September 4, 2022

JF2922: How Customizable Funds Are Changing the Game ft. Badri Malynur


Badri Malynur has invested in various startups and across asset classes, including auctions, stock, commodities, and bonds. After entering semi-retirement, a friend asked him to help co-found Avestor Inc., a technology platform focused on an end-to-end solution for sponsors to build customizable private funds. 

Today, Badri serves as VP at Avestor in addition to his role as co-founder. In this episode, he shares why he and his friends decided to create Avestor, why both the syndication and fund industries are ripe for disruption, and how customizable private funds are changing investing as we know it.

 

Badri Malynur | Real Estate Background

  • Co-founder and VP at Avestor Inc., a technology platform focused on an end-to-end solution for sponsors to build customizable private funds.
  • Portfolio:
    • LP of over 50 deals across multiple asset classes including multifamily, self-storage, industrial, mobile home parks, and student housing
  • Based in: Beaverton, OR
  • Say hi to him at:
  • Greatest lesson: Build a diversified portfolio that spans multiple asset classes using a dumbbell approach for managing risk.

 

 

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TRANSCRIPT

Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, Badri Malynur. Badri is joining us from Beaverton, Oregon. He is the co-founder and vice-president at Avestor, a technology platform focused on end-to-end solutions for sponsors to build customizable private funds. His portfolio consists of being an LP on over 50 deals across multiple assets. Badri, thank you for joining us and how are you today?

Badri Malynur: Hey! Great, Ash. Thank you for having me on the show. It's nice to be with you.

1:The pleasure is ours. And Badri, before we get started, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?

Badri Malynur: Sure. So I used to be an executive of a Fortune 500 company and almost retired 15 years back. I've been in various startups... Investing is my hobby. I've invested in pretty much all asset classes - real estate, of course, options, stocks, commodities, bonds, startups, and I'm an angel investor in over 30 startups.

I was kind of semi-retired, and a friend of mine wanted me to come back and be a co-founder at a Avestor, and my goal is to travel to every country in the world. I'm up to about 70 so far, but hopefully we will resume this after I take a little hiatus working with Avestor.

Ash Patel: And what was Avestor?

Badri Malynur: Avestor is the company I co-founded with a couple of friends, and the goal of Avestor is to change investing as we know it with a new concept called a customizable fund, which allows investors to pick and choose deals within the infrastructure of a fund and still get the benefits of syndications, but in the context of a fund.

Ash Patel: How easy are funds to set up these days?

Badri Malynur: You know, funds are fairly complex to set up, and fairly complex to manage. And that's one of the problems we're trying to solve. Customizable funds makes it very easy for you to set up a fund. There are several problems with blind pool funds today as we know it, Ash. If you don't have a strong track record, it's difficult to set up a fund. And from a sponsor perspective -- I'll talk about it from a sponsor perspective, and also talk about it from an investor perspective. You cannot flex your business model as a sponsor. Once you pick a particular asset class, you have to stick to that asset class, and you have a finite amount of time generally to raise the money, and you're also under pressure to deploy capital as soon as you get it. No investor likes to leave their money laying around, sitting in the bank account. And those are some of the problems we are trying to solve, because we have put a little fund wrapper around syndication deals, and let sponsors create an evergreen, customizable fund, where they can invest in any asset class and raise money as they need it.

And from an investor perspective, the big advantage of a customizable fund is you can pick and choose which deal you want, and... Hold your horses. You get a single K-1. Tell me, who's happy getting 10k [unintelligible 00:04:26.12] Maybe your accountant, right?

Ash Patel: I pay a lot of money to take all of my K-1 and combine them into companies... Yeah. Okay, single K-1 - great selling point. I want to circle back - what is an evergreen fund?

Badri Malynur: Well... Surprise, it's evergreen. But let me build on that a little more. An evergreen fund is an open ended-fund which you create without specifying your business strategy. An evergreen customizable fund, I should say. So it does not have a finite close date, because though investors are investing in the fund, they're really investing in one deal at a time. So of course, a deal has some projected exit dates, but the fund never exits. Think of it like a stock brokerage account for real estate investing. You pick and choose which stock you want, and when a deal exits, the cash balance in your account just gets incremented. So that's what an evergreen customizable fund is.

Ash Patel: And a blind pool fund... What is that?

Badri Malynur: A blind pool fund is the traditional fund that you might think of when you think of a fund today. And as the words indicate, the investor does not have a choice on which investment they want to invest in. So once you invest in a blind pool fund, you're depending on the track record of the sponsor, and every deal which the sponsor is investing in, you have to invest, because you don't have a choice. So if the sponsor suddenly decides to go into a different asset class - voila. You'll have to just go along with him. So that's the traditional blind pool fund. And it's a shame that the blind pool fund was introduced -- I don't know, in President Roosevelt's time, 60 years back; the fund industry has not innovated at all, and we hope to completely shake the fund industry up.

Ash Patel: What have they not innovated?

Badri Malynur: In providing an ability for the investors to pick and choose deals in the context of a fund. So there is no customizability, either for a sponsor or a fund manager, or the investor, in a traditional blind pool fund.

Ash Patel: Alright, I'm going to ask you a question... If I have a fund, and I have three different deals that I'm closing on, can investors put portions of their money in these different allocations?

Badri Malynur: Absolutely.

Ash Patel: And can they move them around once they're in?

Badri Malynur: No. So the way we have structured it is once you invest in a deal, you have to wait until the day exits. But when you put your money in, you can say, "Hey, I like this deal. I like the Sunbelt." I know you like the Sunbelt, because you live in Texas...

Ash Patel: In Cincinnati.

Badri Malynur: Oh, you live in Cincinnati. Okay, my bad.

Ash Patel: That's okay.

Badri Malynur: So they can pick to decide to invest $20,000 in one deal, $30,000 in another deal, but they do have to wait until the deal exits though.

Ash Patel: From a sponsor's perspective, I would think people would want the ability to have investors' money, and they deploy how they see it fit, versus trying to fill one deal at a time. Is that what you're seeing?

Badri Malynur: It just depends. So you can kind of get the best of both worlds, if you will... For example, maybe you set a fund-level minimum of 50k or 100k. But then you allow a deal-level minimum of 20k or 25k or even lower. So what this allows you to do is still collect the 50k or 100k up front, but you're not collecting it for every single deal in the future, and you still have the ability to deploy that capital in a deal, but then the investor comes back and says -- if you have enough investors, presumably you'll have enough deals that some investors may be interested in deal A, and other investors may be interested in deal B. So you still do have that flexibility where you can deploy the capital because that money is already in the account, it's just that you're not asking the investors to commit to every single deal in the future. And as we head towards a recession, I think people will want to diversify their investments, and have the ability to pick and choose which investments they want.

Ash Patel: Badri, the fund investors typically send the money in ahead of time, and then the sponsor determines when they want to deploy it?

Badri Malynur: Either model is possible. For example, in the fund which we built to test out the platform, we do have a fund minimum. And if they like one of the current deals in the fund on the platform, they do have to put the fund minimum of 50k or 100k or whatever it is, and then they can decide to deploy 10k, 20k in each deal which they see, and leave the rest in the cash balance.

The best analogy, Ash, is think of it like a stock brokerage account. You'll fund it with a certain amount of money, but you don't invest in all the stocks immediately. You leave some in the cash balance, and then you can decide which stock to invest in, as time progresses.

Ash Patel: Interesting. So it's exactly like a brokerage account...

Badri Malynur: It's exactly like a brokerage account.

Ash Patel: ...where you don't have to panic and hope everybody wires the money in at the last minute.

Badri Malynur: Exactly. So you can get the money in advance. Or you can also collect money in a deal at a time. So once the fund minimum is achieved, then maybe you put the deal up and say "Hey, this is a deal I'm considering", and just like in a syndication deal, you can gather all the soft commits, and then you can decide which deal you want to invest in, and whether you want to proceed with the deal.

Ash Patel: That's interesting, because I've had a lot of people - over the years, they just randomly say they want to invest with you, and you kind of keep them on hold until you have a deal where you need additional investors, and they may or may not still be interested... Whereas if you had had them open up the account and then they can deploy capital based on the deals - it's a great way to keep that fresh money coming in.

Badri Malynur: Exactly. That's been our experience, and we have some investors who like auto-investing models... Saying, "Hey, we like all the deal you bring onto your fund into the platform, so we will just put 10k every month." And sometimes they pick the specific deal, and sometimes they just invest 10k in the next deal. "We like all the deals you guys bring."

Ash Patel: Interesting. So the syndication model is just unchanged for a long time. Right?

Badri Malynur: Exactly.

Ash Patel: It seems like since syndications started, everybody's doing the same thing. What are some really creative things you've seen being done with funds?

Badri Malynur: What a fund allows you to do, especially a customizable fund, is reduce a lot of the costs associated with syndications. Think about it - for each syndication, you're paying 10k for a PPM, or maybe if you have a very discounted attorney, seven grand; I can't imagine anybody doing it for less than that. You're doing a blue sky filing for every investor, from each state, for every syndication deal. So if you do five syndication deals a year, then for the state of Texas, if the first investor comes along, you'll have to do five blue sky filings. You'll have to do five separate management LLCs. So the customizable fund allows you to get massive cost savings over doing one syndication at a time, from legal compliance and accounting aspects of it.

And another interesting thing which you can do with a customizable fund is, just like in a syndication deal, where you can have Class A, Class B Class C shares, you can do a combination of capital raising where some of it is just hard money loans, some of it might be preferred equity, some of it might be common equity, and some of it might be a combination of everything. So you can take one deal and split it into four or five sub-deals, and what that allows you to do is appeal to investors with different risk tolerances. You may be at different stages in life. At this time you will really want some safe money, you want the preferred equity of 10% or 8% or whatever it is, and say "Hey, I don't mind not having the upside, but I want this guaranteed income." So you can decide how much you want to put in each deal, but all in the context of one fund.

Break: [00:12:17.20] to [00:14:04.04]

Ash Patel: Is there a dashboard where I can do this myself? Or do I have to interact with somebody at Avestor?

Badri Malynur: Absolutely, we have a great software platform. And there is a dashboard where you can -- think of it again, I still go back to the stock brokerage analogy... I don't want to offend your favorite stock brokerage, but think of it like the Fidelity of real estate. You log in, you'll see your account balance, the number of deals you're invested in, you can dissect in going to one deal and say "Hey, let me look at the PPM, let me look at the project updates", and then you can look at all the transactions in the fund, how much money went in, where did the distributions come in... And as I indicated, the beauty is at the end of the year you get a single K-1.

Ash Patel: Yeah, it seems like this industry was ripe for disruption.

Badri Malynur: Both the syndication and the fund industry. We are trying to combine the best of both worlds; take the best attributes of syndications and the best attributes blind pool funds.

Ash Patel: Not to pick on syndication attorneys, but what do they do? From us sponsors, maybe some of us naive people, we assume that it's the same paperwork for every syndication. Why does it cost so much?

Badri Malynur: That's the question you'll have to ask a syndication attorney... But I think there definitely is room for reduction in costs. And yes, there are some unique risks to a deal, but most of the risks in a multifamily deal are common across all multiple deals. To be fair, there is some work involved in doing the Reg. D filing, and you do have to modify the PPM for a particular situation... But there is a lot of commonality between the syndication deals. And what we have done is we have tried to develop a common PPM which addresses the most common risks, and then we take an individual deal and you can add in any number of individual digits to the customizable fund with a simple two-page addendum, as opposed to having to go through and develop a full-fledged PPM for each deal.

Ash Patel: And investors are able to see their financials at the property; any communications, it's all in one platform?

Badri Malynur: Exactly.

Ash Patel: Why isn't everyone doing this?

Badri Malynur: We are seeing a tremendous amount of interest, and as you know, a new concept takes some time to get ingrained in the industry. People understand syndication deals, some people understand funds, but then we come up with a completely new idea of a customizable fund. People say, "Hmm, what is that?" So it does take some time for the industry to turn around. But the cost savings are obvious, and the investor benefits are obvious. And let me tell you something interesting... I think this is a fantastic platform when as we move towards a recession -- in my opinion, I don't think a recession is a matter of if, but when. Regardless, I think we all agree the economy is slowing down. And what happens during these times, Ash - investors want diversification; they're more reluctant to put a large amount in one deal. They want people who they can trust. More importantly, they want liquidity. They want multiple points of liquidity. And you don't get that in an individual syndication deal. And a customizable fund can address all of those points.

Ash Patel: What I meant by that was why isn't everybody doing what you're doing in terms of copying your business model.

Badri Malynur: Ah, good question. Sorry, I didn't quite get that.

Ash Patel: That's okay.

Badri Malynur: It is pretty hard to do. We spent over two years in developing the algorithms. The single K-1 is far more complex than you might think. We opened it to other funds just about nine months back, but we spent two full years with our own fund and two full accounting lifecycles, to make sure that we got everything right.

So sometimes the best ideas are the obvious ideas; why didn't somebody else think about it? So am I saying that somebody else cannot replicate this? I cannot really do that. But is it hard to replicate? Absolutely. Yes. And do we have a lead? Absolutely, yes.

Ash Patel: Badri, I was listening to somebody else's podcast, and I was listening to it because I knew the person being interviewed - huge family office syndicator... And they moved from the single asset syndication to the fund model, but then ended up moving back. And for whatever reason, he said that his investors preferred investing in individual deals. What cases do you think people would have for that? Instead of spreading their capital out amongst multiple assets, why would people want specific individual deals?

Badri Malynur: Well, people like to feel like they have control over their investments. Again, this is the difference between people who like to pick their own individual stocks; people feel like they have better control over their destiny. Now, whether that's true or not is debatable. Think about all the people who prefer to pick individual stocks or mutual funds [unintelligible 00:18:42.19] of people who do invest in mutual funds. People like the ability to control, and people also have different time horizons. So some people may have a kid going to college in three years, or four years. So now, with the ability to pick individual deals, then they can tailor the investments to their particular time horizon, their particular risk tolerance, their particular liquidity needs, and their particular situation.

For somebody who's living in Texas, they may have enough exposure to Texas; they may want to invest in other states. And somebody who already has a lot of exposure to multifamily may want to invest in student housing. So that's what a customizable fund provides you - the ability to invest in individual deals, but within the context of a fund.

So to go back to your original comment, if the person who was being interviewed in the podcast had heard of a customizable fund, and [unintelligible 00:19:40.01] they would have gone back to a customizable fund, which gives them the ability and their investors to pick individual dates.

Ash Patel: So here's what I'm thinking... I would like to start a fund that's open-ended forever, and people can invest, and as long as they're invested, they get their returns, but they have the ability to exit. And when they exit, I would have to obviously replace their capital... Is that an option?

Badri Malynur: When you say replace the capital... Today, when a deal exits in a customizable fund, the money goes back into the cash balance of the investor; the virtual cash balance. So it's a lot easier for you to go back to them and say, "Hey, Joe, your deal invested - here is all the money I made for you. Do you want to invest in my next deal?" You could do that in the individual syndication model, too. But what you'd have to do is you'd have to wire the money to them, and then they have to wire the money back. And as they say, there is many a slip between the cup and the lip patch; they may decide to invest in another deal, they may decide to go buy the latest Tesla... So this allows you to do that.

Ash Patel: Well, what if they want to exit early and the deal is not exited?

Badri Malynur: Today we do not have a resale marketplace, but that is something we are actively thinking about. So if the deal is not exited, as of today, they'll have to wait until the deal exits. So that's why we recommend - when people invest, they can invest as little as $5,000 in a deal; we recommend that they invest in multiple liquidity points, so that when a deal exits, they can decide if they want to rollover the money into a new deal or withdraw the money.

Ash Patel: What if somebody has a life event where they have to withdraw early? Can I have provisions in there where I'm allowed to return their capital and replace it with somebody else's capital, even mine?

Badri Malynur: Not as of now, but that's something we are actively considering.

Ash Patel: Got it. And you're an LP investor on how many deals again?

Badri Malynur: Through the fund, we have invested in over 50 deals. And we have our own fund, which we built to test out our platform. And we have a mathematical model, which really takes a glass half empty approach. The problem with syndicators is that they always take a glass half full approach; we take a glass half empty approach, and we look at all the things where a deal can go wrong. And the beauty of this fund in this 50 deals - they were not all multifamily. They were multifamily, they were self storage, we did an RV park, we did some student housing, we did triple net industrial leases, retail... And it's a great model to diversify across multiple asset classes and multiple geographies. And we learned quite a few things along the way.

Ash Patel: So your LP investments were market research more than anything?

Badri Malynur: No, our LP investments were for our fun, which we built to test out our platform. And we used that as a vehicle to build our mathematical model to evaluate a deal from an LP perspective, not from a GP perspective. The equations are slightly different.

Ash Patel: Interesting. Badri, what is your best investing advice ever?

Badri Malynur: It's all about having a barbell approach. And you just cannot time the market. Pick your asset classes, pick the allocations for each asset class, and invest in a wide range of asset classes. When one asset class zigs, the other asset class goes in the opposite direction. And you can never predict the market, so always invest in a barbell approach with a lot of risk in one side, and very limited risk on another side, and balance your portfolio.

Ash Patel: Badri, are you ready for the Best Ever lightning round?

Badri Malynur: Let's go, Ash!

Ash Patel: Alright. What's the Best Ever book you've recently read?

Badri Malynur: Strangely enough, written by one of the top fund managers in the world, Ray Dalio. I love his book Principles. There's a lot of life learnings, not only for how to run a company, but how to run your life, really.

Ash Patel: What's the Best Ever way you like to give back?

Badri Malynur: We have a charitable foundation, and we donate to a variety of courses. And we also sponsor students in India to go through a full nursing or engineering degree. And that's the best way to give back, instead of giving them money. And education is a gift which keeps on giving.

Ash Patel: And Badri, how cam the Best Ever listeners reach out to you?

Badri Malynur: The best way to reach out to me is just send me an email; you can go to our website. My email is badri [at] avestor.com. Or you can reach out to me on LinkedIn as well.

Ash Patel: Badri, thank you again for being on the show today and demystifying some of these things that are involved with setting up a fund, running a fund... Where a lot of Best Ever listeners maybe thought that this was out of their reach, it's a lot more attainable than what I previously understood. So thank you for your time today.

Badri Malynur: Thanks, Ash. It's always a pleasure to talk to you.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five star review. Share the podcast with someone you think can benefit from it. Also, follow, subscribe and have a Best Ever day!

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