Investment Consideration 2: Investment Markets
After you determine which side of the Capital Stack you want to invest a portion of your capital into (BTW, I do firmly believe that sophisticated investors should have investments in BOTH Equity and Debt), you should then determine which market you will be investing in. Now, most people will scratch their heads and say, “Edwin, are you talking about the Stock Market or the Real Estate Market?” Well … YO, Yes and No. In the world of sophisticated investors, we understand that there are THREE markets you can invest in. Yes THREE. While the general public understands the term “Market” refers to the Stock Market, I want to expand and deepen your understanding, thus pulling you further down the rabbit hole to becoming a sophisticated investor. Think of each of these Markets as an “umbrella”, and under these umbrellas, there will be different primary assets, sub-assets, and strategies to invest in these Markets. So, without further ado, let’s dive in.
Paper/ Digital Asset Market
Most investors are familiar with the paper asset market. This includes stocks, bonds, commodities, ETF, mutual funds, REITs, insurance products and foreign currency. Basically, anything that can be found on a stock exchange or FOREX qualifies as a “Paper Market”. However, with the advent of the cryptocurrency markets, we now categorize Digital Assets within this market category. Crypto assets include but are not limited to contracts, coins, ICO’s, as well as Crypto ETF’s as well. Normally, crypto ETFs are found in the traditional paper markets. The Paper/ Digital Asset Market is known for its volatility and liquidity. Due to its large reach as a market and easy access that ordinary everyday hard-working people, anyone can invest in this market. There is no financial restrictions, and with the advent of technology platforms such as Robinhood, Cashapp, and Crypto market apps, along with large stock market brokerage company platforms, it is easier than ever to buy Paper/ Digital assets whenever you want and for however much you want.
All investments in the paper asset market are considered equity, even if the underlying assets purchased invest in debt, such as mortgage-backed securities. Why? Because you are investing in the company that is holding these debt instruments, not into the debt assets themselves. Another anomaly that many investors are confused about is insurance policies. While insurance policies are unique and are sold to individuals and not on the paper asset market, insurance companies are investing their policyholder’s premiums into assets held in the paper (and maybe soon digital) asset markets. Be aware that an investment into the Paper/ Digital Asset Market comes with a great amount of risk, primarily due to its volatility and the inability of the average person to leverage (borrow against) their portfolio. Of course, there are exceptions, but those exceptions are held for ultra-high net-worth individuals.
Bar to Entry
Due to the low amount that is necessary to begin investing, as little as $10 in some cases, this makes the Paper/ Digital Asset Market very easy for even the beginner to begin investing.
Volatility
Due to its extreme volatility investing in the Paper/ Digital Asset Market can be wrought with challenges. Investing in this market with certain strategies can be very lucrative and very risky.
Liquidity
Because this market is so widespread with many different methods and platforms to invest in, investors can easily invest and just as easily divest from an asset.
Hard / Tangible Asset Market
The Hard/ Tangible Asset Market is exactly what it sounds like. These are assets that investors can invest in, and they are physically able to hold their invested assets. Typical assets inside this market may include but are definitely not limited to planes, trains, automobiles, artwork, furniture, collection items, real estate, gold and silver (bullion & coins), and the list definitely goes on.
While there are numerous ways to invest in the Hard/ Tangible Asset Market, the most well-known and widely available is real estate. Obviously, the intent behind why one would purchase real estate will determine if it is an investment or not, but everyone is familiar with real estate. Whether you are buying a property or renting a property, our daily lives and, therefore, our familiarity with real estate is very high. Due to its familiarity, the Real Estate Market is well known and commonly referred to as simply “Real Estate,” yet make no mistake; it is a market, and quite a large market at that. Now most investors who invest in real estate invest in this market from the equity side of the capital stack. They look to buy a property and consider ways to utilize leverage or borrowed capital. Therefore the money that they invest is seen as equity. Real estate has many different reasons investor clamor to find opportunities in this market; cash flow, forced appreciation, stability, capital preservation, and tax benefits. Investors have a wide net to be able to access capital to invest in real estate. They can utilize Self Directed IRA’s, equity from other assets, cash, and even life insurance policies. The real estate market also allows investors to “come together” in a process called a syndication, and be able to invest in large properties without having to have all the money necessary to invest themselves. There are many reasons why investors invest in the Hard/ Tangible Asset Market, and real estate is the most well-known and highly sought after asset class within this market.
Bar to Entry
Due to the vast differences in investment amounts for this Asset Market, investors can find opportunities that are affordable; however, by and large, when investing in this market, investors must have significantly more investable cash than in the Paper/ Digital Asset Market.
Volatility
Due to the numerous and vast options available to invest in this market, many different asset classes within the market have a wide range of volatility. For our purposes, I looked primarily at real estate. Historically speaking, real estate is not volatile. Yes it does have market swings, and even crashes but they are not as fast nor as common as the Paper/ Digital Asset Market’s volatility.
Liquidity
While there are hundreds of millions of real estate investors around the world, it is still necessary to find qualified buyers of Hard/ Tangible Asset Market assets. Also, due to the fact investors are not able to liquidate their assets in a matter of seconds or minutes makes this market a bit more difficult than the Paper/ Digital Asset Market.
Business Asset Market
This is one of the least discussed, not publicly aware, markets. Investments available in this market are typically conducted behind closed doors in board rooms and over drinks at the local bar during conferences. This is normally called PE or VC investing, or “Private Equity” or “Venture Capital” investing. This is different than IPO “Initial Public Offering” opportunities. By the time a company is ready to launch its business on the Paper Asset market, i.e., the stock exchange, there have been at least one, if not multiple, investments behind closed doors. Of course these investments take an extraordinary amount of capital, and due diligence. These investments are typically not available for individual investors, and are reserved for investment groups, such as PE or VC Firms, with the exception of Family Offices, which manage individual family’s Ultra-High Net Worth “UHNW” people. Of course, a savvy and in-the-know individual may come across a business that is looking to grow on their first seed round of capital raise. Seed rounds are normally the very first investment offering by a company looking to raise operational and growth capital. After the initial seed round, future capital raises are classified in tranches labeled alphabetically, i.e., A Round, B Round, etc. When an investor invest into a business they are investing for the future valuation of the company with the expectation that eventually the company will be listed on a public exchange, one of the Paper Asset Market exchanges, through a process called an IPO.
Bar to Entry
As previously discussed, it takes a lot of bandwidth in capital to invest in businesses, think $1M+. This is hard even for wealthy individuals or families. A sophisticated investor will not normally invest more than 10% of their wealth into any one investment, so normally Business Asset Market investors have a min. of $10M+ in net-worth before even considering business investments. For this reason, I give this market investing a 9 in difficulty.
Volatility
When compared to all other Markets, this asset market has relatively low volatility. Now this is not the same as risks. The overall risks to investing in this asset market is VERY high. 70%+/- of startups will survive the first two years, while 50%+/- survive to year 5, while only 33%+/- survive to the 10yr mark and beyond. While a companies valuation may not fluctuate much, it does have the potential for complete loss within these timeframes. Invest wisely.
Liquidity
When investing in the Business Asset Market, you are investing in the long haul. Remember, we are not talking about investing in businesses listed on the paper/digital asset market by purchasing shares of the business. We are discussing the investments made before the IPO. Because there is not a public market for these investments, and there are more than likely restrictions on selling your investment in a business prior to an IPO, it is almost always a guarantee your investment will be illiquid until an IPO.
Trifecta of Asset Market Investing
I have discussed and shared with you the three primary investing markets, and ALL investments can be summed up and categorized into one of these three markets. But what if… there was a way to COMBINE multiple markets into one investment? There is only one investing strategy (discussed in the Investment Consideration 5: Strategy article) which provides you the ability to invest in all three Asset markets. Do you know what it is?
An investment where you are able to play in the Business Market, the Hard/ Tangible Asset Market, and the Paper/ Digital Market. Think hard (hint: Blue Bay Fund I is such an investment). Let’s go from the bottom up.
Business Asset Market - Blue Bay Fund I is an LLC registered in the state of Delaware. When investors invest in Blue Bay Fund I, they are investing in the company. They receive ownership in the LLC as a Limited Partner, or “LP”. They are limited in the fact they have no decision-making power, yet they receive the benefits of investing in the company through tax write-offs, cash flow, and appreciation of the company’s assets. Investors from the general public are able to invest in Blue Bay Fund I, due to an exemption filing I have with the SEC, the governing body in the United States that is supposed to protect the general public. *I am not here to debate the merits or the problems of this organization, I’m only stating the purpose of the SEC. This exemption can be found in the IRC “Internal Revenue Code” under rule 506(c) in Regulation D of the IRC, commonly referred to as a Reg D 506(c) filing. The filing, using Form D, exempts Blue Bay Fund I from having to register as offering securities, i.e., being made available on the Paper Asset Market exchanges. When I registered Blue Bay Fund I, LLC with the SEC under this exemption, I was able to publicly solicit and raise capital from certain types of investors called “Accredited Investors”. This is a financial metric imposed by the SEC which states that an investor is considered accredited if one of the following is true …
Look Blue Bay Fund I up on EDGAR
What to check and confirm our SEC filing? Follow the link to the EDGAR database and search for “Blue Bay Fund I, LLC” or look up our CIK code 0001990066
From the SEC website:
Financial Criteria
Net worth over $1 million, excluding primary residence (individually or with spouse or partner)
Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year
Professional Criteria
Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)
Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company)
Any “family client” of a “family office” that qualifies as an accredited investor
For investments in a private fund, “knowledgeable employees” of the fund
Hard/ Tangible Asset Market - Once an investor purchases shares of Blue Bay Fund I, and becomes an LP, they have the ability to “own” a fraction of the assets that the company owns. What are the chosen assets of Blue Bay Fund I? Real Estate of course! YET … our investment in the Hard/ Tangible Asset Market is unique, and not the typical type of “ownership” as is common in the industry.
What are the common forms of ownership of real estate in the Hard/ Tangible Asset Market, when a company is investing in real estate? Lets reference earlier, when I was going over the exemptions to registering to offer securities. The Reg D 506(b) and 506(b) are the most common filings used by companies that are raising capital to own real estate. While a 506(c) filing can be publicly offered with only accredited investors being able to purchase a Reg D 506(b) offering is normally called a “Family and Friends” investment because you cannot publicly solicit capital raising, as well as investors in a company with this type of filing do not have to be accredited. To find out more about a 506(b) filing and how I can help non-accredited investors, please send me an email at investor (at) bluebayfund.com or schedule a call with me by navigating to the button below.
Now, most companies raising capital to purchase real estate are doing so through a structure called a syndication. A real estate syndication must file with the SEC using one of the two commonly referred exemptions mentioned above. The syndicator owner or sponsor (also called a GP “General Partner”) raises investments from either accredited or non-accredited investors and then turns around and purchases an asset, typically a commercial or multi-family asset. The syndication company then owns those assets, and the LPs, the capital investors in the syndication company, receive the cash flow, the appreciation, and the tax write-offs called depreciation. If you have not noticed, investors in syndications are investing their capital in an equity position, and this is common.
However, as I mentioned before, Blue Bay Fund invests in real estate differently than a common syndication. I do not believe that investing primarily in equity is the best strategy, I believe investing in Debt is the best option for capital preservation. But if the industry norm is to raise capital in a syndication, and own real estate then how does Bleu Bay Fund I differ from the rest?
Paper/ Digital Asset Market - This, I believe is what makes Blue Bay Fund I so unique. My capital partners are investing in my company, Blue Bay Fund I, LLC (the Business Market). The company is investing in real estate (the Hard/ Tangible Asset Market). Yet the manner by which I invest in real estate is uniquely different. While every other syndication is raising capital for equity, I raise capital to then deploy that capital into debt. I believe very much, that investing in debt is the safest and least risky way to invest in real estate. And when we invest in Debt we are playing in the Paper Asset Market (not so much the digital asset market … yet).
What is the most proven business model?
Look at any downtown skyline. Consider all the tallest, grandest-looking buildings. Whose name do you see at the top of those buildings? Is it ABC Construction LLC? Is it Reno Houses LLC? No, it is Bank of America, it is Chase, it is Regions, it is Capital One. Banks own the best buildings, and it's because their business model has lasted for millennia: lending.
Blue Bay Fund I invests in real estate by, with, and through the Paper Asset Market. We make loans secured to real estate. These loans are secured via a security instrument called a mortgage, deed of trust, or state-dependent security deed. In exchange for our loan, we receive a Promissory note, signed by the borrower, which obligates the borrower to not only pay back the loan but also perform according to OUR terms set forth in the loan. I and my partner investors make the rules that everyone else plays by. And for this unique investment strategy, here’s the icing on the cake, should the borrower not perform according to our terms, we can take the property back through a legal action called foreclosure. You may wonder, “Well, how is investing in loans playing in the Paper Asset Market?” Glad you asked. The Promissory Note, for lack of a better description, is legal tender. We can borrow and we can sell those notes. These Notes are, in fact, paper, much like a stock certificate, yet they are secured to a hard tangible asset and are made available through a business. Now what do you think about them apples!?
For those investors who have had their curiosity piqued, let me provide you a few courses of action. Number 1, you can think that this is great information and then continue on with your day, and continue to invest in the market choice you have made, using the same strategies as before. Number 2, you can reach out to me and schedule a call via the button below or shoot me an email at investor (at) bluebayfund.com. Number 3, you can watch my Fund Presentation, where I discuss in more detail what makes Blue Bay Fund I so attractive, or Number 4. If you are interested in more investment education yet do not want to get pitched an investment opportunity, you can join my Investor Club. My Investor Club is simply a weekly email that goes out to my investors and offers real-world investment education and my opinion of what’s happening in the world of real estate. The choice is up to you. I trust you will have a fantastic rest of your week. Please feel free to reach out should you ever have a question. May God bless you and these United States of America
