How Private Equity Deals are Allowing Investors to Regain their Freedom by Being Passive

School has started, the holidays are coming up, and it seems like daily life is not slowing down anytime soon! With such busy schedules, it’s hard for investors - especially those that may still have their W2 job - to spend time actively hunting for investments. Investing into private equity firms give investors everywhere the ability to take back their time for other priorities in their life without having to sacrifice their investment portfolio. Building wealth doesn’t have to be exhausting, and Neal Lee of NHK Capital Partners joins me today to give a real-life example of how private equity funds work and how they can allow investors to be passive.

Sarah: Thanks for joining me today! Let’s start by having you tell me about yourself.

Neal: Thank you for having me. I’m Neal Lee and I'm one of the founding members of NHK Capital Partners. I run the day-to-day of NHK. I come from a real estate investment/development background, and I started my career with a larger outlet. They had a construction arm, a development arm, and an investment arm. That was a very good introduction to the commercial real estate space for me, because I was able to experience the asset management side of it, the portfolio management, the investment side, as well as the development. As you know, these are all very pertinent aspects of commercial real estate developments and investments. In 2013 after I got my masters from MIT, I got to learn about a federal investment program that was gaining traction called EB-5, from a good friend I met while at MIT.  I joined NHK’s sister company CMB. CMB is a leading player in the EB-5 space.

Sarah: Now, what exactly is EB-5?

Neal: EB-5 is a federal program that grants permanent residency to foreign investors who contribute to the US economy by creating new, permanent American jobs through their investments.

Sarah: Interesting, thank you.

Neal: Of course. So, at CMB I helped underwrite over $2 billion in new deals in commercial real estate, and overall, the company has over $3 billion in AUM and represent close to 6000 EB-5 investors. After a while - after these investments came to maturity and now that our EB five investors were getting their capital back - the question ‘what's our next step’ naturally came up about.

Sarah: Always. Investors and deal sponsors alike always have to be thinking five steps ahead.

Neal: Exactly. So, myself and my principles came together and created NHK back in 2018. NHK Capital Partners was our response to the demand from our existing investors.

Sarah: What was your business model? How did you structure NHK Capital Partners?

Neal: We structured it as more of a traditional private equity platform. We aimed to bring our institutional quality and investment opportunities in the commercial real estate space to our individual investors.

Sarah: I love that. I know that a lot of people that are using self-directed IRAs are interested in commercial real estate investing. What if somebody is not familiar with this, though? How does NHK Capital Partners help someone understand commercial real estate investing?

Neal: We believe in the right education. I think you first need to understand how the investment works. A common approach to commercial real estate investing for individual investors would probably be through buying shares in a REIT, right? REITs are publicly traded, so they're easy to buy. Whether it's multi-family oriented or hospitality oriented, they're easy to buy and sell. However, you don't get to control your investment. A typical way of getting exposure to the commercial real estate space would be to partner up with additional or other investors to create a larger fund.

Sarah: How hard is it to do that?

Neal: It requires you to be more of an active investor because you would have to now spend your time learning how to administer and operate that investment. That’s where NHK provides education about private offerings. These are what we offer at NHK and they can help SDIRA account holders to diversify their investment into commercial real estate without one having to be an active participant. For example, our limited partners take advantage of being a passive investor in commercial real estate developments and I would say most private offerings would follow this trend.

Sarah: That’s great. What is a common way these are structured?

Neal: In the case of NHK, our offerings are structured as a partnership. I would say this is often seen. So, our investors are admitted as limited partners on a passive platform. The general partner, which in this case would be us, would act as the day-to-day manager of that investment.

Sarah: And do most investors prefer that the general partner has most of the day-to-day management responsibilities?

Neal: I think a very big component as to why the private offering model works well is because it is an alternative way of getting exposure into commercial real estate while being able to diversify. So, I would say so. We are seeing crowdfunding grow right now. I think the differentiator between a crowdfunding platform and a private equity company (like NHK) is that the fund has skin in the game. This is important because we're not just a promoter; we're actually investing alongside our investors as fellow limited partners. That creates this alignment of interest between that general partner and the investor.

Sarah: One thing that you mentioned that I wanted to go back and touch on a bit more is the passive aspect of it. That’s huge for Self-Directed IRA investors. Besides the example you just gave, what are other reasons why would someone want to be passive and why would a private equity investment be a good investment for this type of investor?

Neal: Commercial real estate space is very complex and typically requires millions if not tens of millions of dollars of investments and they're highly leveraged. There are all sorts of things specific to that investment that can and probably will come up. This is when you really do need an expert and a team to manage that investment. These private offerings, like those on our NHK platform, provide that ability to partner up with an expert group to help with originating the investment, finding the investment, but also managing it all the way to a successful outcome. That’s probably the largest reason that I can think of why someone would want to be a passive investment partner. A partnership or limited partnership is more conducive for a SDIRA holder.

Sarah: Good points, and I would agree. They can also be great because, as we know, in order to reap those self-directed IRA benefits, the investors need to keep the funds in their IRAs for a certain amount of time anyways, so they may as well let their money work for them and let it grow while they're still working!

Neal: Yeah, absolutely.

Sarah: What are some questions or due diligence considerations that potential investors should be asking themselves before getting involved in a private equity deal?

Neal: Great question. I think the best advice is to stick to common sense. Underneath all the trends, fancy models, and numbers with 7, 8, 9, and 10 zeros is underlying common sense, right? Taking an example of a single-family residence, one thing that we do as investors at NHK, we pull independent third-party data and reports from market research firms and appraisal firms, we learn how to be competitive in the marketplace, we analyze budgets, we consider what sort of timeframe and what sort of return we will make at the end of that investment.

Sarah: That’s a good answer. We actually have a good due diligence article on our page that investors can read more about if they’d like. As a follow-up what should investors be cautious about with these types of partnership deals? Are there things to consider when getting involved?

Neal: In general, a private offering is usually open to accredited investors only. That means it is only available to investors who qualify as an accredited investor and it’s important to realize that there are rules surrounding your credit - either you have a million dollars in your in assets or $200,000 annually in income for the last two years, or if you’re for $300,000 with your spouse. The good thing is that the market value of your IRA counts toward that million-dollar accreditation criteria. There is definitely a high barrier of entry for these private offerings, if you will. Additionally, private offerings are typically illiquid, meaning once you're committed to it, you're in it for the duration of the investment. It could be hard to exit prematurely before the conclusion of the investment. Personally, I think those are probably the items to make sure you understand.

Sarah: Exactly, and like you said, that’s going to be typical across the board. It’s important to ask yourself those due diligence questions before entering into an investment of any sort. What is one thing you and NHK Capital Partners learned while navigating COVID?

Neal: We saw this trend of people moving away from heavily dense urban centers to more suburban settings due to the ability to work from home. So, an interesting design factor that we definitely implemented for our business at our clubhouse was to have a dedicated space for an office. That was the first thing we did. I think COVID threw a big wrench in everyone's life, especially those of builders and developers. We saw a rise in construction cost so we shifted our focus to acquisition deals. We were never bound by an asset class and we were never bound by a single purpose. COVID taught us to see different opportunities.

Sarah: Great answer. It’s all about being able to adapt. Last question here, whether it be you or anyone in the space, how often do we typically see projects getting extended? Is it the norm for things to finish on time?

Neal: You know, it really all just depends. It depends on what's there to begin with, what has to get done, and things like that.

Sarah: Do you have any final remarks?

Neal: Go with the investment that best fits your needs and aligns with you. At NHK, I mentioned our goal is to bring institution grade investments to our individual investors through structuring them as partnerships and providing private offerings to these to these partnerships. While we started in 2018 and are still very young, we’re very active. Our first deal was actually a ground up real estate multi-family development in San Antonio and we exited at the end of last year. Our mandate is to create the maximum value for our investors. So, quick plug for ourselves, not only do we truly handpick and make sure that our investments are good for ourselves, but investors also find that our team has the experience and the expertise to walk through these investments with our investors.

Sarah: Awesome. So, if somebody wants to learn more about these types of deals, and maybe specifically the ones that NHK offers, where can they go to learn more about what can be expected?

Neal: We have a website NHKCapitalPartners.com. Investors are more than welcome to find us there. We have a “Contact Us”. Our team will respond in 24 hours.

Sarah: Great! Well, thank you for joining me today!

To learn more about passive investing or NHK Capital Partners, click the hyperlinks to be redirected to more education! As always, to ask an IRA Specialist how we can help you!