One of the challenges with an open ended fund is this moving valuation of what the value of all the assets of the company are, that investors are best investing into, as time moves on. Because if you have investors coming in at these different time periods, then suddenly the investor who came in at time zero, and the investor who came in two years later, may have completely diluted each other and caused the problem, the solution to that problem is net asset value. In this video, we’re gonna talk about net asset value, how it’s determined, and how you can use it for an open ended fund.
Net Asset Value is the key tool for figuring out what the value is at any given point, so that you don’t improperly take away the rights of an investor based on time. To make that a little bit more clear, let’s look at a whiteboard. So let’s talk about the scenario in which this can take place. Let’s use a very simple example. Let’s say you have an investor who invests Oops, my pen who invests with you here, right? He buys in here and he gives you $1 million. Now with that $1 million, you have put it into a into a property. And in that property, you have done a lot of things. So this is when you bought it right here. Now, maybe you you did a lot of construction here, and maybe you kicked all the tenants outhere and released here.
Now, you’ve still got this property here, right. So the value of this has obviously changed. There has been there has been appreciation that has taken place over this period of time. Let’s say this is three years later. There’s been appreciation this taken over this period of time you’ve done construction, you’ve kicked tenants that you guys have been together through thick and thin for these three years. And now you have someone else who comes to you give him a different color. And he comes to you here. And he says I am going by let’s say he the red guy, let’s change him. He owns 20% He gave you $1 million for 20%. And now let’s say that now this blue guy, he comes to you and he says okay, great. Here is $1 million for 20%, just like the red guy got. Sounds fair, right? Well, what about all this thing that’s been taking place over this period of time, this building isn’t worth that 5 million anymore. It’s worth more, you’ve done a lot of work, you’ve added value. There’s been appreciation, you’ve retested the old building. So it’s not worth that amount. This is the problem that is solved by by net asset value. It’s determining what this value what this person needs to pay, based on what this acids value is. So let’s go through exactly how we can do that. And so you will erase Here we go. So the challenge of figuring out net asset value is very simple in one, one version of it, and it’s very complex and another version of it. Let’s say the most classic example of a mutual fund, which is a bucket a stocks and bonds here here here, right? Every day, it’s a there’s still a bucket there. And things come in and they go out, right? There’s always an addition and subtraction of, of new things coming in and other things going out. Well, did you know that mutual funds actually don’t trade in real time? When you buy a mutual fund, or you sell a mutual fund, you’re not doing you’re not actually buying it, the minute you hit go from your brokerage account, you’re actually buying it at the end of the day, I think it’s like at 530, or something Eastern time. And that’s because what needs to happen before you figure it out before you do it, is that this bucket? Let’s look, let’s blow this up. So we can see what’s happening.
This bucket of in the mutual fund. Each individual piece, each individual piece is figured out what its value is that day. So if it’s a stock, we’ll see if it holds stocks only. They all the different stocks are added up together. It said, Okay, if we were to sell this whole bucket today, what valid price could we get it for? And then what we would divide it by the number of outstanding units, that comes up with the net asset value for the day. And when it closes and at about 530. When you buy your mutual fund, that’s when you’re actually buying and because then you know what the net asset value is. So net asset value is all of the assets minus liabilities. divided by number of units, comes up with that share price. Okay, so that makes sense, right? Now, what is hard to do is what about the case where we’re not talking about when we’re not talking about a mutual fund, when like in the example, we’re talking about buildings, and real estate. And these are all purchases of different buildings in real estate, and they’ve all got different appreciation things going on, and they’ve got different re tenanting going on. And they’ve got all sorts of things, there’s construction going on. How on earth do you figure that out? Because you can’t do that every day. There’s just too many things. If you even had five, five buildings, and you were trying to figure out the net asset value, it would be really hard to figure out what it is every day, you have to come up with five actual, you know, legitimate values. Because real estate is so illiquid, it’s really hard to figure out exactly what that value is at any given point. So what here’s what companies do, they say, Okay, we are going to allow investors in here at time zero, and then we’re going to do some stuff with that money. And then let’s say these are quarters, one, quarter one, quarter two, quarter three, quarter four. So here is here is year, 11234 years, year two, and if I make a mistake, I don’t need to hear about it in the comments. You get the idea. All right. So you got year one, year two, year three, as they go on, so let’s say every quarter, so this quarter, q1, the team gets together and they do an evaluation and they calculate everything. Okay? We know that this is now worth $100 the unit still now, Q let’s skip ahead to year one, q two, q one, year one. Okay, now we’ve got another building, and we’ve also done some other there’s been some appreciation, and the management team determines that now it is worth $110 A unit and you’ve done some more things and then you have some purchases that go on. And oops q1 And you Have a mass downsizing in terms of all of your tenants leave. So now management decides, oh my goodness, our net our value, if we had to sell it all today has gone down radically, it’s now $95 A unit. And you’re only sweeping money in once that determination of the net asset value is determined. Here, I’m making the assumption that there’s also there’s determinations here and here. So that’s how net asset value works. Now, quarterly net asset value determination for a for real estate is still really tricky. It’s a lot of work. So most companies do it, do it annually. Some do it quarterly still, there’s some also do it by end really, the challenge is finding out what’s going to work the best, and finding out what that mechanism for determining mostly what that asset value is determining the liabilities isn’t that difficult, but determining what the net asset value of an illiquid product at a regular interval is challenging. So when doing it, that’s really the big, the big thing that takes the most amount of time, is figuring out that net asset value, the asset itself, and then dividing it by the number of units, number of units, that’s very easy to figure out. So I hope that helps. Let’s go over some key takeaways here that go through net asset value again, just to really make sure we’re rock solid here. Number one, net asset value, or NAV as we call it, most of the time, it’s a critical metric to understand the open ended investment itself, it impacts the pricing that investors are able to go into, and whether or not they can what price that they can exit from. Number two, the calculation of NAV is done by adding the assets or as taking the assets, subtracting out the liabilities to create the total value, and then you divide that value by the number of shares outstanding or units outstanding. What that does is it gives a per unit value. Number three, NAV can be used for assessing the performance of investments as well. It helps you identify first, the true worth of the investments. And it helps in the management of the portfolio. All fund managers want their NAV to go up. So they that shows a good level of performance. Number four market fluctuations change this nap. So it’s that market fluctuation and the value of each individual asset that’s changing over time. It’s the market that’s actually driving it right the markets, the one that determines value. So that’s changing over time, and it will change the decisions that are made not only by your investors, but also by the fund manager themselves. And number five, transparent and accurate calculation of NAV is crucial for giving your investors not only an accurate number that they can rely on, but also for that transparency so that they understand how it was calculated, and so that they can feel like they’re truly being informed with full disclosure about the material thing that’s changing which is net asset value. My name is Tilden Moschetti. I am a syndication and private equity fund management attorney for the Moschetti syndication Law Group. If we can help you establish your own open ended fund, or if you’re doing a closed ended fund and be compliant with the SEC is Rule of Regulation Drule 506 B and 506. C, we’d love to talk with you and strategize about how we can help you move from where you are today to being more successful and getting your funds put together in the right way that will give you peace of mind. Keep your investors happy and ultimately make you successful.
Podcast - Episode 55
Video - Episode 54
Transcript - Episode 54
Podcast - Episode 54
Video - Episode 54
Transcript - Episode 54
What is the difference between an open-ended fund and a closed-ended fund? Either in private equity or a syndication or a real estate fund? What is it that makes that difference? We’re going to go through that in this video
let’s talk about the difference between an open-ended fund and a closed-ended fund. Now first, a caveat. I don’t mean the difference between a fund and a syndication. In reality, a syndication is a group of feed people coming together for a common purpose, where a fund is a group of money, you know, a grouping of money, a pile of money for a common purpose. So to me, they’re kind of the same thing. So whether it’s for one asset, or whether it’s for a group of assets, a pool of assets, either a blind pool or a directed pool. That’s not what we’re talking about. We’re talking about closed-ended funds or open-ended funds. So what exactly are we talking about? And what’s the distinction? So I think it’s helpful to draw it out. And I’ll provide some examples along the way. So here is a two different timelines at the top is closed-ended fund, and at the bottom is an open-ended Fund, in a closed-ended fund. We’ve got an investor and who comes in here, and maybe he’s got another investor who comes in here. And then he’s, there’s maybe another investor, who comes in here. And then together, they all traveled down the same path until a liquidity event here.
And maybe there’s different payouts, and there’s different things along the way. So an example, a typical real estate syndication, we buy the building here at time zero, we maybe we are raising funds for a month or three months, then we all traveled down this path, until it’s time to sell the property, sell the property, divide the proceeds, maybe along the way, we’re paying little distributions here in there. But everybody’s staying in together, it’s all going as one piece down that line. So that is a closed-ended fund. So what exactly is an open-ended fund, an open-ended fund is completely different. A best example of an open-ended Fund is a mutual fund. So a mutual fund, you have people coming in at all sorts of different times and exiting at all sorts of different times. So let’s say you’ve got someone here, who buys in here, travels down for a few months, and exits here. And then maybe there is another person who comes in here, travels down and exits here. Totally different. And then maybe there is a third person who comes in here and travels down and then exits here. So you’ve got these different entry and exit points. The difference, obviously, is that hold period. So what the challenge of an open-ended fund oftentimes is, is determining what we call net asset value. Net Asset Value is the price think of it as the price per share. So for mutual fund, maybe this time it starts at $100 a unit that’s fair, maybe it’s risen to 110. And then maybe it’s gone to 120. Maybe it falls back down to 115 and then 105 But then it skyrockets back up to 130. At any given point, you can see what the profits are. So for this blue line, you can see he bought in at 100 and he’s exiting at 105 So he has a gain of five with the green has bought in at 110 and exit at 130. They have a gain of 20 the red guy though he lost five he bought in at 120 and it went down to 115. So he lost five. So but we know With any given point what everybody has, and everybody is treated the same. But what if this was not a mutual fund? What if this was a property or a portfolio of properties. So there is an important property bought here, a property bought here, a property bought here and here. And this one sold here. This one was held all the way to here. This one was exchanged into this one, which was sold here, how are you going to find out figure out what sort of values the blue guy gets, the green guy gets or the red guy gets, it’s very challenging. So I’ll do another video on net asset value and how that’s done and how we handle that. But you can see for a real estate fund, that’s the true challenge. That’s why they are much, much more complicated, and much, much more difficult to do. It costs more in legal fees to put it together. Because it’s more complicated. It costs much more and accounting fees because it’s more complicated. All of those things make it just that much trickier. So I hope this makes it clear what the difference between a closed-ended fund is and an open-ended fund. So let’s go over what the key takeaways from this are. For First, open-ended funds in private equity, allow investors to enter and exit positions freely. So sometimes there will be a lockup period. But basically, it lets people come in at any specific point as designated in the terms and then it provides more liquidity because we let them out at regular intervals. A closed-ended fund involves the acquiring managing and the ultimately the aim is selling, right, it’s that big capital event. Now, certainly there can be profits along the way and there can be cash flow in that closed-ended fund. But the main purpose of the closed-ended fund is that appreciation were an open-ended fund, the main purpose really is that cash flow. And in an open-ended fund in equity, we have more frequent payouts generally, because of the purpose is that is that cash flow. And so it also offers a lot more flexibility in managing the investment itself, in terms of designing whether how cash flow is gets dispersed. And lastly, the closed-ended funds have the potential for much higher returns, because we don’t have this calculation of Net Asset Value all the time, which exists. So open-ended funds on the other hand, they provide a lot more stability because they can people can come and go as they want. And it gives that liquidity. My name is Tilden Moschetti. I am a syndication attorney for the Moschetti syndication Law Group. I help syndicators and private fund managers establish Reg D offerings for themselves by providing them the compliance documents that they need in order to be compliant with the rules of Regulation Drule 506 B and 506. C. We basically help you put these funds together, whether it’s an open-ended fund or a closed-ended fund. I would love to see if we can help you give us a call or visit our website and set up an appointment and we can discuss your project and figure out a way to get you from where you’re at today to your goal as a syndicator or a fund manager.
Podcast - Episode 54
Video - Episode 53
Transcript - Episode 53
Podcast - Episode 53
Video - Episode 53
Transcript - Episode 53
I see a lot of investment ideas, I get a lot of information about alternative investments from the marketplace. My clients, I prepare about 100 PPM a year. And I review probably about 200 other alternative investments, just to keep abreast and make sure that I’m providing the best service to my clients. And also for my own deals. It is rare that something jumps out at me as such a great and creative idea as what we’re going to talk about now. Now, this is not a pitch for anything of mine, I’m not doing this, I’m not responsible for it. And they’re not a client. I just thought it was a brilliant, brilliant idea for an investment and kudos to them.
So with that kind of play up, you must be wondering what it is that I’m talking about? Well, first, before I reveal the make the big reveal on which investment, I think is just brilliant. I let’s talk a little bit again about founder investment theory. It’s the drum I bang all day long, that is absolutely critical. federal investment theory can almost be boiled down just into one word story, the story that your investors are getting about your investment, what is it that makes it compelling for them to invest? Now we also can break that down into four, two components, one of which is the story. The first one is the strategy. What’s the general strategy that’s taken place? Is this a value add? Is this appreciation as a cash flow? What is it? The second is the philosophy that’s taken? Why it’s a this is a good investment, what this asset class is, things like that. The third is the risk tolerance level. So is it low? Or is it high? Some people like to invest in very safe assets with very, very stable safe returns, some people like High Risk High Return assets. And the fourth of course, is that story. So without further ado, I’m going to talk about what I think is one of the most creative ideas for using an exempt offering for an investment in an alternative investment space. Masterworks. Masterworks is a regulation, a offering that’s put out there to raise money for investing in art. It is a incredibly great idea. I mean, who wouldn’t want to own some of the masterpieces that they invest into? Banksy, Sam Gillean Andy Warhol. Yeah. Oh, we Kazuma. And I totally butchered her name, and I apologize. But these are some of the great works of our time that an even have before our time. I mean, they’ve got a Monet, how cool is that? You can own a piece of that and then take part in the appreciation. So that’s the whole idea behind Masterworks. So their strategy, of course, is just pure appreciation. This is not a cash play. This is something where you buy one of into one of these pieces of art, and then it’s sold at some point. Oops, how it works. So they’ve got a whole mechanism here, they purchased the art, they scrutinize it. They do the whole period, the whole period three to 10 years. You can also trade and shalt sell your shares because it’s taking place under Regulation A. So extremely cool idea very cool strategy. Obviously, the philosophy is art, art appreciates. Art is actually a very good asset class that’s oftentimes ignored, because the asset prices are so high and it is such a illiquid market. But I think what Masterworks has done here is they’ve liquefy the market as much as they can possibly be liquefied, and in such a great compelling way. Risk tolerance, I mean, fairly safe to say that Banksy paintings are going to be worth a fortune, and going to be worth even more. So I think it’s pretty safe to say that it’s going to be a very safe asset class. nothing’s guaranteed, but in general, pretty, pretty safe, low and good returns. I mean, on some of these paintings, these are reasonable returns. I mean, even on a more classical painter, like Claude Monet, you’ve got a 9.2% return which Yes, isn’t stellar, but for that low risk tolerance level It’s right there in the in the in the play. So very cool. And really, at the end of the day, it’s the story. How cool is this? So under each of them that you can also see, let’s see, how did I do that they have descriptions of all the different paintings that they’ve done. They have what their the estimated sales are they have an investment thesis that describe the work to you, but this picks why they chose it and why they think it’s going to be have these kinds of returns. Really, here’s the bottom line, these guys, kudos to you. They’re not a client of mine. I’m not invested in them. I don’t get anything for saying it. But I thought it was such a great example, to bring to you have a clear example of a fit that I think is so unique and compelling. Wow, great job, guys. Now, that said, we do lots of Regulation D work for our clients, I would love to see my clients bring me something that is as cool as this or nearly as cool as this. That said, there are a lot of deals that people are working on my clients included, that can be this cool, that have a unique vision, but they also haven’t crafted it because they haven’t spent the time to think about what their their fit is. So it all starts with fit if you want to be able to get investors into your project with little friction. Founder investment theory is the way to do it. If you’d like to talk about your Regulation D offering, I would be happy to talk with you and see if we can help you not only put together all the compliance work that needs to take place PPM operating agreements subscription agreement filing in the forum de state notices under blue sky laws, but also help you with that fit and how you can talk communicate better with your investors.
Podcast - Episode 53
Video - Episode 52
Transcript - Episode 52
Podcast - Episode 52
Video - Episode 52
Transcript - Episode 52
Direct Investment specified pools or blind pools, there are three different strategies for just what you’re going to do with that money. Now that you’ve raised it, and that only needs to be communicated in your private placement memorandum to your investors. So let’s go through what the three differences are and how you make a choice about exactly where you’re at.
The easiest to explain is a direct investment, we are going to raise $4 million to buy the property at 123 Main Street, we are going to raise $4 million to buy business XYZ Corporation. Very, very simple. That is what a direct investment is. There’s two other kinds of investment strategies though, one we call specified pools and one we call blind pools, a specified pool says we are going to go forward, and we’re going to buy this kind of asset in this kind of manner. So it’s going to be we’re going to buy 123 Main Street 456 Second Street, the one that’s around the corner from that, and maybe the shop down on on Willow street, I don’t know. And once that’s been done, that is the specified pool. So we’re raising all this money in order to buy those things. Sometimes a venture capital fund is also a similar to a to a specified pool where we’re going to be buying these sets of businesses or investing into these sets of businesses. And then we’re going to be eventually selling them or doing make having them go public. Now compare that to a blind pool, a blind fool says, hey, look, we’re gonna raise this money, and we don’t know exactly what we’re gonna buy, we’re gonna buy things that look generally like this. But if some other opportunity comes away, we’re gonna buy that too. If it looks, if it looks good, we’ll probably invest in it. But we’re raising just this amount of money, we don’t know what it is, we’re blind to what it is. Those are the main differences between them. So when it comes to making a decision about what you’re going to do, one of the factors and figuring out what what way you’re going what strategy your syndication or private offering is going to look like is thinking about these things. Now, certainly a blind pool gives you a lot of freedom to invest in whatever, but it’s also harder to raise money for. So it is harder to go in front of an investor and say, give me some money, I’m gonna invested in some things that I think you might like, versus give me some money, and I’m gonna buy that thing right there. That right, there is mine, we’re going to buy that and that’s what we’re going to keep. So that one is very simple, they can see the asset, they know what it is. So obviously, if there’s a level of trust that needs to be developed, and it’s much higher when it’s a blind pool, even a specified pool takes more trust than an individual asset, because there’s more certainty in while it’s that one thing. So that’s one of the considerations that you’ll have to make as you put a syndication or private equity fund together. Now you notice I use the word fund and syndication in the same sentence. Let me just reiterate why a syndication by the pure definition of it is a group of people coming together for a common purpose. A fund by the pure definition of it is a pool of money used for a common purpose. To me, that’s sure sounds like the same thing to sort of two sides of the same coin. So I use them interchangeably. That’s just the way I like to talk. I recognize that some people talk about funds more as these these pools and then a syndication more as a direct investment. But either way, it’s people coming together for for a common purpose, or funds coming together for a common purpose. That’s why we do it that way. My name is Tilden Moschetti. I am a syndication attorney for the Moschetti syndication Law Group. If we can help you put your Regulation D offering together, be compliant with the SEC not get in trouble and have them knocking at your door. should anything go wrong. Like an investor getting upset for whatever reason that can happen. Please give us a call or set up an appointment through our website.
Podcast - Episode 52
Video - Episode 51
Transcript - Episode 51
Podcast - Episode 51
Video - Episode 51
Transcript - Episode 51
There are two kinds of investors in the world. And how you put your founder investment theory together is going to be geared towards one or the other. We are going to talk about investors who are interested in primarily cashflow, and talk about investors who are primarily interested in appreciation.
One of the components of your founder investment theory, that theory of yours that you’re putting behind your investments and portraying it as a story to your investors or your potential investors, one of those components is how it’s suitable for them. See you there are different kinds of investors out there, there are investors who are really primarily interested in cash flow, when you have interest, you have investors that are primarily interested in appreciation. So let’s talk about cash flow investors first. Now, cash flow investors, as the name implies, are those investors who are really interested in a monthly or quarterly check in the mail mailbox money as it were, they are they tend to be a group that either is relying on that income to be coming in at a regular interval, or they’re relying on it, because they plan on siphoning it off to other investments over a period of time. So they’re, they’re going to be doing taking this pool of money, and then just keep compounding it into other investments, rather than your specific investment, right. So they may be getting that check in the mail, depositing it, and then putting it towards this other syndication or this other stock or this bond, or whatever it is. So those tend to be your cash flow investors. Now, in general, and this is extremely broad, so don’t take it with a grain of salt. And it’s also not investment advice. For anybody who is listening to this video who is looking for investment advice. This isn’t investment advice. So that cash flow investor tends to be your retired person because they don’t have a steady income coming in. So they don’t aren’t rely. So they are relying on that cash flow that’s coming in. Now, the other kind of investor that is out there is the cat investor who is primarily looking for appreciation, so they don’t want to check now, you may ask yourself, why don’t they want to check every month or every quarter? Well, the big reason is taxes. So they will be people who probably have a good paycheck and get, you know, get paid regularly and aren’t relying on your investment for that big for those that that regular payment, what they are looking for is sort of like someplace to just keep putting money away, where that will just grow for them. And then they don’t have to pay taxes on it while it’s in the investment. So a good example is a team of doctors goes in invest into a an office building. And then they aren’t really looking for any kind of appreciation whatsoever. They’re looking just for Okay, in the end of 15 years, or whatever period, we’re going to sell this property and we’re going to enjoy all the profits of it. Now, they are two totally separate tracks. I personally I fall into the appreciation track, I make good money, I have a regular, I earn regularly, I don’t need to be paying taxes on my on a yearly thing, I’d much rather be putting that money away and watch it grow, right and watch it and I have a transaction that’s turns into a sale. And then suddenly now I’ve got a nice bit of appreciation. So if I’m not paying also, I’m not paying at that regular tax rate, I’m paying at that capital gains rate, not the annual rate, which is much higher. So that is a basic picture of what those two different types are. Now there certainly is people and a large number of people who want both, and they exist in there out there. The point of this video really is not to say one or the other or that your deal should be one or the other because they’re all different. Every deal is unique. It has its unique fingerprints. But what is critical for you to do is to identify what kind of investment it is because depending on what it is, it’s going to change how you talk to your investors. If it’s a cash flowing investment, you need to have that conversation with them, or they’re going to turn off instantly if they’re an appreciation person, and maybe that’s okay, because if all they’re looking for is just to prove situation and cashflow deal probably isn’t right for them, or vice versa for the appreciation person, but the person who really needs the regular regular money coming in. My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. Now what we do as we help real estate, syndicators, developers, private equity funds, businesses, raise capital, raise that money that they need in order to put it into their business, put it into their syndication, whatever it is, they’re raising money for, not only for the benefit of their investors, but also for the benefit of themselves. They make money this way. So we helped make that whole process legal and compliant under the SEC rules. Now if we can help you stay compliant under Rule 506b or Rule 506c of Regulation D. We’d love to talk with you give us a call. Our link is at the bottom of this. These notes.
As a Syndication Law and Private Placement Memorandum attorney, my firm specializes in providing expert legal guidance for raising capital through Regulation D. Our services cater to various sectors, including real estate, entrepreneurs, crypto-businesses, and private equity. We pride ourselves on preparing customized, attorney-drafted private placement memorandums, operating agreements, and subscription agreements. Our primary focus is to ensure compliance with Regulation D, allowing you to navigate the capital raising process confidently and successfully.