[PART 1-4] The Five Ultimate Functions of a Fund Manager

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We’ve been talking a lot about private money fund management lately, and I promised I would make a note to expand in another post on the true functions of a fund manager.

Well, here it is.

The responsibility of being a fund manager should not be taken lightly — whether you’re working with one or performing the services of one. If you do take it lightly, you’ll be haunted by your poor decisions forever.

Fund managers are generally detail-orientated, data-driven, highly motivated individuals who genuinely want to improve their investors’ income.

A fund manager will be in charge of a wide array of the daily “management” tasks that make up fund management. To achieve success as a fund manager, one needs to excel in five main functions.

I’ll go into those shortly, but first let’s take a closer look at…

The Role of a Fund Manager

A fund manager hears terms frequently like “acceptable volatility” and “outperform your benchmarks”— but what does a great fund manager actually do?

You can tell a lot about a fund manager purely by the way they have structured—or attempted to structure—a fund.

While there are multiple definitions of what a great fund manager does, the easy answer is this: Great fund managers care. They spend time on the important details, like fund structure, legal matters, and finding incredible investments. But above all, they keep in contact with their investors to promote peace of mind.

How do they do this exactly? By getting the five functions right.

Over the next coming posts, I’ll be taking a deep dive into all five function, which include…

  1. Origination
  2. Underwriting
  3. Asset Management
  4. Raising Capital
  5. Fund Administration

The trick here is to remember that all of these functions are interrelated. A decision in one area cannot be made that does not directly affect another area. If you are not great at underwriting decisions, then it can and will affect your ability to collect and raise capital.

As a fund manager, then, you are only as good as your weakest area.

(NOTE: Raising capital for your deals? Download a free resource for raising millions for all your real estate deals with a “Wall Street” grade, done for you investor Pitchbook. Grab it here.)

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Five Core Functions of a Fund Manager #1. Origination

The first of the five functions is origination.

In the context of fund management, origination involves a loan applicant submitting a variety of financial information—such as bank balances, credit card information, and tax returns—to a mortgage lender or alternative authority.

As a fund manager, while they will not be taking any loans, they will be dishing them out if they choose to invest in hard money lending. This means having an iron-clad origination process for potential real estate investors who would like to take loans for short-term investments.

The point is that without the right origination practices, you are going to run into tons of trouble and many, many problems.

Loan origination begins when a real estate investor approaches a fund manager for a loan.

There will be a number of essential screenings and tests they need to pass if you are ever going to give them a cent of money. Otherwise, you’ll will find out the hard way why so many hard money lenders go bankrupt.

Often it is because their loan origination process is not done properly and they do not adequately “check out” the potential borrower.

Fraud is rife in the real estate industry, with scammers making off with thousands of dollars.

A good fund manager will realize that the first line of defense for any hard money lender is to spend time making sure that their origination process is deadlocked.

The applicant will apply for a loan, and an office team will process that information. The fund manager will decide which checks and financial documents to request and screen and whether or not the applicant passes the test.

Most real estate investors will pass easily and have a local reputation to back them up…

…But every now and then you get applicants who have no intention of ever paying you back, or who simply do not know how to invest their money.

The risk must remain with the applicant and not with the fund manager. The fund manager’s job is to greatly reduce the risk of loss by ensuring that each and every real estate investor that borrows money pays it back, along with the interest or asset security.

Fund managers that can balance fund investors and loan applicants—keeping both happy—are the ones that have exceptional reputations.

Origination helps the applicant as well, by requiring them to be authentic and serious. If you can see that your applicant cannot afford to lose their assets, you can always strike a deal if you have provisions for it.

The goal is to take real estate fund capital and lend it out to various real estate investors at high interest rates. When the investors borrow money, they will place a key asset as security against the loan.

Often these loans will earn the fund manager money, or they will end up gaining various property assets for resale.

(NOTE: Don’t forget to download your free resource for raising millions in capital for all your real estate deals with a “Wall Street” grade, done for you investor Pitchbook. Grab it here.)

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Five Core Functions of a Fund Manager #2. Underwriting

The second of the five functions is underwriting.

As a real estate fund manager underwriting skills aren’t debatable. The best fund in the world will not matter if your underwriting expertise is lacking. Your investment decisions will be poor, and when the market turns, you will lose all of your money.

Traditionally, underwriting is the process that a financial service provider uses to assess the eligibility of a customer to receive their products or services.

When underwriting for hard money loans, a strict set of rules will be required to implement for each and every lender. That said, the rules still will not be as strict as those financial institutions that you are competing with.

Ideally, you want to attract real estate investors that do not have the credit or good standing with the bank, but they have assets and need money for investments. The ideal lender borrows often, pays all the interest, and is a repeat customer.

This is how you guarantee growth to your investors over time—but back to underwriting!

Banks, as you may know, require a good credit record. Fund managers can choose whether or not this matters, but it is not critical to business. This is because they will not accept any loans where there are no assets that stand as security for your money.

That way if a lender defaults too many times—and is completely unable to pay—they forfeit their asset. Most of the time, the fund manager will get an asset, or equity from that asset, which can then be turned into even more money with the right connections in real estate.

Side note: It’s the job as a great fund manager to make sure that the underwriting process is very specific and legally binding. The last thing you want is for a lender to claim that you have somehow tricked them out of their assets.

The goal for the front end of a fund manager’s business is to provide consistently clean loans to real estate investors that need access to quick cash. The banks will not finance these people, so there is a large potential market in your area for this.

The word underwriter actually comes from the days of old when lenders would write their name and the amount of risk they were taking on a note, with an assigned premium. It is still very much the same, just with a lot of extra paperwork.

When a fund manager is hiring their underwriting team, their priority is to make sure that they run through the system perfectly so that there’s never a loss on the fund’s money. One poor lending decision can lead to a total collapse—I have seen it happen.

Five Core Functions of a Fund Manager #3. Asset Management

Next on the list of five functions is asset management.

Once a fund manager has invested in assets, they need to know how to manage them! When you operate a mortgage pool fund, there is loan servicing. In a real estate fund, it will mean asset level property management, which is not easy.

In short, being a great fund manager means figuring out collections and foreclosure work. (Yes, prepare for endless paper trails that all need to keep you squeaky clean and organized.

You will have to sit down and figure out how to get your money back if a loan goes south, and you will need contingency plans in place to know how to deal with real estate owned properties that have been foreclosed on.

If you are a mortgage lender, you will need to focus on repositioning, rehab, and fixing up properties that can be flipped for profit with the right staging and sales techniques.

Recovering capital is essential for a fund manager, and it needs to be one of their constant, key concerns.

I am always amazed at how many funds I see that do not have a good asset model. I have talked to countless people who were excited to start a fund but had no idea about asset models. They just take whatever model somebody offers them so that they can get their fund going.

This is not how you should operate!

If you have a great asset model, a fund is a good capital structure to implement and allows you to leverage and scale your business appropriately.

In the absence of a good asset model, you have no idea if a fund is the right vehicle, and you should not be starting one.

It is really as simple as that.

A few good asset models include mortgage pools—common, but highly effective in every way and brimming with advantages. Another model is the fix-and-flip, a popular choice for small funds used to buy distressed properties—rehab them then sell them for a profit.

There are also buy-and-hold models for long-term closed-end funds, and these are far more difficult than open-ended funds because of share price issues.

The key takeaway at this point is that some asset models work well, and others do not work at all. It depends on your management style, your experience, and your skills.

It is always best to know which model you are going to implement before you begin lending money to real estate investors. Implementing a fund around a bad asset model will only lead to the eventual collapse of your fund and company.

(NOTE: Don’t forget to download your free resource for raising millions in capital for all your real estate deals with a “Wall Street” grade, done for you investor Pitchbook. Grab it here.)

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Five Core Functions of a Fund Manager #4. Raising Capital

The fourth of the five functions is what fun is all about—raising capital!

This is where you put down the strong foundation for all of your fund earnings. Raising capital for a fund in a pooled format is very different from raising money for once-off deals.

This is the single most important consideration to take into account when structuring a fund and offering documents.

With any fund, the goal is to sell an investment spot in a pool that is going to make the investor a lot of money. If you can communicate this clearly, effectively, and with evidence to support yourself, you can make it happen.

In the case of your fund, you need to develop processes, systems, and procedures that will help you sell the same investment repeatedly to a wide range of different investors. They will all have different questions that you have to be prepared for.

Most people struggle to make the leap from once-off sales to capital raising in this repetitive context. That is why when you are setting up a fund, you have to divert much of your attention to the singular goal of developing a capital raising strategy.

Without any capital investment, you will not have any money to lend. That is why you have to treat the capital raising side of your business like it is your whole business, because it is.

It will take more detail and discipline than anything you have done with origination or underwriting. It is going to be way more difficult than settling on the right asset model.

Most fund managers come from the wide world of assets, where single deals are made. Each deal requires new perspectives and approaches. With a capital raising strategy, it is not varied at all—you can only sell what you have created.

Remember when I mentioned that everything is interlinked?

This is why.

You have to embrace your capital raising strategy as a key piece of your business, or you will never get off the ground. Starting with too little capital will spell disaster. Running out of new investors will spell disaster.

Of all the skills that you can develop, getting new investors to take that leap and become part of your mortgage pool is the number one concern of yours as a great fund manager. It is one core competency that you cannot afford to overlook, waltz by, or forget about.

Some of the best fund managers in the world are total experts at capital raising and for good reason. As you persist with your fund, you will gain a reputation and experience.

Mostly, you will gain the data you need to prove to new investors that you can make them money.

What are you waiting for? Get to it already.

And check back in a couple weeks for Part 5: Administration.

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Salvatore M. Buscemi
A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.

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Salvatore M. Buscemi

About Salvatore M. Buscemi

A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.
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