Journey to Institutional Investment Management | Durable Value Ep. 92
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Ryan Swehla: So today I thought we'd talk a little bit about that journey to institutional investment manager. Today, uh, we have four public pensions that invest with us and multiple other institutional investors. Um, but, you know, that is a success in some measures. But, um, let's talk about that journey. Let's talk about how we got to where we are today and what that entailed.
And hopefully some of the people listening today can take away some tidbits or some, uh, gems for how they can go through that prog- that progression as well. Well,
Joe Muratore: you know what they say, the first 17 years is the hardest. So, uh I, it's, it's, uh, it's been obviously quite a journey, and it's taken some, uh, very intentional steps and, uh, I would say the, the courage to, uh, to keep going.
I mean, we started this business as, uh, as real estate brokers and added on property management and began investing in the early 20-teens in, with syndication and friends and family and working our way up to institutional partners and then our first, you know, four real estate funds. Uh, but maybe s- uh, this is a progression where we see a lot of our peers that, that stopped at earlier rungs.
Maybe talk about what kept us going and also, like, what it took to get to the, the rung we're at now.
Ryan Swehla: Yeah. You know, it's interesting because like many investment managers, we started with friends and family and, you know, uh, more the high net worth investor, family office investor. But early on, what we realized about the strategy that we are focused on, um, investing in the inland West secondary and tertiary markets, is that there's a huge m- untapped market potential.
There's $1.8 trillion of multifamily and industrial real estate in secondary and tertiary markets in the Western US. That's four times the size of the entire US self-storage market. So it's a huge addressable market, and yet it's largely untapped. And what we realized is to be able to grow into that opportunity, we really needed to be able to have capital that could grow with us into that, um, opportunity set.
Joe Muratore: I know a, a very big step for us and one that many operators, uh, don't make the leap to is to go from, uh, syndications to, uh, real estate funds. So, you know, for those watching, a s- a syndication is basically you start with a property, you say who wants to be in, and you assemble the equity capital around it.
A lot of challenges with that. You have to find the property first. You have to be courting equity. You have to thread these things together. It makes you less nimble, harder to, uh, execute at scale, sort of a clunky process. You're doing a lot of th- uh, complex things all at once. Um, and in about 2019, we started our first real estate fund.
We'd had a relatively large group of, um, of investors who had been with us through five, six, seven deals and, and we moved to our first, uh, fund. And maybe you can talk about, you know, how we built into fund two, three, four, and- Yeah ... and how that increasingly became institutional and professionalized.
Ryan Swehla: You know, it's interesting.
I don't think when we started this journey toward a institutional manager, we recognized the level of financial commitment and the level of time commitment associated with that. We, uh, started actually with a firm, Alliance Global Advisors, Heather Fernstrom, uh, Jen Stevens' firm, and great individuals that helped really shepherd us through the initial stages of understanding what our internal processes, what our infrastructure needed to look like, what our due diligence materials needed to look like, how we address the institutional market.
And I would say that was really formative in helping us to start to lay the groundwork in, in becoming more institutional. But becoming more institutional is really a cultural and organizational shift. And I think a lot of managers, uh, they see y- you know, the amount of capital available in the institutional world, and they say, "Well, I'd like that."
And, and they think that it's a kind of you pull off the shelf, you pay a certain amount, and then all of a sudden you're there. But it is, it is an organizational and cultural shift that, you know, we did over many years. Um, today we're SEC registered. We have chief compliance officer. We have all sorts of, uh, fiduciary aspects of our business and our internal processes that, uh, y- they're, they're not easy to implement, um, as a small manager and a small operator.
Joe Muratore: It takes a lot of belief though to, to see what could be in that. And when you're building a, a firm, especially in your, in the lower AUMs, y- y- you need much more talent and much greater talent than you can afford because the, the size of your AUM doesn't support it. So i- it's taken a lot of belief and a lot of guts to grow the firm because even once you add all those things, you still have to convince, uh, you know, large institutions to make a bet on you.
And that is like, you know, knowing where the puck is going to be, not now. In other words, you have to be part of a mega trend. You have to be a, a credible investor. You have to be investing in the right spot at the right time, which aligns with the values and organizations of institutional investors that see how you are going to add, uh, add value and reduce risk for their portfolio.
And it's a journey of, of faith and effort in, in many ways.
Ryan Swehla: Yeah, and you're, I think you're, you're touching on a, a really important point that I think other investment managers could appreciate The question is, why would an institutional investor invest with Graceada Partners versus name the big firm that, uh, that could replace that name?
And fundamentally, what smaller managers provide is the ability to generate sustained alpha through whatever strategy they have, whatever their, their unique focus or, or niche is in the real estate world or in, you know, whatever world they're in. And I think that gets missed a lot because as a young manager, you're so, um, wanting to scale into the market opportunity that you see.
Um, and maybe sometimes there's a question of scale that you need- your firm needs to be to a certain size where it's economically viable and, and all sorts of other dynamics, that you can be lulled into pursuing any opportunity that comes available. Mm-hmm. And you see this a lot of times where capital allocators, um, they will invest with operating partners, and they are wanting a specific thing out of that operating partner, and that thing may be different than the core value or, or competency that the, the operating partner provides.
And, and one of the things that we decided early on, whether consciously or subconsciously, was, "This is our focus. This is the thing that we do. This is the value that we create and where we can be additive to your portfolio," and we didn't waver on that. If anything, we refined more and more and doubled down into that specific focus versus, uh, you know, pursuing other opportunities that presented themselves.
Joe Muratore: One enjoyable and interesting part of this process has been that, uh, organizations don't make decisions, people make decisions. And in truth, for every, you know, pension or, uh, you know, group that's sit- invested in us, there's always been a champion. There's always been someone there that could have made a, a more normal decision maybe, but- Mm
but saw something in us, uh, saw runway, saw potential, saw a, a, a unique strategy, saw alpha that they weren't seeing in other places and, and that person was willing to, to champion us, willing to say like, "All right. Let's, let's start this and, and let's build into this, and let's see if you guys can live into the opportunity that- Yeah
that we think you can." Maybe, maybe talk- Yeah ... about that, too.
Ryan Swehla: Well, and there, there's this, uh, you know, mutual step of trust that occurs because, uh, it takes that- initial conviction and belief in whatever the strategy is or the f- the operator or the platform. But then there is the, uh, step on the operator's part to, uh, do they actually live up to what is believed , you know?
There's, there's an initial conviction, but then there is this long courting process, which is really understanding is what I perceive as the opportunity, what I perceive as the strength of the platform and, and the operator, the people, whatever, does the... is that actually lived out? And that's a part of the process that, um, I think people who haven't been through it don't realize the magnitude of the operational due diligence, investment due diligence, and all of the, the courting steps prior to that to really understand, is this a firm, a strategy, a team that is, you know, suitable for, uh, institutional capital?
Joe Muratore: Mm-hmm.
Ryan Swehla: But it does, to your point, it does take that first individual, and we can... I, I could name very clearly those individuals, uh, in our, uh, investing career and, and m- most recently in our, um, institutional investing career who have taken that bet, who have, who have said, "I see something here, and I'm willing to spend the time to validate it or, or find out that, you know, it's not what I thought it was, but I'm willing to take the time to listen and to e- explore more to see if there really is an opportunity."
Joe Muratore: It's a, it's a real mindset difference for the operator to go from syndications to funds to institutional funds in that syndications are very here and now, and smaller, younger firms have bills to pay. All firms have bills to pay, and this deal needs to happen now. We've got s- you know, 30 days of due diligence and a 60-day close, and we have a gun to our head with equity.
And I, we both certainly remember those days. Yeah. Now... so it takes a certain mindset of an operator who can do that time and time again, and we did dozens- Mm ... of deals that way. But to be able to shift to an institutional mindset, I mean, institutions are not bound by your deal timeline. Mm. They are, uh, multi-year in the courting.
It is a, a slow, methodical, institutional process, and it can go years in the courting Which is very different from how most operators think, so it's a new mindset. But then when they, uh, finally choose you, the... I mean, you might call it an interrogation. I mean, they- it is, uh, intense, and if there is weakness, they will find it.
Right. They are in your buildings. They are in your books. They are with your people. They are running background checks. I mean, it is, it is a industrial grade investigation. And, um, I- so I- there's a lot of... I, I guess I'll send it back to you, but there's a lot of different mindsets and different factors here.
And to, to graduate to this part, you have to not be an urgent, need money now, deal-oriented person. You have to move into thesis and timeline and institutional courting.
Ryan Swehla: And I think that, uh, touches on another really important point, which is patience and duration. Um, to, to go down that path, uh, toward institutional investor, uh, or institutional manager, you have to be willing to play the long game.
Again, I, I would say we didn't... We weren't as, uh, aware of the time and the amount of resource and effort it would take to get there. But because we already had a property management and brokerage company when we first started this journey, we were coming in at least with an operating company that had some, you know, financial, you know, strength or some financial viability.
We weren't starting from, you know, nothing. And I, I would just, uh, really encourage that you have to take the long game and foster relationships over time and allow the time that it takes to really build the institutional muscle. Uh, work with folks like Alliance Global Advisors. They were incredibly helpful in helping us understand what we need to do organizationally.
But allow the time that it takes because it, it is a slow process, and it's, it's been tremendously rewarding. Uh, you know, as we sit today, again, we have four public pensions and, uh, various other institutional investors that trust us with their funds, and it's humbling to be in that position, but it is not a, a, a fast or a inexpensive process.
Joe Muratore: I mean, so far we've been describing this from our point of view, but to see it from a large public pension's point of view, they have, uh, something to solve, which is that they need emerging managers. They need future alpha producers. And the ones from a decade ago and 20 years and 25 years ago have aged out.
They're not what they were. They're looking for that next bench. That- And they get thousands and thousands of solicitations, so they're... It's, it's not easy to win those slots, but they are looking. They are building their minor leagues and hoping that- hoping for major leagues. And I, thinking of one story in- specifically that happened recently with- Um, with, with a large pension.
There's a person in there that, that t- spoke of us, uh, that, uh, they thought of a company that they'd started with when they were early in their careers, and now they were a, a larger company, and they were seeing those hallmarks in us. And this person reflected on that in choosing to champion us and thinking, like, "You're the kind of company.
I've seen this before. I know what this looks like. I believe that you can be like that other company and, uh, over decades, outperform and be a long-term partner for our public pension." And, a- and in truth, that sort of belief spoken into us and that sort of mentoring helps make it so. We, we can believe into that, uh, as that person also is working to pull that out of us.
Ryan Swehla: Yeah, and, and that is where I just can't underscore enough sticking to your core and sticking to what you believe to be your unique focus in the marketplace is so important because that is what institutional investors are looking for. They are looking for the next alpha. They're looking for the next, uh, edge in the marketplace.
And so reflect on it and know what your strength is and, and live into that
What does it actually take to go from friends-and-family syndications to managing capital for public pensions? In this episode, we pull back the curtain on our 17+ year journey to becoming an institutional investment manager — the mindset shifts, the organizational overhauls, the patience required, and the champions along the way who made it possible.
If you're an emerging manager trying to level up your capital stack, this one's for you.
In this episode:
Why the Inland West secondary & tertiary markets represent $1.8 trillion in largely untapped opportunity
What it really means to go from syndications to funds — and why most operators stop there
The cultural and organizational transformation required to attract institutional capital
How to find your champions inside large pensions and family offices
Why sticking to your core focus is the single most important thing a manager can do
Timestamps:
0:49 — From real estate brokers to institutional managers: how it started
2:18 — Syndications vs. funds: the leap most operators don't make
3:24 — Working with Alliance Global Advisors to build institutional infrastructure
7:46 — People, not organizations, make decisions: the role of champions
10:36 — The mindset shift from deal-by-deal urgency to institutional long-game