You buy equity. You're last in line. Your money is committed for three to five years, and what you make depends on what the asset is worth when it sells. You get a projection and a wait.
That seat is fine. I own plenty of it. But it's one seat out of several, and the reason you keep getting shown it is that it's the seat sponsors need filled, not the one that necessarily fits you best.
Here are three others. I'll use what we're actually doing this year as the example, because made-up examples teach badly.
SEAT ONE
Be the bank
Every business you've ever admired had a stretch where it needed money faster than a bank would move. The bank isn't wrong to be slow. It's underwriting a five year relationship. The business needs an answer this week.
That gap is a business. Somebody funds it, and they get paid for speed rather than for taking a view on where the economy goes.
The thing to understand about lending to small businesses is that the whole game is spread. One borrower going bad is not a risk, it's a certainty at some volume. What matters is whether you've done enough of them, across enough industries, that the bad ones are already priced in. This is why a book of a hundred and fifty loans across eighty industries behaves nothing like a book of ten.
It's also why the honest question to ask any lender isn't what they yield. It's how many loans they've made and what happened to the ones that went wrong.
WHAT THIS SEAT IS FOR The part of your money whose job is to pay you rather than grow. It competes with bonds and CDs, not with your equity positions. You get paid monthly and you're not waiting on an exit. |
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SEAT TWO
Own the boring business
Here's a number worth sitting with. A software company trades at twelve times earnings or more. A paving company trades at three to four.
That gap isn't a reward for taking more risk. It's a reward for showing up somewhere nobody else wants to be. The seller is 63, has no succession plan, and there are three plausible buyers instead of thirty. Price follows the number of bidders far more reliably than it follows quality.
The part people underestimate is what comes after. Buying cheap is the easy half. The hard half is that these companies usually run on the founder's memory. No systems, no reporting, no second layer of management. We spent the last twelve months building operations, accounting, IT, finance, and go to market across the platform. None of that is fun to write about, and it's what separates a group of acquired companies from a platform.
If you take one thing from this section: the multiple you buy at is decided by how few people want the deal. The return you get is decided by what you do in the twelve months after.
WHAT THIS SEAT IS FOR Growth that isn't priced by a market. This doesn't move with the stock market and it doesn't move with traditional real estate. Cap rates and rents don't set the outcome. Roads get repaved in any economy. |
SEAT THREE
Sell time, not money
This one most people have never heard of, and it's the most interesting of the three.
A sponsor has a property under contract. The lender is ready. They need ten million of equity and they've raised eight. Closing is in three weeks.
Miss that date and the deposit is gone, the seller moves on, and the rate lock expires. All three cost more than the money does. So the sponsor has three options. Call every investor again and hope. Give up a piece of the promote they spent a year earning. Or borrow the gap for ninety days, close on time, and finish the raise from a position of strength.
The third option is usually the cheapest, even at a rate that sounds expensive, because it's paid in months instead of in a permanent slice of the deal. That's the part worth internalizing. A high monthly rate on a short clock is often cheaper than a small percentage of forever.
We've done more than a hundred of these. The lesson that took the longest to learn is that you aren't underwriting the property. You're underwriting whether the sponsor can replace the capital on schedule. Those are completely different questions, and the second one is far more knowable.
WHAT THIS SEAT IS FOR Money you want working but not locked up. Be clear on the tradeoff. The timing is the least predictable part of it. A thirty day loan can run a hundred and twenty while a sponsor finishes a raise, and there's no monthly check while you wait. The collateral behind it is the strongest of the three. |
The three side by side
Stacked by how long your money is committed:
Seat | Committed | Paid | You're betting on |
Sell time | Months | At exit | One financing closing |
Be the bank | A year | Monthly | Spread across many borrowers |
Own the business | A couple of years | Along the way, plus a buyout | Operators doing the work |
Read down the last column. Three different things have to go right, and none of them is the same thing. That's what people mean by non correlated, and it's a much more useful definition than the one that involves charts of gold prices.
None of the three needs rates to fall or cap rates to compress. That isn't luck. It's the filter we run everything through.
Tax strategy before year end
Entity structure, timing income and expenses, what to do when you're sitting on a large gain, and the places most people leave money on the table.
The one I want to spend real time on is equipment financing. Bonus depreciation is back at 100% and it's permanent now. Put roughly 10% down on a piece of equipment, finance the rest, and the full purchase price is deductible in year one. That's a first year deduction of about ten times what you actually put in.
Whether that loss can offset your active income comes down to how the deal is structured and to your own situation. That's most of what we'll cover.
All three of these are open right now. I'm not putting terms in a newsletter, because what fits depends on what you already own and what's already paying you.
If you want to see how one of them actually gets underwritten, I'm happy to walk you through a real deal. What we looked at, what we passed on, and what has to go right for it to work. Grab time here.
- Sam
