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How’s it going, everyone? Today, we’re covering an interview Lincoln Archibald had with John S. Pennington Jr. last week that is appropriately named, “Funds are made for scaling.”
The Journey into Fund Management
Lincoln: How did you get into funds?
John: In 1999, I was exiting my former business, and I came across a New York reporter complaining about how little taxes hedge fund managers pay compared to how much they make! I decided to study what a fund was and become a fund manager. Right away, I studied for and passed the Series 7 exam and started working as a stockbroker. Within 6 months, I became a manager of 14 other stockbrokers. I knew I wanted to get into real estate, so I started selling mortgages, and I got my Series 65. Then, my first business partner and I started doing short-term real estate loans. We would underwrite real estate properties or late-stage land entitlements and invest there; they were basically syndications. I did this for 5 years, trying to figure out how I could become a fund manager. I didn’t tell anyone this because I thought I would get laughed at.
In 2004, we had a huge deal going on, and we had 5 syndicated investors that promised to wire money into the title company. We worked 24/7 for at least 4 weeks to make this $4M deal happen, but by Friday afternoon, only 4 of the 5 investors had wired in money for the syndication, so we were $1M short – the deal fell through! I was so mad! My business partner and I decided that we wouldn’t have lost all that time and money if we had been using the fund model instead of the syndication model.
I had been studying for years on how to get a fund put together, but it still took us 9 months to get our PPMs, LPAs, and other fund docs and admin complete! One of our first few deals, half of the capital came from our fund, and the other half came from syndicators. However, when our fund picked up some momentum, we swiftly terminated our syndicator investors – it was just creating too much busy work for us!
The Evolution and Success of the Fund Model
Lincoln: How big was your first fund?
John: I can’t remember what our first one was, but our second one was about $80 million. However, most of our success came when we were able to use 2008 and 2009 as a springboard to more investments. We had a brilliant partner who thought things were going to go south in 2007, so we lent out less and bought more real estate properties. We launched a fund in 2008 that became one of our best moves!
Transitioning to Institutional Investors
Lincoln: When did you transition from high-net-worth investors to institutional investors?
John: We never really moved away from high-net-worth investors. We didn’t even get our first institutional investor until 2010! It took 6 years of business to get there! One thing I’d note is that successful fund teams have 3 capital raisers for 3 groups of investors: high net worths, institutional investors, and family offices or banks. In other words, someone who knows how to communicate with high net worths might not be the right person to talk to an institution.
Conclusion
Make sure to check out the "Funds that Won" podcast to hear the rest of the conversation! You can also visit my YouTube channel or Fund Launch to learn more about why funds are made for scaling!
Thanks for stopping by,
Bridger Pennington
Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the author
