Transcript

Bronson Hill:
So again, my name is Bronson Hill. We do these events because we really want to create more value in the space. We’re going to hear some amazing experts today. I’m going to go ahead and welcome everyone up here, our panelists, I’m going to give them an introduction one at a time here. So let’s go ahead and welcome them up, so they’re going to be coming on up here. And I’ve got two Stevens, so hopefully we’ll get the right Steven, and we’ll welcome you guys up. So give a quick intro to these guys. Looks like Steven’s up there. Perfect. Okay, let me get to my intro here. Okay, awesome. So I mentioned myself, Bronson Hill, CEO of Bronson Equity. We have a debt fund we’re doing, which is in the private credit space. We’ve done a lot of multifamily, over 2,500 units. We’re also doing some oil and gas and other tax advantage investments, some self-storage, other types of things as well. And I’m the author of this book, behind me, Fire Yourself: Replace Your Working Income with Passive Income in 3 Years or Less. I have with me today, I have Dave Wolcott from Pantheon Investments. Welcome, Dave. Good to have you.

Dave Wolcott:
Great to be here, Bronson.

Bronson Hill:
Great to have you back to another event. We’ve got my good friend, Patrick Grimes, from Passive
Investing Mastery, all the way from Hawaii.

Patrick Grimes:
Excited about it.

Bronson Hill:
Awesome, man. Keep that haircut looking good, brother. Steven Pesavento, VonFinch Capital, from
Colorado.

Steven Pesavento:
What’s going on? Good to see you.

Bronson Hill:
Good to see you again, brother. And Sam Silverman, we met recently, excited to have you here,
Silverman Capital.

Sam Silverman:
Yeah, thanks for having me on.

Bronson Hill:
Awesome, guys. I’m going to go ahead and put a poll in here of who you’re most excited to see, because  that’s something I always want to know is who are you actually here to see? So you should see that poll coming up there, so everybody should be able to answer that.

But let’s jump into private credit. Let’s talk a little bit about this event specifically. The title of this event is The Rise of Private Credit: Replacing Banks and Creating Stronger Yields. And if you’re an investor, you likely may have heard that term from me for a number of years. I was unfamiliar with what does that really mean, private credit? Does that mean like credit cards or other things? What exactly are we talking about here? And so, private credit, there’s a variety of real estate, there’s stuff in doing merchant lending, there’s all kinds of different stuff where people are getting loans outside of a banking situation, sometimes there’s higher returns and it can be really attractive for investors. So I wanted to just go around and just talk through a little bit about private credit and why it’s appealing. I’m not sure who would like to start today and just give us a quick intro, and then we’ll go around, just somebody can add in what’s missing there. Anybody want to raise their hand to start?

Steven Pesavento:
I think Patrick should start.

Bronson Hill:
Okay. Patrick, why don’t you start, brother?

Patrick Grimes:
Sure. Well, private credit is pretty simple. It’s just when you’re not going to a bank, you’re going to private investors or private equity or a fund. For example, in a lot of our cases, they’re funds. And we’re going to go out there and compete with those banks, where companies potentially don’t have to go register or get what is a highly regulated environment. There’s a lot more flexibility for private credit to meet the need, especially in downturns. That’s why we’ve seen private credit go up five times since 2009. When banks falter, private credit tends to soar, and we’re actually in one of those cycles now.

Bronson Hill:
Love it. Okay.

Steven Pesavento:
I’d add onto that and say one of the key reasons that private credit exists is because after the 2008 collapse, there was a lot of regulations that were put on banks which limited their ability to loan to certain types of borrowers, on the real estate side, on the business side. If you think back historically, when a business needed money, they came into their local banker and they brought their business plan and they said, &quotHey, here’s a project that I got to do,&quot and that bank would make a decision based on a personal relationship.

Well, after those regulations changed, little banks aren’t able to do what they used to and big banks are limited as well, and so that’s where private credit really entered the space to be able to fill that need. So a lot of private credit dollars are actually coming from banks and then coming from private individuals that pool that capital together and go and actually deliver those loans outside of the banking system.

Bronson Hill:
Love it.

Sam Silverman:
I’d say it’s also speed too. The space that we’re in, we work with a lot of small businesses, and for them, they may have inventory, they may have payroll, they may have a job they have to go complete. And if you’ve been through the process of, say, an SBA loan, for example, it’s a burdensome, burdensome process and it takes a long time. So we often see that speed is one of the biggest pieces of the puzzle when looking at creative financing.

Dave Wolcott:
Yeah. I’d also add that the actual entire industry has grown by over 15% CAGR in the past 15 years, really demonstrating the up and to the right nature of this need for credit that’s out there. And as Sam pointed out, it’s really interesting, because we’re serving this gap in the marketplace that just needs capital. Some of these business owners don’t have a college degree, they don’t have good credit scores, they need access to capital because they have growing businesses, but they can’t deal with the complexities of the banks that could take them six months to underwrite. So we can actually fund them very quickly and get them off and running. Think of it like in real estate terms, hard money lending, really on the business side.

Bronson Hill:
I love that, yeah. It’s basically, as banks and some of the regulations have gotten to be pretty onerous at times, it’s capital still needed to do stuff, and if you have a project… We’re working on a project now building after the fires in Altadena, we’re doing something that’s a hard money, private money type of situation to be able to get it done, because a bank will look and say, "Well, this doesn’t really fit our box." And so, we’re finding more and more, a lot of things don’t really fit the box, and so that’s the reason why private credit exists.

We’re going to get into private credit as an investor and what that looks like, understanding the different types here in just a minute. I just want to give a quick structure and welcome you to the event if you’re joining us a little bit late. This is all about private credit. We will send out a replay of this event afterwards. We also have our YouTube channel, Bronson Equity, that has all of these videos we do. Twice a month, we’re doing this. And this will be sent out to you automatically. We’ll have time for questions at the end. So if you have any questions, you’re welcome to ask them now, we will get to those at the end.

So we just finished this poll. I shared this. People are most excited to see Patrick, it looks like, he’s edged out the rest of us. But congrats, Patrick, on that of winning the popularity award. And then, I’ve got another poll I’m going to stick in the chat here as well.

Steven Pesavento:
Number two, baby. Don’t forget about number two.

Bronson Hill:
Number two.

Steven Pesavento:
We try harder [inaudible 00:06:28].

Bronson Hill:
That’s awesome. Okay. So let’s launch this one. How familiar are you with private credit? That’s a poll in there. We’ve got a good room of people, if you wouldn’t mind just going and answering how familiar you are with this. And this could be debt funds, it could be specifically private credit, merchant credit, things like that.

So let’s get into, just for each of you, you guys are each doing different things. Now, we’re not pitching anybody’s deals here. We went over this before, and of course, you guys know that. But I want you to talk specifically about what you’re doing, and obviously, you like what you’re doing, so what is it that… And I want you to talk like, "Hey, this is the type of product we’re doing, this is the type of risk that we see in it, and these are the type of returns." I think those are good things. If the returns are really great, but the risks are high, it’s just good to know that as an investor, if the risks are low and how that looks. So why don’t we go reverse there, Dave, why don’t you start with this one and we’ll work our way around here?

Dave Wolcott:
Yeah, for sure. So again, we’re focused primarily on businesses that are looking for capital to actually grow. And I love this simple example. I live in Florida, and last year, we had a bunch of hurricanes that came through. So you’ve got a roofing company that he needs equipment, he needs people, he’s got a two-year backlog of business, so his business is just humming along. But if he goes to see a bank, it’s going to take him months to actually get that capital and he’s going to lose that business. So what we can do is we have a unique proprietary underwriting that we’re able to actually give him his capital very quickly and efficiently. He pays that off. Our average loan cycle is about seven months. And what’s really unique is we’re actually collecting principal and interest payments on a daily and weekly basis. They come back into the fund and then literally get redeployed into other deals.

So number one, we’re diversifying across 15 different industries. So with private credit, you can get nice diversification across different industries. And in this case, we’re actually able to further diversify with the velocity of money into other deals in a broader fund. And with that model that’s been going on almost nine years right now, we’ve seen, last year, we actually had a 34% return that the funds delivered, and more importantly, we’ve brought down the default rate from 6.5% to 2%. And part of that is because of the unique underwriting that’s going on, and also, the business is very mature, so there’s a lot of repeat customers and things like that. So it’s becoming quite mature from that standpoint.

So one thing I would just point out to people is that people assume that private credit, you get the higher yield and then you have a high risk with it. Well, there’s ways with which you can actually reduce that risk as you get into that. I mean, at a 2% default, we have a Sharpe ratio that’s actually better than bonds right now.

Bronson Hill:
Yeah, it’s amazing. I want us to make a pause there real quick. I feel like private credit with the right… Obviously, I don’t know your deal specifically, Dave. But if you’re doing the right types of thing, it’s become what bonds used to be without the volatility, because bonds have actually become very volatile with changes in interest rates and things like that. And so, having these other alternative things can be very attractive for private investors, especially for steady cash flow. That’s the thing, I think, a lot of people want is cash flow. Sam, I know we talked yesterday a little bit about your fund, why don’t you talk a little about what
you’re doing?

Sam Silverman:
Yeah. So I’d say we’re in a pretty similar space to Dave overall in terms of thesis. Our business was really built off of a step prior. My partners in the fund themselves run a brokerage shop that is basically a sales and marketing arm for merchant cash advance, seemingly similar to what Dave is saying, daily, weekly payments, average term’s about nine and a half months, across 30 industries, across 45 plus states. So for us, a big play in diversification and a big play on velocity of money, because they’re fully amortizing, you can go cycle that capital back very quickly, like Dave was saying. So we see it as a huge opportunity. Think of us in the lens of, if you tie it to real estate, they were effectively your property manager for the last 11 years, brokered out a billion dollars plus of these fundings, and now in turn, they’re saying, "Hey, why don’t we go keep the top portion of these quality-wise on our own books and go broker out the
deals that don’t fit our risk profile and criteria here too?" But we see it as a huge opportunity, especially as it relates to speed, repeat customers, diversification of industry.

I think a big point here too is that if you take multifamily as an example, I think the syndication space from ’21/’22, what you’re seeing there is that these are very illiquid single assets that are very difficult to go move. And here, what you’re looking at is that you can go turn your whole portfolio of loans over in a period of six, seven months. So if you see any shifts in the industry in terms of industries you’re in, locations, sizing, whatever it may be, you can go shift pretty quickly to go reallocate your portfolio and really adjust the market itself too. So we love the space for those main reasons.

Bronson Hill:
Yeah, love it. Thanks, man. Appreciate you sharing that. Steven, I know you’re doing something different, why don’t you talk about what you’re doing? I know you’ve got a big real estate emphasis in general, what you’re focused on.

Steven Pesavento:
Yeah. So Steven Pesavento, managing partner at VonFinch Real Estate Partners, aka VonFinch Capital. We’re a operator based out of Denver, collectively have purchased and operate over $550 million of real estate, just under $200 million of equity we’ve raised, and have managed a portfolio of private credit notes above $40, $45 million since 2016. Recently merged my firm with my partner’s firm, who’s a direct operator here in Denver, which led us to managing over 3,500 units. And so, on the private credit side, I started in the business, flipped over 200 houses, done over $220 million of real estate myself personally. I started by borrowing capital from individuals, paying 8%, 10%, 12%, and we would go and flip a home. Well, then, as we moved into the multifamily space, we’d bring on equity, and the benefit of equity is you get to participate in the upside and the downside of a project. So you end up getting a larger return, but the trade-off is you don’t have that consistency of cashflow.

And so, we brought back the private credit fund about three years ago, and the way that we use it is we’re all multifamily. We buy distressed assets, we buy deals from people who are in need of a sale, and the benefit of private credit for us is we’re able to move very quickly. We buy 100% cash, we’ll get in, renovate a 50 to 100-unit building on balance sheet, and then we’ll refinance that out and we’ll recycle that money.

And so our VonFinch fixed income fund is paying anywhere in that 10% to 12% current range, where you know that every single month, you’re going to get that payment. The difference is your loan is backed both by an individual property loan, it’s collateralized across multiple loans, it’s collateralized against a company guarantee of interest, meaning we’re on the hook to pay the interest, and then it’s backed by our portfolio of over $400 million of real estate and our interest in those projects. And so, the trade-off is when you go into MCA or any kind of business lending, you’re going to be able to get a very high rate of return. And when you can find the right thing, you’re the loan shark, so you get paid really well for doing that, because there’s not a lot of other options. The thing about real estate is it’s backed by a physical asset that has value, and that we’re increasing that loan-to-value throughout that three to six- month period on that loan.

So lower rate of return, but typically higher loan-to-value, and it’s backed by assets, not dissimilar from the loans that you just learned about on the business side, backed by a company guarantee, so very similar in that sense.

Bronson Hill:
And these are real estate-backed, correct?

Steven Pesavento:
It’s all real estate. All we do is real estate. We’re focused on multifamily in Denver, Colorado Springs, Kansas City, Omaha, and Des Moines.

Bronson Hill:
And one thing I want to say too is that’s the thing, if you’re a real estate investor, a lot of us were doing multifamily and other types of projects several years ago, and as an equity investor, there’s been some challenge. Either you’ve gone through things or there’s been capital calls or difficulty or valuation stuff. And the big thing, even if deals have gone great, cashflow has been diminished and it’s hard to find new deals with cashflow. And that’s, I think, what a debt fund does particularly, or some sort of private credit fund can do, both in real estate and outside of real estate.

Patrick, why don’t you jump in here as well? I know you’re doing some real estate credit as well.

Patrick Grimes:
Yeah. We’re in three different kinds of private credit right now. I mean, our company’s a little different in that we’re not all in in real estate or all in in merchant cash events, which is more of a broader spread across different industries. I tend to look at my Venn diagram of recession resilience and non-correlation, and I’ve added to it over the last year, insulation from AI disruption, and I look at specific industries that are opportunistic that we want to target. And so, we have done, as Bronson knows, about three years ago, we set up an opportunistic debt fund, a fund that would step in when commercial real estate lenders are on the sidelines. And so, we’ve been doing private lending, it’s called PIM Rapid Lending, and we’ve been lending to small balanced commercial real estate at a time when you used to only be able to get 6%, 7%, 8%, and now we’re doing 10%, 11%, 12%, sometimes 14% healthy properties. We’re talking below 65% loan-to-value, a lot of protection from market volatility. But our returns we’re bagging to our investors or mid-teens. I mean, that’s equity-like returns for the security and protection in a debt fund, it’s pretty extraordinary. So that’s real estate though.

But that to me, I was an automation robotics engineer, real estate’s an allocation, it’s not the end game. So we are also doing in the legal industry. Why? Well, we’re also doing medical industry. Why? The same reason, really. If you look at, over time, how industries perform, the ones that tend to be the most recession-resilient, non-correlated to each other, they don’t rise and fall, they don’t rely on the same market fundamentals, those are ones that just simply don’t care what’s going on with interest rates or they don’t care what’s going on with gold, the stock market. In fact, you can see all the other industries, legal and medical, up into the right, and they just simply just don’t care.

So those two industries are very attractive to me. So what did I do? We stood up private credit funds to service needs within those industries. So we’re not broad spectrum-ing merchant cash events, we’re focusing. And in the legal space, attorneys that are contingency fee-based, they need funds to get more clients, service them to settlement. So we have a diversified litigation portfolio, where we get liens and we finance a small percentage of their collateral value. They have a long history and we collect great returns.

And on the medical side, it’s similar. You’ve got to find a way to service them too. It turns out that a lot of healthy practices out there fall victim to the old problem here that once you provide care, because you’re contracted to do so with the insurance company, you have to do it. What happens? They don’t pay you. They don’t pay you sometimes for 60 days, one year, two year, three years. And so, we can bridge the gap. Otherwise, very healthy practices sometimes run into an operational liquidity crunch, or they just want to invest in equipment, people, and growth. And so, we can help fund a small percentage in advance on their medical receivables, and we do a large pool of medical receivables. We’re launching that fund right now, we’re already originating, it’s going great.

So all three of those provide for the ability to access institutional-grade investments in different industries, which don’t rise and fall together, and build more strength and security in somebody’s portfolio. So I think private credit’s an incredible way for investors to bag incredible risk-adjusted returns and solve needs along the way.

Bronson Hill:
This is an amazing thing too about, as an investor, I think you should be agnostic from just,” Hey, I don’t really care what I invest in .” But looking at the risk profile, looking at the cashflow and looking at the industry, look at different things. So if you’re a one trick pony, all you do is flip or all you do is multifamily. Well, maybe there’s the other things that actually make more sense. And right now, I think private credit can make a lot of sense. We’re involved in a debt fund that’s real estate-based, and I’m happy to share more about that if somebody wants to reach out.

I want to go over the questionnaire real quick, or the poll here, how familiar you are with private credit. We’ve got over a third of people are already invested, and then over 50% have either invested or are considering investing, and some have read a little. So definitely something to look into. I’m going to launch another poll here, just because it gives you something to do while you’re watching this. What net return would you be happy with in some sort of private credit? We’ve got some different results in there, so please go ahead and answer that.

Let’s go in and just talk about if someone’s new to this, because I know some of us are very new to this, what do you think are some things that an investor should consider before they invest into private credit? Because again, one thing that surprised me over time is that there are some types of private credit that they have okay returns, but they’re very high risk. I heard of a guy doing bridge debt, he called it a gap loan for flipper funds. It’s the highest position risk in a loan, so they’ve got their hard money, and this person comes in as the… So people don’t realize they’re coming in as the highest risk position. If the flip doesn’t sell for what they hope it sells for, the investor gets a huge haircut, and they think they’re getting their 10% or 12% or 15%. So can we talk a little bit about red flags and how do you vet these? And anybody can just jump in. Who wants to jump in first on this?

Dave Wolcott:
Yeah, I’ll go.

Steven Pesavento:

I’ll just say I think it’s worth being aware that private credit is a pretty diverse field. You see a bunch of guys that were in real estate that are now in private credit because the real estate market has taken a downturn and there’s huge opportunities in private credit. And so, when it comes to private credit, I think the thing you want to look for first is who’s behind it, who’s doing the work, what are the assets that back it, how can you go through the process of verifying that information? Because the upside of private credit is that you know relatively what you’re going to get, whether it’s a promissory note, like what I’ve discussed, or whether it’s a profit participation or something in between.

But the thing is that a lot of private credit is a black box. So that’s the downside is that private credit could be anywhere, they can do anything. And so, the PPM is really important to understand where that money is used for, is additional leverage being used, and then request what kind of transparency is available on the specific note or loan tape of what is actually backing that. And not everyone’s going to be able to provide that, and that can be okay, but it is good to be able to understand what is actually included in that package that you’re investing in.

Sam Silverman:
Yeah. I also think showing, if you look at it, show me the incentive, I’ll show you the outcome. When you look at how someone’s compensated, I think you see… Take a step back at the industry as a whole, you look back in these last few years of syndications, there’s at times very misaligned incentives. Something I look at really heavily is if this deal does not perform, what portion of the sponsor’s earnings are coming from fees versus what percent are coming from performance compensation? So I think something that
you have to just understand any deal that you’re doing is where’s money being made and who is at risk when things don’t go well?

I think that structure matters a lot too. For example, the MCA space, to at least speak for ourself, there’s two routes you typically see people go. One is the syndication route on a deal-by-deal basis, that has a level of risk to it. On our end, how we want to go mitigate that is that everything goes into a portfolio itself. Also, how it’s aligned too, I think we’re one of the only groups who does this, is that we take zero fees and don’t get paid a dollar until our investors are made whole on their entire return. So it takes all the risk on ourself, our performance. In turn, we take a little more upside for ourself on it, but we take all that risk for ourself too. So not saying it’s the right solution, but-

Steven Pesavento:
And just to say for Sam, that’s pretty huge, because in the MCA space, people are charging two, three, five, 10 percent points upfront on placement. These brokers charge extreme… They make a ton of money by placing capital. So the fact that you’re not taking that is a huge alignment thing that’s unique in the space.

Bronson Hill:
Great.

Sam Silverman:
Yeah. And you’re also seeing acquisition fees, you’re seeing deployment fees, you’re seeing AUM fees. On our end, we structure all of it as a pref, and then we keep the upside beyond net pref. And we’re at, call it, 10, 16 depending on share class. So alignment-wise, we look at this from the long, long-term of doing it. So again, I’d say understand what you’re investing into, like Steven was saying, but also understand the incentives of the manager there as well.

Steven Pesavento:
Well, what are you charging on the front-end when you’re doing these loans? Are you charging 22%, 25%?

Sam Silverman:
So if you look at our blended rate right now, we’re in the low 30s on about a nine-and-a-half-month period in terms of net. It’s also an operating business though too. We have full-team underwriters, we have expenses to go into, and we have a level of default. I think the big thing here too is that our model can go sustain about 25% of the capital we put out, be lost, and still have our full 16 to investors in the highest share class. We think we’ll end up much more so in that range that Dave was in previously, in that six to eight range, ideally lower than that as well. That’s where we have pegged at the last 10 plus years.

Dave Wolcott:
Yeah. And I’d also say, from a risk perspective, just like any other asset class, we always want to be investing in the jockey rather than the horse, so really doing your diligence on sponsors. There’s definitely some shady sponsors in this space, in the MCA space, for sure. So it’s really critical that you need to do all of your research on the sponsor, background checks, criminal checks, everything. Basically, our diligence process, we only work with institutional sponsors. So we’re investing alongside other very large brand name institutions, where we know they’ve done their degree of diligence and we’re able to invest alongside with them as well.

Steven Pesavento:
At what point do you guys think audits are necessary? At what size of fund?

Sam Silverman:
So we’ll be doing our first one this year in terms of a third party reviewed. Not sure if we’ll do a full audit. I think on our end, we’ll shy away from institutional capital, from the guardrails that come with it, less so than the reporting requirements. We’ll definitely have third party both closed books and reviewed financials, and then potentially audits in the future.

Bronson Hill:
Yeah, it’s interesting. That question comes up sometimes where it’s like, "Well, do you guys do audits?" And it can be very expensive to do a full audit, and like you said, it makes sense, Steven, at some size, but maybe at a smaller size, not as much. I think too, one thing I just want to share is that it is really important, I’m shocked at how few investors do background checks. I mean, obviously, you can check, but it’s just… I can’t even think of the last time somebody asked me to do a background check, but I do it all the time. Whenever we work with sponsors, we always do a background check. It’s just a little simple thing you can do for whoever you’re working with. Patrick, I know you’ve been eager chomping at the bit here to jump in, so jump in, brother.

Patrick Grimes:

Well, and we’re not bagging 30%, we’re in the merchant cash advance space and we have the default. I don’t think we missed a payment, actually. Our space is asset-backed and we can underwrite valuations, and I think one of the things that I like about real estate debt is that you can lend on a performing property, you can get it valued by a third party, and you can underwrite the sponsor, to your guys’ point, their liquidity, their net worth, their background check, and then you can lend a very conservative amount. And so, when I look at LP investors, you want to see, what did that docs actually say? Our docs say you can’t go over 65% loan-to-value. That’s extraordinary, especially in debt, because most residential funds are like 80%, 90%, and ours is performing properties 65% and below.

So that shows some… And the sponsor partner of mine that does it is Lance Peterson, he’s been doing debt for 15 years. And in the litigation finance space and medical space, I think that’s where you really start to see some outsized returns for the level of risk, because both of those are very stable industries. You can land on very low loans to investment amounts to collateral value. We’re talking like 10%, 20%, 30%. And these guys are like, "Hey, thank you," because not a lot of people are out there doing it. So you can sit very nice in a much more secured position in some of those industries, and I think there’s something to be said for that.

Bronson Hill:
I just shared this poll results here so you can see what do people want for returns. 0% want a 6% to 8% return, which is different from when interest rates were low, 60% want a 10% to 12%, and over 12% is 24%. Now, you guys were talking, I just want to talk about the elephant in the room here, we’ve got real estate, so primarily Steven and Patrick. Patrick, you’re doing a number of things, but there’s a lot of real estate between what you guys are doing. Dave, Sam, I want you guys to jump in here. So you guys mentioned 30%, 40% or higher annualized, those are the rates people are being charged. How does that roll down to investors? Obviously, there’s some fees and there’s also some defaults. So how do those play in, and what does that trickle down to typically for investors? And how do you minimize that risk, both as an operator, as well as if I’m an investor looking at something like that, where the returns sound, wow, that sounds really amazing?

Dave Wolcott:
Yeah. I mean, from our perspective, I can just speak to our fund because that’s what we’ve been managing for the past three years, we’ve actually reduced the default rate. Like I said, it was averaging, for the first six years, about 6.5%, and last year, it was down to 2%.

So that’s-
Bronson Hill:
How did you do that? What was the mechanism? That’s three times less.

Dave Wolcott:
Yeah, because that’s some of the magic in terms of the underwriting that goes in. So the underwriting just keeps getting better and better in terms of what goes into it, what they’re looking at. And then, also, the business is so mature that there’s a lot of repeat business, so people keep coming back because they need this. So that’s what I think reduces it. There’s relationships with clients and things like that. So we’ve got, actually, a very low default rate. And then, from a return perspective, those are net of fees. We did 34% last year, 25% the year before. But our fund structure is such that whether you’re looking for cashflow, you could do cashflow on a quarterly basis at 12%, you could do it at an annual basis and make 15%, or if you want that growth class, you can actually be in the 20s, and that’s actually compounding every year as well.

Sam Silverman:
So how do you guys handle the compounding piece of it? Because those are all short-term, right, so they still have tax liability on the compounding side?

Dave Wolcott:
Yeah. So basically, as that capital keeps coming back, we are redeploying it, and then we’ll provide a NAV by the end of year. everything is managed third party management in terms of all the financials. So there’s an end of year NAV of what that is, and that continues to get reinvested for Class C shareholders, and they’ll get their payout at the end of the five-year hold.

Patrick Grimes:
So Sam, we’ve had [inaudible 00:30:53] funds with reinvestment classes, now our third with medical, and we have, in our docs, we’ll do a tax distribution for anybody that asks, and we’ve never been asked. For three years now, we’ve been reinvesting, and nobody’s ever said. And I think it’s because they have other real estate passive losses coming and maybe offsetting those gains, or oil and gas. But to this day, we’ve thought it was going to be a big issue, investors are just willing to take the compounding and pay the taxes or defer them with other losses.

Sam Silverman:
We do the same thing too. We just haven’t been able to really work around that tax piece as you have that side of it. But Bronson, to answer your question as it relates to structure, we put all of our… So ours are zero fees. We are 10%, 12%, and 16% in terms of preferred returns. I mean, that gets paid [inaudible 00:31:39] investors. We have the upside behind that for ourself and we pay it all monthly. And those shared costs are based on check size, so 100, 250, and a million, in terms of allocation, with a one-year lockup, and then it’s liquid within 90 days after that too.

The big benefit here is that when you look at this space, for our loan tape that’s out right now, we need about 14% liquidity in the fund every single month. So if we put out a dollar today [inaudible 00:32:05] 14 cents back in the next month. So it allows us to provide meaningful liquidity to investors if they need it back. So for us, that definitely helps a lot too with the low lockup period, people like having access to their capital. We think it’ll be staying there for a lot longer than that too.

Patrick Grimes:
We have three years in our debt fund, we have six-month and one-year notes, two-thirds of them never redeemed. Instead of taking 14% for the growth class, they took 8.5% or 10%, six month in one year, and they just rolled it forward and never redeemed.

Steven Pesavento:
People like that flexibility. That’s the downside of real estate is that depending on the type of project that you’re doing, having a two to three lockup is kind of typical. Most of our notes are two years plus.We have some people who’ll do shorter term notes. But back on that, what I’ve learned on the private credit side when it comes to audits is that there’s a size of fund that it doesn’t make sense to do any kind of audit in real estate in private credit, and usually that amount is minimum $20 million. Realistically, the higher the size of the fund, the better, because those audit costs are the same at a $20 million fund and a $100 million fund. But if you’re investing in private credit and there’s more than $40 or $50 million, you should be looking for and expecting a full audit. And just so you know, a full audit doesn’t mean that there’s not funky things going on. But the benefit of the audit, the benefit of the review, even doing just a review, is that you get a third party that’s looking at that, that’s making sure that things are well. We have set ourselves up to go through that audit process, but our private credit fund is fairly small. It’s $10, $15 million at any given time, they’re promissory notes. We’ve got a lot of discretion on being able to deploy those out on the real estate assets that we’re buying and managing, all new, no backfilling deals that need money. But that’s the thing, if you’re ever looking to get into a boutique fund, like some of the ones from folks on this call, it’s unlikely that someone’s going to go through a full audit unless that fund size is $20, $30, $40, $50, $100 million, because that cost gets passed on to you, and audits cost between $20,000 and $50,000 a year. You can find cheaper ones, but typically, that’s around the range.

Patrick Grimes:
I think where we check the box typically is with a third-party fund administrator too, because then you have somebody else looking through everything.

Steven Pesavento:
For sure.

Patrick Grimes:
Go ahead, Bronson.

Bronson Hill:
No, that’s great. I think that’s great. I know we’re getting a lot of questions here. I’m going to take quick pause here. So one thing about private credit I think about is it takes money to make money, but it just doesn’t have to be your money. So this is where a lot of operators and businesses will say, “Hey, we’ve got a great business here, we’ve got a great something, but the money’s got to come from somewhere to make the investment." And so, that’s where private credit comes in.

This survey real quick, we went in, about 33% said first position is something they look for or similar, having collateral assets to claim is 67%. So thanks for sharing that. We’re going to go ahead and take some questions here in a minute. If you have questions, go ahead and put them in the Q&A or the chat. I’m going to share something that we have going on that we’re really excited about, an event coming up, a live event in Scottsdale, Arizona. We’re going to be March 5th and 6th. We actually had Patrick join us recently for one of these events. And basically, we’ve got Ken McElroy, he’s got over three billion in real estate, he was on our panel two weeks ago, as well as Kathy Fettke, even though we spelled her name wrong here. Rich Fettke, Christina Suter, Russell Gray. That’s basically our mastermind group that’s high- net-worth investors that are trying to really gather. I’ll put the link in the chat here in a minute. But would love to extend that to you. We do a discounted rate for people that want to come and visit that. So that’s March 5th and 6th at the Westin in Scottsdale, and I will go ahead and put something in the chat there.

So we’ll go ahead and get to some questions here. Let me stop sharing and we’ll jump into the questions here. So a question here from David, all the way from Japan, BlackRock just downgraded their loan value. How worried should we be if we have private equity investments, just in general, when it comes…

Let’s talk about private credit. Is there any way that this will affect if we’ve got loans, we’ve got other
things, does this affect us?

Steven Pesavento:
Maybe. It’s a generic answer because it’s a generic question. The truth is private credit has some serious risks. There is a lot of money that’s flowing in institutional funds. There’s a lot of money from those institutional funds flowing into the market, into private equity, into a variety of different asset classes, and there is risk that comes along with that. Remember, the reason private credit exists is because the banking market was overly regulated, and therefore private credit is money that’s not sitting on people’s balance sheet, there is typically not filings to show, so somebody in the private credit space who’s a borrower can go and borrow for multiple people. That’s not true all the time, but most of the investigations on the risk of private credit is that there’s a lot of different people who are borrowing money re-loaning it back out.

And so, there is some risk in private credit. That’s why it’s important to be close to the operator that’s executing whatever that business plan is, that they understand the space on a deep level, and that they feel confident about the assets that are backing those individual loans. Any investment has risk, so you’re trading what is the kind of return you’re getting in exchange for what level of confidence you’re going to get paid back. That’s one of the reasons people like Patrick and myself like hard assets. We feel comfortable that that is going to continue to be able to serve that need. But there’s huge benefits going into these other tools if you’re getting a much higher yield in exchange for a little bit more risk.

Patrick Grimes:
I think it’s a good point. I think it’s a reminder that you’ve got to be really conservative with your underwriting and your valuations. Of course, we’re not going to be affected directly by BlackRock. And most of our funds, they’re asset-backed. I mean, we’re lending against a lien on a property or a lien on contracts of a law firm or a lien on already service-provided and billed and to be paid by a large insurance company, so there isn’t a lot of valuation risk directly tied to those, because those outcomes have somewhat been determined to an underwritable amount and you’re underwriting to such low investment amounts to collateral value. So it depends a little bit.

But it is a reminder, and I think that it’s not just BlackRock, the entire commercial real estate sector took a colossal blow, 10%, 20%, 30%, outsized in office, and I think that knife is still falling right now, while others, like industrial, is seeing incredibly high occupancies. It’s incredible how these markets can shift, and I think that’s where there’s questions in there about what is diversification, and I think that is when you’re not in the same market fundamentals, when you’re investing in markets that don’t rise and fall together based on the same driving indicators. So if you’re all in in BlackRock, maybe you’re in trouble.

But if you’re in BlackRock and seven or eight other completely non-correlated investments, that’s where

I see investors can live out cycles like this.

Steven Pesavento:
To Patrick’s point, it’s a really good point to say why investing in multiple different things is so valuable. My company does one thing because this is what we do, we’re operating in it. Same with Sam, same with Dave. But when you’re thinking like an investor, there’s allocations you want to be making to these different buckets that have different risk profiles, different redemption dates, different liquidity availability, and you build that portfolio around those different pieces so you have that diversification.

Dave Wolcott:

Yeah. It’s also important to notice that even on the business side, we’re actually every loan is collateralized by 65%. So it could be business equipment, doesn’t have to be a hard asset, like in real estate. We still actually have exposure to real estate, it’s about 10% to 15% of the fund. But just think, transportation, logistics, a lot of these businesses, they still have assets that are actually collateralized. And another point that was pretty fascinating as we went through our diligence and one of the reasons we’ve been able to manage that default rate, actually, even during the pandemic, we managed to a 6% default rate, and you would’ve definitely thought that this would’ve been an area that would’ve completely blown up. But what happened was the sponsor was really shrewd in saying… And in fact, here’s a good example. SkyChef was one of those companies that provided all the meals for the airlines.

Airlines are grounded, they’re not doing any business, there’s no revenue coming in. Well, rather than put the loan completely into default, what they did is they just said, "All right, you know what? We’re going to extend your terms. We’re going to give you an extra two months here." So instead of completely writing the thing off, the return wasn’t as great, but cash still came in and everything worked. And then, they’ve been a customer for the past seven years since then. So that’s just a good example of how this industry can work if you’re partnered with the right sponsor.

Bronson Hill:
And Sam, I know you’ve been confident… Go ahead.

Sam Silverman:
For us too, one measure we look at is the retrieval rate. What that means is that we take a portion of someone’s revenue over a fixed period of time to pay us back for making a loan and funding. And in turn, our portfolio weighted right now is under 10%. So if we lent a dollar to Bronson, he’s paying us back over nine months for paying us back a dollar in total, that’d be $1 divided by 39 weeks that we get those even payments on it. In the portfolio itself, we’ll take back less than 10 cents of his revenue to go make us whole in terms of that as well.

So when we look at leverage, we look at leverage relative to their total revenue as it relates to
historicals, no growth, no projections there, seeing a really healthy payment volume. So not thinking a
developer who has one transaction a month, these businesses that have ACH payments go into their
accounts every single day. So when looking at it, we like to capture a small piece of their total revenue
when looking at the weighting LTV against it.

Bronson Hill:
One thing I want to say real quick, as an investor, a great way to learn about any of this stuff is just have a conversation with ChatGPT. “Hey, help me understand private credit. What are some of the risks here? How do I understand? Break down this. What is a NAV value?” Just all these different things that we’re talking about here, spend time with this, because you can obviously reach out and ask questions, but it’s a great way to understand any topic. And if you’re not taking your PPMs and your marketing material when you get proposed a deal and putting it in Chat or one of these AI things, you’re missing out, I think it really can help you to analyze things very quickly. We’re getting a few more questions in here, which I appreciate. This is a question I see about risk. I guess this is probably for all of you, especially I’m seeing it more on the business side. How do you assess risk when a business can fail? And even, I guess, from a structure, Dave, you mentioned somebody keeps coming back for seven years to be a customer. Why do people do that? I mean, just getting their people’s head around why does this exist and how do we actually underwrite it, and then what recourse? If, all of a sudden, these guys stop paying, do you have to sue them to get your money back, is it just gone, or how do you go about that?

Patrick Grimes:
I think it’s very interesting in the legal space and the medical space, the payer is not the party that you’re actually financing. So we’ll take a first position out and then we’ll take control over… The collateral is essentially a payable, which is their contingency fee agreements in a case that’s coming. It’s not derived from the attorney, it’s derived from the underlying case. And we’re engaging in late-stage cases, those things are chunking along, and oftentimes settlements have already been negotiated or posted. Same thing in the medical space. You can put a lien against the medical practice, but the payers are government agencies and insurers for care that’s already been provided. So that asset-backed, you do certainly want to underwrite the operator, whether it’s real estate, legal, or medical. You want to make sure that they’re able to do their job and that there’s no fraud going on.

But at the end of the day, if you put yourself in a secured position to a stronger payer coming, you can collect on what is due to you in all of those cases.

Bronson Hill:
Awesome. Anybody else want to jump in there on just diligence and recourse and things? Obviously, you guys have quite a bit of experience with this. You guys have already kind of touched on it.

Steven Pesavento:
Yeah. I mean, I think when it comes to risk of any kind, whether it’s business, real estate, medical receivables, it’s all about you’re investing in the operator, unless you’re a professional. Even when I’m working with family offices or retired real estate professionals that have made hundreds of millions of dollars that understand this stuff, at the end of the day, they know that it comes down to what’s our ability to execute the business plan. That’s the risk reduction. They look at the collateral, they look at the thing, they look at the business plan, they look at all these pieces. At the end of the day, whether it’s receivables or business loans or it’s real estate, it comes down to what’s that person’s ability to execute to collect.

So if I’m buying a deal and I’m paying $30,000 a unit, and I know I just sold a building the week before for $85,000 a unit on the same block, and I’ve got to put 25 in, I know I’ve got a lot of room, so I feel very comfortable with that. And that’s the interesting thing, is that in any of these businesses, whether it’s real estate or any of these other niches, there are nuances. You might read the headlines and hear, “Oh, commercial real estate’s in a really bad place.”That’s true if you’re in office or if you’re in general generic multifamily or if you’re in workforce housing, which we are. But that also creates an incredible opportunity if you understand the market.

Just an example, we’re buying a deal for $47 million from an operator that most of you on this call will know, and their total project cost, my understanding, is somewhere in the $80 million range. So there’s always opportunities from an investment standpoint in all of these niches, and the key thing is finding people who spend all day, every day, this is all they do, and they’re relied to identify those deals, understand how to de-risk them, and then figure out what’s the right position in the capital stack, because we have private credit, we’ve got preferred equity that pays more, we’ve got 1099 in money, and we’ve got equity that you’re a partner and you participate in the upside. And the same is true with everything you’re going to hear when you look into private credit, it’s just about understanding what’s the opportunity and how am I going to de-risk it to make the most money?

Patrick Grimes:
I couldn’t agree. I mean, I totally agree with Steven’s perspective there. It really comes down to your experience, and that really is processes and diligence. Lance, my partner’s, been in debt for 15 years, Dave in litigation finance for 15 years, medical receivables since 2009. So it really comes down to have you been through market cycles and you’ve seen how things can go south? Have you been around long enough to where you can see when something, through looking at financials, see if something smells wrong? Because sometimes it can be really good at putting something and you’ve got a gut feeling, “This doesn’t feel right, let’s dig in deeper.”

And then, have you built relationships over decades where people keep coming back to you, not because you’re the cheapest, but they know they can trust you and rely on you and they keep coming back to you as a source? Because they know that banks, whatever other financing private equity they’re looking at, those guys will drop them like a rock, because there really is no long-term relationship. And when you go to the boutique-y firm private equity route, you start building careers with people, and that’s, I think, when it becomes very beneficial. People just want to buy the building, they just need the capital right away to advance their litigation or their medical practice, and when they can find somebody they can trust to do that, you set up a revolving line, an accordion financing agreement, you just continue doing business with them over time, and that’s what we’re doing.

Bronson Hill:
It’s amazing too, when you can provide capital for things like that, where lawyers don’t want to simply have funds tied up and front stuff, they want to get paid, but if there’s a way you can do it where it’s a win-win, and that’s where those private credit takes place.

We’ve got time for one more question here. So somebody says, I’m thinking about looking closer at private credit, what industries should I focus on? How would you answer that? What industries or what’s out there, what would you guys say is interesting to focus on?

Dave Wolcott:
Yeah, I’d say you should actually focus on what you know. There’s literally private credit for every industry that’s out there. You can actually get into defense contracting and engineering or aerospace. So if that’s a business that you’re in and you really understand the dynamics to it, invest in what you know, use your investor to get in.

Bronson Hill:
How do you find that? If I’m looking for that specific thing in private defense contracts, how do I find that private credit?

Dave Wolcott:
Well, it’s people like us on the panel who have good connections and relationships to be able to make an entree there. Or the second approach is to get exposure to it. So kind of like Sam and I have funds that have a lot of diversification across… I mean, we’re across literally over 15 different industries, and we think that that actually really reduces the risk across industries, so we’re never tied into one too much. But I think in general, it’s always investing in something, in a space that you understand, you know how it works.

Bronson Hill:

Love it.

Sam Silverman:
I look at it as what margin do you have for things to go wrong and you can still go be made whole in some way, what buffer room do you have? So I’d say it really depends on what you feel comfortable with and what you want to correlate it to. If you have a ton of exposure to real estate, like I have the last handful of years, for me, having things non-correlated to real estate is super appealing. If you don’t have exposure to real estate or you want a super tangible asset, real estate may be really appealing for you in the private credit space too. So I’d say it depends on what you want and how you look at your exposure as well in total.

Bronson Hill:
Got it. Great. Guys, we’re going to go ahead, and before we move on here, we’ve got just time to make a quick announcement that we’re going to have how people can reach out to. I want to be sensitive to everyone’s time. We do this every two weeks now, so we’re doing it twice a month now. We’ve gotten great feedback on it. This is our next event coming up here on February 17th at 4:00 PM Pacific. We’ve got myself and three other people that all have better hair than I do, so I live out my dreams in other people. But this is Tax Secrets for 2026. So what are people doing to reduce taxes? There’s things like oil and gas, tax strategy, retirement accounts. We’re going to have a great conversation about that. I put the info in the chat for that event, so please do sign up for that. Again, we’re doing this every couple of weeks, because we’ve just found it’s an incredible way to help you grow as an investor, really help grow
your wealth and your strategy. So let’s go around real quick and just a quick, hey, I want you guys to talk about how people can reach out to you. If you would please put your information in the chat, how people can connect with you if they’re watching on a replay. I just want people to be able to reach out if they want to know, “Hey, how can I hear about your fund or what you’re working on?” So let’s start with Dave, and we’ll work our way around here.

Dave Wolcott:
Yeah. If you want to connect, feel free to just reach out to me directly, happy to answer any questions and everything, and I’ll just put my email in the chat.

Bronson Hill:
Awesome, okay. Thanks, brother. Appreciate that. Sam, why don’t you go ahead and… You’ve got your stuff in the chat there, I see. Go ahead and just tell people how they can reach out to you and what you’re working on or any giveaways you have.

Sam Silverman:
Yeah. So I threw my information in the chat too, but I’d say I’m most active on LinkedIn, so if you ping me there, I always respond.

Bronson Hill:
Awesome, thanks, appreciate that. Steven?

Steven Pesavento:

Yeah. Best place to follow me is go to vonfinch.com, join our mailing list. You can shoot me an email at steven@vonfinch and I’ll connect you to somebody on our team. Just so you know, most of the deals we do only come to people who we’ve actually talked to. So if you want to participate in something with us, schedule a call with someone on our team, do a discovery. If we feel like it’s a good fit for both of us and we could build a long-term relationship, we’re here to serve.

Bronson Hill:
Thanks, Steven. Appreciate you, brother. Patrick?

Patrick Grimes:
Well, first, I want to push Bronson’s event coming up. I just attended his last one in Pasadena. It was awesome, man. I’ve flown to events and been disappointed before, and I just had a great time. There was so much value packed into that day. So definitely, if you’re in the Phoenix area, check that out. Patrick Grimes, Passive Investing Mastery, passiveinvestingmastery.com, all spelled out. So patrick@passiveInvestingMastery. We do have deals there at the top you can take a look at, some non- correlated alternatives if that’s resonating with you. We also have an alternative investing mastery series where we bring in different panelists. A lot of these guys, I think, except for Sam, have all been on that, and we should change that, Sam. And we deep dive into completely different non-correlated alternatives every time, and love to have you there. And if you’re out there looking for different ways to
invest outside of Wall Street, it’s the only place I know of where I spend every week telling everybody every other way to invest in alternative investments.

Bronson Hill:
All right. This has been a great panel, guys. Really appreciate it. Let’s give them some love here if you enjoyed that. There’s the little emoji button, you can send up some hearts. I think Steven was sending some hearts up there as well, and some other guys as well. So these guys crushed it, I felt like. I wanted to share one more thing with you. I’ve got a quick giveaway that I’m doing, my bestselling book behind me here, number one Amazon bestseller. I’ll give you a free copy if you set up a call. We have these strategy calls that we do with investors. I am a consultant. We charge for those, typically, but I’ll do that for free and give you a free book with the audiobook, my recommended reading list, and a couple of course, and a speed reading guide, if you go to bronsonequity.com/join. So I’ll stick that up there for you. I’ll also put that link in the chat.

But I just want to say, for each of you for being here, thank you so much for being here. Appreciate you taking the time. This is really how we get better. I’m just going to stick this in the chat before I forget, so bronsonequity.com/join, so I don’t miss it. Okay, perfect. And then, we’ll go ahead and send that to you, just put your address in when you’re joining there. But thank you, guys. Thank you to our panelists, thank you for being here. You guys are awesome. I think this is a great area. As investors, really, you should be investing in your own education, and this is the ways you do it, paid mastermind groups. I know Dave has a paid mastermind group. I think some of you guys are part of other groups as well. But really grateful.

Again, this replay will be sent out to you. Also, on our YouTube channel, we have all this stuff from every couple of weeks we put out. So thank you everybody for being here. We look forward to seeing everybody in a couple of weeks on the 17th for those tax strategies.

Thanks, everybody. Have a great night. Appreciate you. Thank you to our panelists as well. And we look forward to seeing everybody
soon. Thank you.

Patrick Grimes:
Thanks, Bronson.
Bronson Hill:
Thanks, guys.