser is the Managing Director at Aspen Funds, a private fund manager who operates real estate funds for investors looking to diversify outside Wall Street. They manage several funds and have a proven track record of success. Ben’s professional background couples an analytical nature with a passion for serving clients. He prides himself on delivering outstanding client service and strong returns through Aspen Funds’ (now managing five different funds) out-of-the-box investments. Before Aspen, Ben was a commercial lender at First Business Bank specializing in government-backed loan originations (SBA & USDA) for one of the top SBA lenders in the nation. Before that, he was a commercial credit underwriter for Crossfirst Bank, personally responsible for underwriting over $125MM in C&I and CRE loans across various industries. He also worked for Tortoise Capital Advisors, a boutique asset management firm in energy infrastructure investments, and helped grow their institutional managed accounts from ~$3BN AUM to ~$7BN AUM.

💬 Words of wisdom: “We all tell our investors, don’t put all your eggs in one basket.” – Ben Fraser

🔎 Where to find Ben Fraser: LinkedIn

Key Takeaways with Ben Fraser

  • The most common errors Ben saw people make during his years in banking and how he learned that the ultra-wealthy mostly work with private equity and real estate.
  • Why investing in alternatives trumps investing in the volatile stock market.
  • The investment maneuvers that allow Ben to buy at better valuations, with more cash flow, while taking advantage of tax benefits.
  • Why multifamily properties have been a popular investment choice for small and large investors and how interest rates and debt disrupt this market.
  • Why Ben believes retail is here to stay, how he leverages investing in strip centers and how that gets him a 10% cash-on-cash return on his investment on day one.
  • Ben’s strategy on de-risking his investments by always doing due diligence on the sponsor before doing it on the deal and the biggest risks he sees in multi-family deals.
  • His thoughts on where the economy is headed and how to position yourself to capitalize on inflation.

Ben Fraser on Why Now Is The Best Time To Invest In Strip Malls

Ben Fraser Tweetables

“I'd rather take the illiquidity risk in the private markets buying that deal and honestly having a little bit more ability to control the outcome than I do in the public markets.” - Ben Fraser Click To Tweet “Even though borrowing costs will slow down the real estate market, we don’t think it will crash yet. We think it maybe reduces some of the amount of overbuilding that people are doing in single-family homes.” - Ben Fraser Click To Tweet


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Read the Full Transcript with Ben Fraser

Justin Donald: What’s up, Ben? So glad to have you on the show.


Ben Fraser: Yes, thanks, Justin, for having me. Looking forward to it.


Justin Donald: Yes, it’s going to be fun. Well, we share so much in common with just our investment thesis and really, the way that we look at the world of investing and public equities versus alternative investments. And so, I’m just excited to have you on as someone else, another expert that can help validate kind of what the majority of the wealthy are doing to create their wealth.


Most people have been kind of duped into thinking it’s all through Wall Street and public equities. And I’m excited to have you on the show because you’ve got kind of a different mindset like I do and like many of the other guests that I’ve had on. So welcome.


Ben Fraser: Yes, thanks for having me, Justin. I agree, it’s been fun every time we talk. It’s like we’re almost doing very similar things and very similar verticals and definitely align. So, excited to jump in.


Justin Donald: Totally. So, how did you get started? Like your early background professionally, you were in the banking industry, right? You are an underwriter, which is an incredible skill set, especially for vetting deals and like the different alts that you’re doing. But I’d love to hear why that was the route, and then how you kind of pivoted into what you’re doing today, Ben.


Ben Fraser: Yeah. So, I come from a banking background as a finance major MBA and actually worked in kind of asset management for a while, but then spent most of my career in banking. And it was something that was pretty intriguing. It wasn’t really on my radar until I talk with a few kind of mentors of mine, and they come from banking backgrounds and said it was a great training ground, being an analyst, being an underwriter. And I really viewed it as a learning opportunity. I want to go learn and see what’s under the hood of these borrowers and people who are having successful businesses or buying real estate. What are the things that they’re doing to build this wealth?


And one of the cool things being an underwriter is I get to see everything. You get to see the financial statements of these individuals. You get to see their tax returns and get a look at the deals they’re doing. And so, you get this really granular view of what’s going on. One of the lightbulb moments, when I was younger in my career, but I saw a lot of these borrowers who were kind of high net worth borrowers and they’re doing lots of deals.


And banks love rich people. So, generally, a lot of the customers, especially the bank, a business bank that I was working at, led to a lot of wealthy individuals. And so, seeing what they did, one of the common threads was one or two things, either one, they owned businesses, or two, they owned a lot of real estate. And those were like the two most common things that I saw. And so, it’s definitely some light bulb moments and getting to see kind of behind the scenes.


But for me, it was never the end game, and I saw a lot of people who had been in banking a long time. You kind of get this very myopic view if you’re in banking for too long because you’re only focused on the downside. What’s the worst thing that can happen in a deal? And banks have to think that way because they don’t participate in the upside. They don’t participate in the downside.


So, I knew early on that I wasn’t going to be here long term just because it wasn’t aligned with the mindset that I had and wanted to grow and look for opportunities and kind of the abundance mindset, but it was a great training ground, got to underwrite a lot of deals, became a lender for a while, and then joined Aspen Funds about four years ago and became a partner in helping grow kind of our private alternative investment platform.


Justin Donald: Very cool. And so, how long have you been in the banking industry before you decided to go on your own and get into alternative investments?


Ben Fraser: I was in about four years. And at that point, I was about to make a jump and had an offer from another bank. And I’m kind of seeing this, after about a 4 to 5-year mark, most people that stay in banking don’t ever leave. And it gets pretty good because it’s kind of like golden handcuffs, like it perks. You get to play golf every Friday and you get paid pretty well. So, there’s definitely some appeal to that. But I knew in my gut level that that’s not what I wanted and it would just be too comfortable and I wanted to grow.


And so, as I continue to work with Aspen and kind of help grow their platform and kind of get into the equity side of things, not just the debt side, and that was really intriguing to me. And so, that was the jump that I decided to make. And looking back, I’m very glad that I didn’t make that jump.


Justin Donald: Well, I know you’ve had many role models, but your father, Bob, who I just got a chance to hang out with, the three of us got a chance to kick it on your show, what a wealth of knowledge he is. And so, I’m curious if his influence on you was kind of pulling you in that direction or how long he’d been in that space? Or if this is something that maybe you two had talked about a long time ago doing some sort of business together. I’m curious, what the dynamic is there, and I’m sure it’s not always easy to work together, but you guys seem like you get along so well.


Ben Fraser: Yeah. I think early on, he was definitely a big influence in my career and he was a tech entrepreneur back in the late 90s, had a very successful business, was one of the most venture capitalized tech firms in the Midwest, where we are here in Kansas City, had won the Ernst & Young Entrepreneur of the Year award at one point, and was a wealth of knowledge and had that mindset. So, he was an entrepreneur and he was always the bug in the back of my ear saying, don’t settle for anything and keep pushing it.


So, I think he’s definitely influenced that pulled me to not get comfortable in banking and get stuck there, but yeah, in making that decision in that jump, aside from just leaving the industry that I was comfortable, I was very successful in, and a lot of parts that I’ve enjoyed and just making the leap into a different space, raising capital was kind of my– when I was initially joined to do it, I’ve never done that before and so a whole new experience.


But aside from that, around the layer of Aspen Funds, it was started by my father with his other co-founder. And so, there’s a whole other layer of family dynamics that I was concerned about. And it’s really interesting in leading up to this point, kind of making that decision and making the leap. Most of the conversations I’d have with people I work with, family up to that point were very negative. It was like, oh, it was terrible. We never got along. It was always, it didn’t allow me to make my decisions or grow how I’d be.


But then, right before I made that leap, I had at least three or four conversations with people that said that was the best experience. When I worked with my father or I worked with my son, it was the best experience I ever had. I wish I could go back and do it and I got to take that a little bit of a side from God, and also just the little positive experiences that people had had. And so, it definitely seems polarizing to do that. But ever since it’s been really, really awesome. And we have a great working relationship, and it’s been really, really cool to have a big mentor of mine. Also, I’m a partner with, so there are some unique dynamics there, but it’s been really cool.


Justin Donald: Oh, it’s awesome. I mean, very few people get a chance to have the privilege, the luxury of getting to work side by side with their father. I think a lot of people don’t have the relationship that you have. So, it’s cool that you have the relationship to be able to work arm in arm. So neat.


And so, you have a lot of experience in alts, and I’d love to get your framework as to why you like alternatives as opposed to the stock market. Why are you so heavily allocated personally? Maybe your dad, Bob, as well, I know he feels the same way, but why alternatives? Why not the stock market?


Ben Fraser: Yeah, absolutely. I’m still earlier in my wealth-building phase, but I’m about 100% into alternatives at this point, personally. And Bob’s not really quite there, but he’s pretty high. And before I was in banking, like I mentioned, I was actually planning on being a wealth manager. So, I was going to go down the whole CFP route and actually had an internship with a wealth manager that managed equities in the stock market. And I was a finance major. And that’s what you learn is how to do fundamental analysis of the thing. And so, I was going to go that route. That was my plan.


And then right after college, I graduated and that all fell through. It didn’t end up working out. And so, I kind of was familiar with that space, familiar with kind of the public markets. But then, kind of right when I was in school was during the Great Recession and seeing these kind of massive nosedives in the public markets.


And a lot of the things that you learned in school and efficient-market hypothesis and all these kind of things, it kind of all falls apart when that happens. And hearing many people, knowing several people that had gone through that, and it was very challenging, I just never had a huge appeal for it and I’ve kind of gravitated towards this. And then kind of been in the banking side and seen a lot of these deals are going on.


And aside from just the real estate deals that I was doing, I was also doing a lot of SBA mergers and acquisitions loans. So, I was lending to borrowers that were buying businesses and getting really attractive financing, buying really heavy cash flow businesses. And they’re making like in some cases, 100% cash on cash returns. And the light bulb moments going on because you’re here, you have all this finance background and training of here’s what the official market says and here’s what you should expect in the stock market and here’s the path laid out for you. And it just never had an appeal to me. And so, I think seeing a lot of those things just worked out well to be in a space I’m in now, whether intentional or by accident.


Justin Donald: Yeah. It’s interesting hearing you talking about efficient markets, and I remember learning about this as well. But the interesting part about it is the opportunity to make good returns is really hard in an efficient market. So, if you’re efficient, that means there’s less of a gap of opportunity, there’s less of an opportunity to even get in. And so, really what you want to do as an investor is find inefficient markets because that’s where the huge gains happen.


So, to have someone be able to make 100% cash on cash return, they make all their money back year one, that doesn’t happen in the stock market as a general rule unless you get lucky or have some sort of inside info. And even then, it’s really hard. But in the private markets, that’s very common where you can get into real estate and private companies and different cash flow deals. And so, I’d love to hear how this has expanded over the time of you actually becoming experienced in the space.


Ben Fraser: Yeah. It’s interesting because coming from that background of being trained in public markets, investing, the big advantage of the public markets is liquidity. That’s why for some its valuations, it trades for, but on the flip side, the private market is illiquid, generally. And so it trades at a discount which makes sense. But to your point out of efficient markets, if I can earn 100% cash on cash at a private market deal, that’s a really big discount if I’m going to be going to invest in the stock market, a 7% return on the average, whatever time period you use.


So, to me, I’ll way rather take the illiquidity risk in the private markets buying that deal and having honestly a little bit more ability to control the outcome than I do in the public markets. To me, there’s a massive disconnect in valuations. One of the great things or kind of not great things for investors, but amazing stats that we point out on our podcast is valuations of real estate and REITs on the public markets.


So, one way to kind of measure this liquidity or illiquidity discount in the private markets is looking at the price-to-book ratios of these public REITs. So, a REIT is a publicly-traded real estate investment trust, generally, going to own real assets. And so, a lot of people think who are investing in REITs, publicly-traded REITs, that they are investing in real estate. Well, a lot of times, these REITs will trade anywhere from a 5 to a 10x price to book multiple.


So, price-to-earnings ratio, as you are familiar with, that’s the price divided by the annualized earnings. Well, price to book is the price of an asset divided by the book value of the asset, which is, generally, in gap, a fair market value. And if you’re trading a five times book value, that means only $0.20 of every dollar you’re investing in that rate is actually going to buy real estate. The other $0.80 of that is buying goodwill. They’re buying liquidity.


Well, that’s very expensive price to pay for liquidity when you can go and buy private real estate at much better valuations, actually get cash flow, have some of the tax benefits. So, yeah, I think there is a big disconnect and there’s a massive amount of opportunity in these private alternative investments that we’re finding, that our investors are finding, and I know you are as well.


Justin Donald: Yeah, I like your way of kind of breaking that down. And for those that are unaware, a lot of people who do invest in the public equities, they like REITs because REITs by definition or by the rules that they’re governed by have to distribute 90% of the profits. So, people like that, there’s cash flow, there’s distributions, but you also have REITs on the private side as well.


And then to take it one step further, you have sub-REITs where it’s a variation of a REIT and you have these tax advantages to it, which is really nice. And so, you can have a sub-REIT status, but even have like a debt deal where you aren’t paying ordinary income or short-term capital gains on those returns because you’re getting a 20%, 25% discount that exists because of that sub-REIT status.


So, there are lots of interesting maneuvers on the private side where you’re saving money, you’re making more money, there’s more control. You also have this ability to depreciate more depending on what the business is. There’s a lot to like.


So, let’s talk about your experience. You guys have done a lot of multifamily. We were talking before one of my favorite things right now, I love self-storage, but you can’t find good self-storage, or I shouldn’t say you can’t. It’s really hard to find good self-storage because it’s so grossly inflated. Same thing with multifamily. Like right now, prices are just crazy.


But you and I are both invested in some self-storage conversions where basically you’re buying some existing buildings. Maybe it’s a strip mall, maybe it’s something else. And it’s not the glamorous, nice, brand new build of a self-storage location right in downtown of whatever city you live in. So, it’s not as esthetically pleasing as that, but the returns are incredible.


And I know you do some industrial as well. And I love industrial distribution centers, warehouses, like all of this, anything that supports e-commerce, I think, is the wave of the future. So, I’d love to hear some of your thoughts on this and the success you’ve had with your conversions.


Ben Fraser: Yeah, absolutely. When we are looking for deals, we use kind of a top-down approach and kind of a macro thesis. So, our kind of skill sets and Bob especially has been an economist for the past 10 years. And so, just by design and by how we just love learning about the economy and tracking all these different trends going on, we’re very in tune with a lot of the kind of trends that are happening.


And so, a lot of times, it’s very difficult to predict out what’s going to happen three, five, ten years down the road. But a lot of times, you can see the trends that are taking place and materializing over the next few years. Usually, kind of a 2 to 3-year runway, you can generally see a lot of things that are going to be happening. And I always make the distinction of is a lot of investors conflate the economy with the stock market.


And the stock market can have these wild swings in price. And we’re seeing some real major price depression right now in the public markets, but it doesn’t always correlate to the economy. And there’s other things that you can see going on. And the economy is kind of like a big cruise ship. It’s going in a certain direction. It actually takes some time for it to shift.


And so, you can see these underlying trends, demographic trends. You can see things that the Fed is doing and how that’s going to impact certain markets. And so, you can position yourself to be the beneficiary of those trends in the short term.


So, one of the things we’re seeing right now, and you’re alluding to it is a lot of these asset classes that we like, that we believe in from a fundamental standpoint, i.e., rent growth and multifamily and demographic trends and self-storage. Same thing, it has been massive rent growth there, and both of those assets are very inflation protective, which is really, really, really great right now, but it’s very difficult to buy at a decent valuation.


And so, what we see is the play in these different strategies is to develop, to do development projects, or at least have a development opportunity to where you can buy maybe an existing asset that is a self-storage facility, then develop onto that, add on more square footage, and develop that because your premium there is really, really the margins are great right now.


So, yes, and the self-storage, we’re actually taking about 150,000 square foot. That retail strip center, it actually used to be retail and it was an office. And now, it’s completely vacant, but it’s right on the highway and it’s actually at the intersection of two highways. So, it’s amazing visibility which you love in self-storage.


And basically, the whole reason the deal works is we’re buying this existing building and land for about, I would say, 40% of replacement cost to go buy an existing self-storage facility. So, when you go on with that basis, you’re taking a little bit more on the construction risk, you take a lot more of the development risk, and you don’t have cash flow going and they want a pure development deal.


But your basis is so low and there’s not a whole lot of ways you can lose the deal. And so, if you’ve done enough of the research and you know there’s a market there for it, it can at least be a double if not a home run. And so, we’re seeing a lot of opportunity there. Same thing is going on in the industrial space right now. There’s no product to buy.


And our submarkets where we’re at right now, vacancy is near 100% occupancy. The only vacancy in the market is what’s considered functionally obsolescent, meaning it’s just older vintage, it’s just outdated, or it’s unusable space. Like in Kansas City, for example, where we’re at, which is a big industrial hub because of its central location, there was, I believe it was $10 million of square feet that was built in our market here.


And in 2020, the vacancy rate was 4%. At the end of 2021, when they built 10 million square feet, vacancy was still at 4%. This was a 100% absorbed in one year. There’s so much demand for it right now, seen not only the e-commerce boom that continues, especially now through COVID and just the continued move towards more e-commerce. But we’re also seeing a massive reshoring trend of big manufacturing and other warehousing that’s needed for a lot of these big manufacturers that don’t want to have the supply chain risks anymore.


Ford auto manufacturer is a great example where they can complete the cars, but they don’t have the chips to finish them up. So, they’re just sitting in lots and literally was driving by industrial site today, and there are at least 300 to 500 Ford trucks just sitting in a lot that don’t have chips in them.


Justin Donald: Wow.


Ben Fraser: They can’t sell them. Think about what would Ford be willing to pay to have a warehouse domestically with chips in them, instead of having to get them from, I think, Tijuana, where they get them, and they’d be willing to pay a lot. So, that is similar to what we’re seeing in a lot of different areas where there’s been this big globalization trend in the supply chain. And Justin, just-in-time inventory was the big buzzword for a decade.


Back when I was in school, you learn about just-in-time inventory. Well, that doesn’t work anymore, especially in this COVID era. And a lot of the dependencies that we’ve created, lots of manufacturers are wanting to bring that back. And so, they’re onshoring, they’re reshoring a lot of this product, and they’re willing to pay a lot to have access to the product when they need it.


Justin Donald: Yeah, that’s all so interesting and so well said. And I know you’re out in Kansas City. We’ve got a group, a team. I do a lot of investing in Kansas City because I like the market, in general. I think it’s a very strong market and a lot of people don’t know that the largest– so look at the whole United States. I love doing this one for trivia. I’m going to give this one away. But the city that has the most government jobs outside of Washington, D.C. is actually Kansas City.


And so, I love that. It creates a very strong environment there. So, I’ve owned many brick-and-mortar businesses there. We had a dog training company there, as I was sharing with you before. We, by the way, invest a lot with Northpoint, who’s out of Kansas City as well. I like them on the industrial development side of things. They do less of just buying existing and much more of just buying brand new, but yeah, it’s a great part of the country.


Now, something else that you are doing that is a lot more contrarian right now is going to be this investment into retail strip centers. And I’d love to hear your thoughts on this. I actually just met with a group today that is doing this at scale, and they’re doing it at a very large clip and really focusing on picking up the strips right next to Walmart’s since Walmarts are the largest retailer, so large that the next five retailers after them combined aren’t even close to what Walmart is. And so, if you can just be in the shadow of Walmart, things likely are going to be pretty good. So, I would love to hear your thesis on this and how it’s going so far.


Ben Fraser: Yeah, absolutely. So, it’s definitely contrarian. And when you say retail, people usually have a very polarized response to that. And going back to, we don’t have a hammer and everything’s a nail. We’re very much agnostic to the deals that we do. We just want to be a good deal. We want to fit into the macro framework that we’re seeing.


And six months ago, I started hearing about retail being kind of coming back in play, and every single Real Estate Congress I’ve been to, every economist I’ve talked with, every real estate analyst I’ve talked to at a macro level, is saying retail is the place to be right now. And the reason is because this retail apocalypse has really been oversold. And COVID was extremely impactful to retail, as we all know, because they had to generally shut down the foot traffic. And that is vital to functioning retail properties.


But what end up happening is it shook out a lot of the players or the tenants that were already on the downhill slope anyway. The weakest players ended up exiting. But for the most part, there’s a lot of different types of retail, and people don’t always differentiate between them. And so, what we’re focusing on are we call them neighborhood strip centers. So, hyperlocal strip centers, these are the places where you go and get your nails done or you go and get the liquor at the liquor store.


And a lot of times, more local or regional tenant base, sometimes you get national credit tenants, but what we’re seeing is these strip centers, in general, did amazing through COVID, and a lot of that was helped through the PPP loans, but these are core businesses that are not going to be fully replaced by e-commerce, that you have to go in person to get these products generally or these services. And there are things that are hyperlocal to where you are. They’re generally in the residential areas. And there’s a good case behind that.


But on top of that, because of this massive overselling of the retail apocalypse, there’s a really massive opportunity in where you can buy these properties at. So, we’re seeing properties here in Kansas City or we’re actually on contract in several properties right now. We’re purchasing these going in at 10 caps. So, it’s a 10% cap rates, which means unlevered, we’re going to be getting 10% cash on cash return on our investment day one.


And there’s a massive amount of value to be added to these because they’re kind of sleepier centers. We can improve the curb appeal, get some better tenants in there, renegotiate leases. Leases are pretty far below market because strip sellers are generally owned by one or two individuals, they don’t really know how to maximize them. We can add pad sites so we can add a little area where you can put a little fast-food restaurant or a little bank or something and sell that off. A lot of times, you can sell it off, and a lot of times, recap your whole equity, put into the deal.


So, there are some really cool things going on. And because of the purchase price that you can get these at right now, we think there’s a massive opportunity. And every economist we’re talking to is saying this is a play to be looking at right now.


Justin Donald: Yeah. I appreciate you sharing that. So, I recently had my friend David Lawver on the show and he does a lot of strip centers, and uniquely, he’s got this anchor tenant that he uses that he brings into all of his locations. And there’s so much foot traffic. It’s a fitness group, a crunch fitness, and it brings so many other people in. And so, it’s easy to find the other businesses that will benefit and come in there.


And then I’ve got another friend that has done very well in this space. He buys strip centers everywhere. He buys strip centers in your B and C markets even and has really done well over the years. And so, yeah, interesting concept and strategy, and I think that, definitely, if done right, if you’re really able to get a 10% cash on cash return, you can do that all day, every day, and that’s awesome, but that doesn’t mean every deal is like that. And so, you still have to do your due diligence, which I want to get…


Ben Fraser: And I think, yeah, one little point to make is we all tell our investors, don’t put all your eggs in one basket. And especially, retail is riskier. It’s a different risk profile than a multifamily. And so, if your tenants go out of business, and you have to usually put a lot in tenant allowance to tenant room and allowance to improve it, rentable again.


So, there are definitely other things you got to consider, but it’s something to where the risk-adjusted nature of it right now, I think, is very, very high and something to consider. Currently, it’s a small portion of your net worth in there. Don’t put all your eggs in that basket, but it’s good to be diversified.


Justin Donald: Yeah, certainly. And by the way, while we’re speaking about due diligence, I think it’s important that when you’re looking to make an investment, you’re doing due diligence on the deal itself, on the numbers, the financials, the pro forma. And just to know, the pro forma is likely not how it’s going to work out.


Whenever people say, “Hey, you’re going to make this much,” the projected IRR, internal rate of return, is this much. It’s like whatever. Like you can tell me whatever number it is, that’s not true. What’s actually more important is what was your projected IRR on your past deals? And then what was it? What was the actual? That to me is way more important than some number that most people look at and they say, “Oh, I’m going to make 20% IRR.” Well, those people are cashing paychecks before it happens. So, that number is pretty irrelevant.


So, some of the due diligence you want to do is on the financials, and hey, are you using long-term debt or using a bridge loan? If you’re using a bridge loan, that can be a little riskier because you’re not locking in that long-term debt at a low-interest rate. When you’re doing due diligence, you also want to diligence the sponsors as well. And so, I’d love to get your thoughts on diligencing a deal, diligencing the sponsors. Like what do you do as part of your due diligence process to make sure that you’re not making bad choices that could, I guess, equate into losing money?


Ben Fraser: Totally, yeah. We differentiate between the sponsor due diligence and the deal due diligence. One kind of analogy I always like to use, if I was in horse racing, I’m not really, but this is analogy I come up with so I use it. But basically, if three parts of every deal, you have the racetrack, which is the vertical that the asset is in or the asset class that it is in. Is it in a secular positive trend? Is it in a secular negative trend? Is that particular submarket in a positive or a negative trend?


Then you have the horse that’s the actual deal itself. Is that deal structurally well? What does the capital stack look like? Is there pref equity involved? Is there mezzanine debt involved? What does the senior debt look like? Like you said, is it fixed rate? Do you have interest rate risk? Do they have an interest rate cap that they’ve purchased? What does it look like? What are the terms? What’s the leverage ratio? And what are the underlying metrics supporting the deal or the value?


And then you have the jockey, which is the sponsor. And arguably, the jockey is the most important part of all three of those pieces of doing due diligence. And so, we spend most of our time doing the due diligence on the sponsors. And so, we always start there before we’d ever invest in a deal.


Well, we’ve passed on several good deals or perceivably good deals because we haven’t done the diligence that we’d want to do on a sponsor beforehand. And so, what that looks like is exactly that. It’s looking at track record, looking at what are the full cycle deals you’ve done. How long have you been in the space? Is this particular deal align with past deals that you’ve done? Looking at who makes up the kind of core part of the team or their backgrounds then. What does their kind of tier two management team look like? And what are their backgrounds and skill sets? Because you’re ultimately trusting these folks with your capital and not only just from a character standpoint, which is another big thing, but it’s also just competence.


And so, I always like to ask, what’s the worst deal that you’ve done? What happened? A lot of times, it’s something that they couldn’t have planned for, like we’re doing sponsor due diligence actually today on a sponsor. And they had one deal where they hired all the consultants to check– it’s a multifamily deal, check all the big components of the roof, the plumbing, the HVAC. Well, the seller had basically lied in all of these things, and it wasn’t caught by the consultants. And all three of those things ended up breaking. The roofs needed to be fully replaced. HVAC needed to be fully replaced. All the plumbing needed to be fully replaced.


So, their $1 million construction budget now is a $3 million construction budget. That’s massively impactful. That’s a deal that can easily get blown up, but they’re managing through it. And so, how did you manage through that? What were you doing? Well, we had to pause distributions. We’re having to reinvest cash flow or going back to the seller and see what retribution we can go back there where we have another deal, this portfolio that we bought is supporting the deal. We’ve got all of our investors on board and we’re working through it.


To me, that’s a really positive thing to hear, of how they’re managing through it. They haven’t had to a capital call yet, which is very surprising. And so, those are the kind of things that you want to be asking, and eventually, there’s going to be a dud in a deal that a sponsor does because not every deal is as being perfectly the way they expect it to go. And so, It’s always good to ask about that and how they manage through it.


And then obviously, when you look at the deal, I think one of the biggest risks right now to it is debt risk. I think a lot of these deals, especially in multifamily, only work with bridge debt at high leverage ratios and they can’t support the interest rate risk that is potentially going to happen if the Fed keeps raising rates, and these rates keep adjusting a lot of deals I’m seeing, even though they’re good deals, they’re good assets, the business plan makes sense, the financing structure can’t support it. And so, I think we’re going to see a lot of deals blow up over the next couple of years if we keep seeing interest rates rise and if there’s any reversion in cap rates, yeah.


Justin Donald: Yeah, I mean, there’s definitely going to be deals that blow up and deals that you’re able to buy at a distressed level because people did not structure the debt properly. There’s no doubt about that. I mean, some of the debt I’m seeing, like just the way people are locking it in the short-term nature, just there’s so much about it that is very concerning. You made the comment about the seller who lied. And that just reminds me that if you’re buying real estate, it’s really important in your contract to have reps and warranties where you have the ability to go back when someone is lying, it protects you. It’s protecting your downside of them, not giving you all the info. And you do have the ability to go back and collect on that because they misinformed or lied to you.


Another thing that I think is really important is, and I learned this from my good friend Hans Box, he really only likes to invest in deals where the sponsors can be removed, that if there’s anything in the language that doesn’t allow you to remove them, that is a big red flag. And he’s been in investment. And part of what started him from being a CPA by trade to being an investor and a syndicator was that he had to take over a deal for someone that just ran a deal under the ground, but they were able to remove him, and he was able to take over and run it. And so, I think that that’s an important point.


Something else that I’m curious to get your opinion on is the times that we’re in. Do you foresee that we’re in recessionary times? I mean, if you just look at what’s going on in the stock market today, it’s a bit scary. But what do you think? Are we going to pull through this? Is it going to be a minimal blip? Is it going to be a longer one? Obviously, no one has a crystal ball, no one’s holding you to anything, but I’m just curious where you’re at and what decisions you’re making based on that?


Ben Fraser: Yeah, we track several kind of key measures to kind of see where’s the direction of this economy going. I think a lot of the corrections we’re seeing in the markets right now is really due to overvaluation. I mean, I think most people would not disagree that the markets have been similarly overvalued for a while. And so, there are interest rate increases, whether that signals that’s going to cause recession or that it signals higher borrowing costs and it makes a lot of these investments look less attractive. That is what I think is going on.


I think a lot remains to be seen. The Fed has a lot of power, and it’s anyone’s guess what they’re going to keep doing. They have a real problem on their hands with inflation. As real estate investors, I love inflation and I love it at 8% because there are a lot of other unintended consequences that that causes.


So, from an underlying fundamental standpoint, up until really a few months ago, the consumer was in really good shape. A lot of these consumers sailed through COVID because of the massive stimulus that was pumped into the market and the direct payments that were paid to families. And then all the business loans that were made, there’s a lot of liquidity on the sidelines that’s being poured into assets.


And right now, we’re in this really weird time that we haven’t really been in for a long time where we have negative real interest rates, so where inflation minus borrowing costs or your interest rate is actually negative, that’s not normal. That’s actually very abnormal historically. What that actually does is it actually does cause asset price inflation because you’re basically, effectively getting paid to borrow money if that inflation continues to stay at that level and you have fixed-rate debt. That’s a great arbitrage. I’ll take that all day long.


But we are starting to see some signs of weakening in the economy. And nothing that I would say is red flag. They’re definitely yellow flags. I think affordability of housing is a big issue right now. We’re seeing massive jumps in the cost of mortgages from home price appreciation plus borrowing costs from mortgages going up. That’s challenging.


And then the real big thing that we pay a lot of attention to is sentiment – business sentiment and consumer sentiment. Our economy, the GDP is made up 70% by consumer spending. So, if there’s a positive sentiment where consumers expect the economy to do well and they’re feeling positive about where they’re at in their personal financial situation, they’re going to keep spending and spending, keeps the economy going.


And so, we are seeing some waning sentiment a little bit. Small business sentiment is also important because that is the level of investment that’s being made by small businesses to grow, to improve productivity, and to hire. We have very low unemployment. We have generally a very healthy consumer, but we are seeing some certain things that are, I would say, yellow flags and were long in the tooth and economic cycle. So, we ought to be careful, but we still see is a massive opportunity right now as investors because this inflation problem, while parts of it are, I think, supply chain disruptions that will get solved, it’s going to be a lot slower than people think. And I think taking advantage and position yourself and reflect the inflation protective asset is really positive right now.


Justin Donald: Yeah. And something interesting that you also said that you do, you’re talking about mortgages going up. You guys buy distressed mortgages, which is another interesting investment vertical.


Ben Fraser: Yeah. So, what we’ve been doing for the past 10 years, actually, as a result of the last Great Recession, buying a lot of these mortgages that were distressed at very, very deep discounts. And so, it was kind of surprising that we could put a hold on the podcast on distressed debt, but the expectation at the beginning of COVID, where we’re seeing this massive spike in unemployment, I think was up to 16% at one point. We were kind of getting ready like, wow, this could be the next Great Depression. We never see unemployment like this in modern times.


And so, we were expecting there’d be a massive amount of defaults and debt, other things. And we actually had the exact opposite. Everyone sailed through, and a lot of the stimulus, I think, prolonged a lot of things. So, we expect there to potentially be more distress coming up. And I think as borrowing costs increase, that should likely slow down the housing market a little bit. Other challenges we’ve got, massive supply-demand imbalances in a lot of areas of the economy.


So, even though borrowing costs are going to slow down the real estate market, we don’t think it’s going to crash yet. We think it maybe reduces some of the amount of overbuilding that people are doing in single-family homes. But yeah, we’ll see what kind of next year or so holds for the distress in the market, but we’re not seeing it right now, which is interesting.


Justin Donald: Well, Ben, this has been so much fun catching up with you, learning all the cool stuff that you’re doing and all the success that you’re having. I’m glad that you made the leap from the banking industry to the alternative investment side of things. That’s super cool. I know you’ve got an incredible podcast. Please let my audience know how they can learn more about you.


Ben Fraser: Yeah, well, we just had you on our podcast, so come check out Justin’s episodes. It’s called Invest Like a Billionaire. It’s to check it out to see the latest episodes. And then we also have a private equity firm called Aspen Funds, You can join our Investor Club to kind of get notified of the deals that we’re bringing out but definitely appreciate you having me on, Justin. It’s been a really fun chat.


Justin Donald: Yeah, this has been great. Well, I’m excited for the future and I just love leaving my audience with one question, one thought to wrap things up for the week, which is this, what’s the one step that you’re taking today to move towards financial freedom and towards a life that is truly on your terms, not by default, but by design? We’ll catch you next week.


Ben Fraser: Thanks.

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