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Life lesson

A fund manager advises to study the past

August 8, 2016

‍As real estate values continue to rise and interest rates continue to remain low, I am reminded of a fund manager who claimed to have “zero ability to predict the future.” He is a hard-money lender and an active investor in real estate. Our lunch date was days after the Brexit vote.

“We are originating three times more hard money loans this year,” he said. “Our effective coupon is nine and half yield – that’s with a three points origination and eight percent interest only for two years - and while we have some concentration issues in California, a hundred percent of our loans are in first lien position. Five years ago, I was dreaming to be in this position.”

All well, I respond, but there are plenty of entrants in the hard money lending arena, with crowd funders and Fintech companies looming in the horizon. “Yes, but at the same time, it is getting tougher and tougher to get credit. And, even for the highest credit worthy client, and with the regulatory environment banks are facing, getting a loan is a lengthy, often unpleasant process. It takes a couple of weeks at best. We, on the other hand, finance in five business days.”

We enter an American diner at rush hour. He orders an elaborate drink with three espresso shots. I order a sandwich and we sit down. I ask for his thoughts on interest rates. “Some argue that interest rates will increase in the next year or two,” he notes. “But the real question is by how much. My spread is about five points over the WSJ Prime. You do not have to be a genius to see that hard money lending is suited best for a low interest rate environment.”

And an environment of rising real estate values, I add. This fund manager’s success in capital markets is more than luck. In the eighties, he had most of his fund real estate portfolio sold prior to the S&L collapse. He then purchased both distressed loans and real estate from the Resolution Trust Corporation. Stupendously, he sold the real estate portfolio in the late nineties and purchased municipal bonds instead. He then left the United States and became a resident of Panama. He returned to America in 2009. When he saw, again, opportunities and capital markets, he launched his now flagship operation of hard money lending.

Our time was nearly up. What are your predictions on Brexit? I ask. “Using current events to prognosticate the economy of the future requires me to be right. In other words, my predictions will have to be true for you think of me as wise. Instead, my career was built on being a student of the present and learning lessons from the past. It allows me to look smart without having to be right about the future.” I wish I had it in me to follow his example.