NextGen Capital Conversations | The Emerging Manager Journey: What it Really Takes to Compete | Durable Value Ep. 97
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Ryan Swehla: For our next episode of Durable Value podcast, we're going to be taking from the recording where I was a guest on the Next Gen Capital Conversations podcast with Heather Fernstrom and Jeff Dorman, IREI and Alliance Global Advisors. Enjoy.
Jeff Dorman: Welcome everybody, uh, to today's edition of Next Gen Capital Conversations.
I'm Jeff Dorman with Institutional Real Estate, and today we're gonna focus on a topic that resonates, I think, with so many real estate managers. Understand what it takes truly, um, to take the next step as an emerging manager. Um, 'cause either you are one or, uh, you were one, so I think you can all relate.
Uh, the process can be exciting but also pretty complex, and the path isn't always obvious and the expectations aren't always clear. So our goal today is to help unpack what that journey looks like. And to help us walk through it, I'm joined today by Heather Fernstrom, who is the co-founder and managing partner of Alliance Global Advisors.
Heather and her team have been, uh, doing this now for about six years, helping emerging managers and established managers, uh, develop strategic growth solutions for their platforms. Everything from organizational design to messaging governance to investor communications, marketing, messaging, and capital formation strategy.
Did I leave anything out, Hea- Heather, or did I get it all?
Heather Fernstrom: I think you covered it. Yeah. It's always ongoing, Jeff.
Jeff Dorman: Yeah. I... Of course, 'cause you're growing as an organization, as your clients grow. And we're also joined today by one of our clients, Ryan Suela, who is the co-founder and co-CEO of Graciada Partners, or Graciada.
I never pronounce it right. You can pronounce it right, Ryan. It's great to be here. No worries. It's a
Ryan Swehla: real estate,
Jeff Dorman: it's a real estate investor, probably the only investment manager headquartered in Modesto, California-
Ryan Swehla: Yeah ...
Jeff Dorman: focused on apartments and industrial parks and secondary and tertiary markets of the Western US.
Um, Graciada was one of the Alliance's very first clients, and Ryan has deep firsthand experience navigating, uh, the institutional process and building the infrastructure needed to, uh, to scale a business. So, um, let's get into it. So Heather, let me start with you. Uh, you work with dozens of emerging managers.
What typically triggers- A team to reach out and say, "Okay, we really need some help on institutionalizing our platform."
Heather Fernstrom: Yeah. Great question, Jeff. Um, I'd say there's always some type of inflection point. So it's fairly typical for an operator or a deal-by-deal manager to be contemplating entering the institutional space.
Maybe they had some success raising high net worth, um, family office capital. Um, they're thinking about some succession, you know, planning. Uh, they're undergoing long-term, uh, organization goals and trying to formulate their business plans. And at times, um, you know, the executive team can, you know, need to come to some realization of what's next.
And during that process, uh, the executive team is, you know, essentially toying back and forth on, on what to do next. Um, reflecting on, you know, how they've gotten to where they are today, and thinking about what is it really going to take to grow their organization to the next level. Um, that typically involves some type of capital.
Um, and when it comes to establishing the next round of capital, uh, that's a really strong entry point for Alliance Global Advisors to, to get involved.
Jeff Dorman: I think it's probably safe to say that, that most operators feel like, you know, be- life would be so much easier if they were an, an investment manager. Um- You know, what you don't know sometimes can really hurt you.
But-
Ryan Swehla: Yeah ... you
Jeff Dorman: know, some managers are ready, some aren't. What defines institutional re-readiness for an, for an operator? You know, how do they know when it's time to move in that direction, and what are the must-haves that a manager has to have, and that, you know, an operator who's thinking of moving in that direction might underestimate?
Heather Fernstrom: Yeah, a loaded question. Um, I would say it's not a one-size-fits-all approach, uh, but I think the biggest piece where we've seen managers fail, and that is where you don't have the entire executive team moving in one direction. And so at the onsite of Reliance, um, you know, conversation with the manager, we spend a lot of time with the executive management team trying to stabilize, stabilize their kind of internal Q&As.
And so that we get the management team all moving the same direction, that they all have confidence that this is where they wanna go. Uh, once there's a definite, you know, decision point of, yes, we'd like to find a way to, um, filter in some institutional capital, we'd like to go after that marketplace, uh, then there's a variety of steps, um, which we kinda call the pathway to fundraising.
And within that, um, I would say that there's some key themes in the emerging manager space right now. Um, the, the investors used to be, like, solely focused on track record and, and hyper-focused on track record. And I would say in the emerging manager space, that's, that's moved a little bit, whereas, you know, clearly the investors are, are hyper-focused on track record.
Um, however, they're, they're very much focused on the organizational stability of the platform today. And so if a manager can go in and showcase that stability, if they can showcase their investors-- investment strategy in a very clear, concise way and show the scalability of that platform, and then be able to articulate how in which they can be flexible within the investor's needs, um, requests, uh, that's kind of, I would say, like, the opening of it all.
And we can get into more detail during this conversation.
Jeff Dorman: Where do managers typically misjudge? What do they underestimate, Melissa?
Heather Fernstrom: Yeah, and I would love for, you know, Ryan's feedback here too. But I would say the misjudge really comes into the intense amount of time and resource it's gonna take to get ready.
Um, so I've s- I spoke about, you know, the intensity and, and the prolongness sometimes that these executive teams take in order to make the decision to finally enter or to go after that, that marketplace. When they do, there's a ton of kind of operational due diligence, um, that needs to, um, have a lot of time and attention.
And what we've seen at times is that they say, "Okay, yes, we're ready." Um, we start working through the DDQs. We start working through all the operational, um, uh, due diligence kind of responses, if you will. Um, we start loading up the data room, start organizing everything, and a lot of the times the information is just, you know, inconsistent in nature, telling five different stories.
Uh, the track record says one thing, but the, the strategy says another. Um, the operational kind of day-to-day, um, way in which the organization moves is not clearly articulated in any of the operational docs. And so it takes a lot of time to almost undo it all to then redo it in, in a consistent format. And I would say that's where kind of managers, uh, tend to think, "Okay, that's just an easy check the box," you know, "Upload the data room and off we go."
Yeah. And unfortunately, that takes months and months of overhaul. Yeah. And I'm sure Ryan has some feedback there too.
Ryan Swehla: Yeah. Uh, I... We recently spoke at the, uh, re- real estate emerging manager conference in Austin, and I echoed this same thing that- From our perspective, a manager should be expecting to spend two to three million dollars over a three to five-year process, and that sounds, um, huge.
But when we look back at the amount of, um, resource and energy that was invested in that process, it's substantial. And, uh, th- managers get this idea that, uh, "Okay, hey, I'm ready for institutional capital. That, that's where I need to go next. I, I, you know, we're ready for it." And they think that they can just go out and buy it or press a button, and all of a sudden, you know, it comes, and they don't realize that it is a huge process.
When, when we started, um, w- I joke, we, we didn't know what a DDQ was. Uh, we didn't have a chief compliance officer. We weren't SEC registered. If you asked me what GRASP stood for, I wouldn't know. Um, and y- you know, that's the kind of thing that you can't, uh, simply flip a switch or press a button. It's a lot of time and resource, and it has to start from the leadership level all the way down through the organization.
It's not just something, you know, you as, as the owner, co-founder, whatever, can outsource to someone in the organization and say, "Hey, go do whatever we need to do to make us institutional." It's a serious effort.
Heather Fernstrom: The other piece I'll add, um, is that as you're going through this process, I've found that managers, um, don't focus on the importance of educating their teams on the why and the, the how.
So for example, if say we have, um, you know, a f- 50-page, you know, blank page DDQ that you're passing through the organization to try to get some feedback and you're passing it to the asset managers, you're pack- passing it to the accounting group, and you're, you know, you know, passing it on to each of these verticals.
Jeff Dorman: Mm-hmm.
Heather Fernstrom: Without the education from above and, you know, to Ryan's point, without, you know, the direction from the executive team and the top-level leadership team, these team members internally have no idea, um, why they're actually putting this information together or how the information's being used. And, you know, they see the stress on the organization, they see the stress on the resources in order to conduct all this information and, and get it out there.
Um, but I think the importance of education is, is something that is al- also kind of not, um, you know, top level, if you will. And so at Alliance, we spend a lot of time with our managers, and we try to silo each of the verticals internally and perform these educational forums on, on why we're gathering this information, what we're doing with this information.
Once the, once the information's gonna be all processed together, and then what's going to happen with the information on an external basis and how is it gonna be used for those investors and consultants to make decisions.
Jeff Dorman: Yeah. And you know, you, you mentioned the term DDQ and, and that you didn't know what it meant, and there may be people tuning in that don't know what it means.
It's due diligence questionnaire for those of you who aren't familiar with the term. So Ryan, you know, y- as I understand it, you were on fund one, you'd finished fund one And then you're getting ready to do your second discretionary fund, and all of a sudden decided maybe we need some help. What led to that decision?
Ryan Swehla: Yeah, great, great question. Uh, so at that point, we were already a very seasoned operator and manager. We had been managing discretionary capital, but it was high net worth family office. Um, we came from a third-party property and asset management background. So I'd say from an operator, uh, standpoint, our organization was very mature, very sophisticated.
But what we realized is w- we, the, the strategy, so we focus on secondary and tertiary markets in the Western US. We focus on apartments and multi-tenant industrial, and this is a large untapped opportunity in our minds. So this is... And the data shows this. These are markets that are broadly non-institutional, and it's no coincidence we're based in Modesto.
Uh, that's, that is part of the, you know, origin story, so to speak. And so what we realized is the market potential of our strategy is significant. Uh, it's this l- probably one of the last large untapped non-institutional kind of segments of real estate. And so we realized the market potential is huge. And so that's really where we recognized we need to be going up to institutional capital because the market opportunity that we have relative to, to capital is, is needed.
And, uh, it just happened that at that time, when we kind of had that epiphany, uh, I, uh, saw Heather at a conference. Uh, actually, this was during COVID, and so this was a virtual conference. Uh, I think it was May of 2020. And, uh, little did we know that, uh, they, Heather and Jen, were just starting out their firm as well.
And so we were, I think, client number one or two, uh, with them. And, uh, I, I do, uh, tell people we candidly did not recognize the level of investment necessary to go through that path. And just to fast-forward a little bit, today we're on fund four. Uh, our biggest commitment to date, we just got a $90 million commitment from Pennsylvania, uh, State Teachers.
Uh, actually, just yesterday, we found out about a, um, very well-known name brand university endowment that is investing with us. So clearly the, um, the result has been successful. Uh, but it was a, a long process to get there. Um, and, and I think, y- I think managers need to understand that it i- it really is a, a real investment of time and resource to do that.
Jeff Dorman: Um, Heather mentioned earlier that, um, managers moving into an emerging manager focus from being an operator tend to underestimate things. So what are the things that ended up being underestimated by you when you first started out?
Ryan Swehla: Yeah, I'd say the kind of the three main areas that Alliance helped us, um, the biggest one really is what I would call institutionalization of the organization.
So this is really not about writing a policy and putting it on the wall. It's not about creating a document and then, you know, filing it away. This is about g- uh, making sure that all of the internal processes of the organization are institutional, from finance and accounting to investment committee to asset management to, uh, acquisitions.
Everything about how you do things is institutional. Uh, and that I would say was the biggest lift, uh, without a doubt, is really kind of like Heather alluded to, inculcating within the whole organization all the way down. We have, uh, we're vertically integrated, so we have a team of about 75 people. And so this means all the way down to the property level, down to the property manager level, uh, making sure that they understand how we do things in an institutional manner.
That was the biggest. Uh, the other two areas I would say were, um, helping to better articulate our strategy and communicate in a compelling way to the institutional community because as I think we all know who've been doing this for a little while, the institutional community has a different lens with which they're looking through things than a high net worth or a family office.
Um, it's different based on, you know, the ty- the ins- type of institution they are, how they manage money, what is important from a risk and a return standpoint, and being able to articulate that well a- and what our unique approach is to the c- to institutional community. And then the last part of it is really kind of understanding the landscape of the institutional community and how to access, um, you know, institutional investors.
But definitely the biggest one was that kind of, uh, ch- changing the organization, the fabric of the organization.
Jeff Dorman: And what impacted those shifts that you made as a result of the advice that Alliance provided? Uh, what impact did that have on how investors perceive the firm, do you think?
Ryan Swehla: Well, uh, I would say it this way.
You know, uh, first of all, it's definitely somewhat of a black box. When you're working with institutional investors, you don't always get constructive feedback. You know, a lot of times you outreach, you don't know why it is or what it is that they, uh, like or don't like about your strategy. But what I would say is, um, when we've received that feedback, like for instance we went through the, um, inv- IDD, which is investment due diligence, and ODD, which is operational due diligence.
Uh, when we went through the IDD and ODD process with NEPC, for instance, a lot of the feedback that we got back was, "You guys punch above your weight," or, "You guys are, are more institutional than we would've expected for a firm your size." Uh, similarly when we went through with Axia as well. Um, so I, I'd say that that is probably the best measure is just that, um, when they do that deep dive and they dig down into your organization.
Because as Heather said, part of the DDQ process and part of asking a lot of questions is understanding if what you're saying you do is actually what you do, and if what you're saying you are is actually who you are. And so they are looking in many ways for internal inconsistencies. And if you're, uh, i- if the organization as a whole doesn't consistently reflect what you actually say you are and what you do, they're gonna find that out.
And, and I think that's an im- important part of that process is really unifying how we, how you do things and, and, uh, how you articulate who you are.
Jeff Dorman: So if you could give one piece of advice to somebody out there listening in who might be an operator thinking about moving into emerging manager space, or maybe already is an emerging manager just starting the journey, what would that advice be?
Ryan Swehla: Well, first I would start with w- uh, what you have. So every emerging manager should recognize that you have a unique value proposition. Um, you should be generating alpha above the market. That's the reason people are drawn to emerging managers, is because they have the ability to generate outsized returns relative to the real estate market.
Otherwise, they shouldn't be investing with you. They should invest with, you know, some name brands I won't mention. Um, we went through the PSERS process, Pennsylvania PSERS, and as a part of that, they had to, um, benchmark our realized and unrealized track mar- uh, track record against their benchmark, and it showed that we generate, across all of our realized and unrealized track record, 752 basis points of alpha.
So 750 basis points, uh, 52 basis points above the market. This is why institutional investors want to invest with emerging managers, because they get that alpha. Uh, w- so I would start by saying recognize that you do have something unique. You do have a unique value to offer. You need to, uh, know how to articulate that, and you need to be prepared for a big process.
That, that, that, that's really what you have to ask yourself, is, "Am I prepared to spend $2 or $3 million and three to five years really changing the nature of the organization to be able to handle institutional capital?" And you have to understand that while they are looking to the emerging manager for alpha generation, their biggest filter, or their first filter of any investment is risk mitigation because, uh, they are entrusted by the retirees, by the university endowment, by whoever it is, they're entrusted to ha- steward those funds.
And so the first lens is risk mitigation. The second lens is investment performance. So recognizing that going into the process, it helps to understand why there is this magnitude of investment. But go in knowing that you do offer something unique to the world, um, but it's just, it's going to be a big investment if it's something that you're, you're committed to.
Jeff Dorman: So Heather, you're, you just heard what Ryan's been talking about, and you not only heard it, you probably lived it with him. Um, what parts of that story do you really see all the time with clients and prospective clients?
Heather Fernstrom: Yeah, I would say that one of the main parts that I've seen consistently is that there's these elec- e- executive teams of these emerging managers that are making a lot of assumptions or not quite putting in the time to understand the process between the investors and the consultants, and how these decisions are being made.
Um, the investment committee process- Mm-hmm ... um, the re- the reporting process, the underwriting process. And so I would say that one of the, the areas that I would focus on if I was emerging manager, is really studying the market and identifying the relationships between the consultants and the investors.
Um, when you're in a meeting and, and you're able to be in the presence of an investor or a consultant, uh, make sure that you're listening more than you're speaking. Um, there's a lot that you can learn in these meetings. There's a lot that, um, you can learn and do some homework prior to going into these meetings.
Um, many of these investors, uh, their reporting is public information. And so with just a little bit of digging, you can start to understand how they're thinking about their overall portfolio construction. And if you know their portfolio construction and you understand their underwriting process and you understand their decision-making process, um, you should be able to go in these meetings and really articulate your differentiators, um, the way in which your investment strategy could, you know, ultimately be a differentiator for their current portfolio or some other opportunities that they're looking for in, in its, in the current marketplace.
Jeff Dorman: And what would you say are the biggest three gaps that you typically find when you're looking at one of these firms?
Heather Fernstrom: Yeah, the inconsistency in messaging. So, um, I would say that's in materials and then also just in conversation. So you could get three co-founders of an organization and they'll all speak the history of the organization in a very different manner, right?
They'll speak it from their own personal experience, uh, versus, uh, you know, a concise, organized, um, message that resonates, you know, throughout the entire firm. Um, Ryan, uh, spoke to some of the operational inconsistencies and like how are we really doing it on a day-to-day and, and actually how we are doing it, is it clearly articulated in the materials?
Um, because as you're going into these meetings, the investors are going to dig, they're gonna ask questions. Um, they're going to have spent some time in your, your ODD and DDQs, um, beforehand, and they're gonna be in listening mode themselves. So if what you're speaking to is different than what's on paper, um, that's an automatic, you know, no thank you and moving on.
And then the other piece I would say, like the third one would be this, the inconsistency in track record versus going out to the market for investment strategy. So, um, it's really important that your track record, um, showcases that you have the ability to be successful and the investment strategy that you're bringing to market.
And the other piece to this is that you wanna be able to showcase that your current investment strategy has some scalability into it. Um, as these investors are, are looking to understand and, and get to know these emerging managers, it's not a one-time transactional relationship that they're looking to adopt with these managers.
They're looking for longevity in their relationships, so they wanna know that their platform is scalable and that investment strategy is scalable as well
Jeff Dorman: So Ryan, um, you know, there's at any given time about 1,200 of these investment programs in the market competing for investors' time and attention, and they're overwhelmed.
They, they can't respond to everybody. There's no way, and they, they admit this in public all the time. How do you stand out? How does an emerging manager get noticed? How do you stand out and really get the time and attention of these guys when so many people are knocking on their door and asking for their time and attention?
Ryan Swehla: Yeah. I'd say, um, for us at least, we invest in secondary and tertiary markets. I love saying that word. To some investors, that's like a four-letter word. Whoa, that means risk. Hold on. And what we learned early on is we have to hit the misconceptions about the market at the front end, um, because there are misconceptions around liquidity, around economic vibrance, around how real estate performs during downturns.
And so we spent time doing the research and providing the data that shows actually if you're in the right asset size, that that's the most liquid part of the market is the smaller asset size, not the larger asset size. Uh, showing that, uh, GDP growth is stronger in secondary, tertiary markets. Population growth is stronger.
It's less volatile than it is in primary markets. A lot of these, uh, preconceived notions really needed data to show that, no, actually, these are highly investable markets. They're just overlooked. And so I would say that, number one, take whatever strategy that you have and really put flesh to it from an institutional investor perspective.
Help them understand why your strategy is compelling and why they should be looking at you, whether that's through research or better articulating what you do that is unique and why. Um, and then the second thing to that is, as Heather said, listen. Uh, we, we do a good job of going in and talking about what we do and how great we are at what we're, we do, but if we're not listening to the investor, we're not, uh, receiving back information that's important for what we do.
And that's another thing that because our strategy is, is so unique, it's obviously a, you know, high return generating strategy. It has, uh, low risk characteristics, but it's unique, you know, and it's not for every investor. And so what we've learned over time is that, uh, uh, we d- we need to listen and make the conversation short if it's clear that that investor is not a good fit for what we do or that what w- they're looking for is not what we are able to provide.
Um, and don't try and sell, but rather listen and find those investors that are d- naturally drawn to the strategy.
Jeff Dorman: Okay, so it sounds like you've successfully made the transition to an institutional platform. What's next? What's the next step for the firm?
Ryan Swehla: Uh, thank you. Uh, yes, I'd say es- especially with our, our Fund IV momentum, we've been very fortunate.
Um, we, uh, this w- fund will be 80% institutional capital, pensions, and endowments. Um, and more importantly, what I would like to say is those early investors that invested with us, they mean the world to us. These are the early investors like, uh, Pennsylvania PSERS that, um, really took the bet and they said, "I, I believe that you have the ability to generate outsized returns."
And so we will forever be grateful to those groups, and we hope to have a long, you know, decade plus relationship with them. But I would say when we look for what, what we see in the future, we do believe that this market is one of the last large untapped inst- non-institutional markets. So we think there's tremendous opportunity.
And, and I like to say that we would like to be known as the Kleenex brand, the brand name associated with secondary and tertiary markets in the West. So when people say, "Hey, I'm-- I actually think I wanna get involved in these kind of markets," that the name Gracieta, and feel free to call it Gracieta, by the way.
The name Gracieta is associated with these markets.
Jeff Dorman: Okay. Well, that's been a great conversation. Thanks, Ryan, and thanks, uh, Heather. Um, hopefully for those operators who would like to be emerging managers and the emerging managers listening in, um, you learn some things along the way. And here's the real takeaway.
Institutional success doesn't start with capital, and it doesn't start with deals. It starts with readiness. And if your strategy is strong but your platform isn't yet built to inspire confidence, now is the time to start investing in structure, narrative, and alignment. Um, companies like Alliance Global Advisors can help companies like yours build the foundation you need to scale, and they can help you understand exactly where your platform stands and what steps will move it forward.
Bottom line is, you don't have to do this alone, and you don't have to struggle, and you don't have to spend years making mistakes. You can get help. It's out there. Alliance isn't the only one that does this, but, um, they certainly are available to help you. And if you need help, don't be bashful. Ask for it.
Give Heather and her team a call and explore ways that they might be able to leverage what you're trying to accomplish. Again, thanks for listening in. Thanks, Heather. Thanks, Ryan. And, uh, looking forward to our next conversation.
Heather Fernstrom: Thank you.
What does it really take for a real estate operator to transition into the institutional space?
In this episode, we feature a conversation from the Next Gen Capital Conversations podcast, where Ryan sits down with Jeff Dorman of IREI and Heather Fernstrom, co-founder and managing partner of Alliance Global Advisors.
They discuss the inflection points that lead operators toward institutional capital, the organizational evolution required to get there, and the significant time and resources needed to build an institutional-quality platform. Ryan also shares Graceada Partners’ journey from its first fund to a fourth fund supported primarily by institutional capital.
Whether you’re an operator considering the next stage of growth or an emerging manager already building toward institutional partnerships, this conversation offers a candid look at what it takes to earn investor confidence and scale intentionally.
0:00 — Introduction & guest introductions
2:31 — What triggers operators to seek institutional capital
4:07 — Defining institutional readiness: the must-haves
6:05 — Where managers misjudge: time, resources & message consistency
11:02 — Ryan's journey: from Fund I to institutional capital
18:18 — Advice for emerging managers: know your alpha & prepare for the process
24:32 — Standing out among 1,200 competing investment programs