Why Many Real Estate Investors CAN’T Understand Private Equity (the untold truth) – Natu Myers – Investment Banking
And probably unless you’ve been involved with over nine figures in capital raises for private equity deals, the mental models by which you understand everything are probably flawed and you’re probably confused when it comes to the structures and the entities in raising capital. And even from some of the top professionals in the field, you may be deceived in how everything works.
And I’m going to show you why right now.
So. What is a mental model? I mean, the way by which you understand, like the ways and the structures by which you understand how private equity laws work, how, you know, the deal structure and the capital structure and how all these things work, it’s very likely that the way by which you, the mental models by which you understand these things are broken.
And I’m going to walk through exactly probably three main things that are probably broken about the mental models of how you understand all this stuff. So, what is a mental model to begin with? So if you watch, if you look at a map of a country, you can probably see that when you have a map of a country, the map is not actually what the country looks like.
The map is just a mental model of what it looks like if you were to… Uh, look at it from far away. And so if you look at, for example, the map of the United States, there are no, like zigzaggy lines and the rivers and the mountains and everything. They’re not exactly as it looks like on a map. The map is just an abstraction away to help you understand what it looks like.
So it’s an, it’s a model. And so in our brains, we have the same thing. We have these images that we conjure up so that we can understand and make sense out of our world. And these are called mental models. For example, If you try to understand, try to explain something theoretical, or something that we made up, like a country, you know, a country is really just a human made thing.
So we have all these mental models to understand it. The real world, outside of humans. There’s no such thing as a country. So when it comes to capital raising, the main mental model that is probably broken is what you call exemptions. So nobody really calls an exemption, an exemption, and people call exemptions, funds.
They call things all these names, but one of the easiest ways to have mental models that are more close to reality in the industries of private capital raising for real estate or M and a private equity is number one. When you look at. The laws of the land, right? So, an exemption, so basically, to keep everything basic, in the 1920s, in the United States of America, you know, after, one of the things that caused the Great Depression were people who sold investments to people who weren’t suitable for these investments.
For example, investments in really… questionable companies, sketchy companies that didn’t produce a good return. So old people who spent their whole life saving money went to invest in companies because they were pressured by ultra high pressure salesmen and a lot of them lost all their fortune. As a result, what happened is the securities commission was a new entity formed to help people to help protect those investors from selling deals that weren’t So the market split into two that you start to have publicly traded companies that could launch to be sold.
For example, anybody can buy shares in Apple stock right now because those are publicly trade companies and they are registered with the securities exchange commission. And then you have other types of companies that don’t register with the securities and exchange commission because they’re not listed on a public exchange.
These are called. Private, private, these are private equity companies. Private because it’s not publicly listed. So, they’re exempt from the registration requirements. But, because they’re really complicated investments, they have to be exempt from registration requirements because they’re more sophisticated investments and It requires a lot of people.
They have to, you’re exempt from having all the reporting and paying a lot of money to go in and exchange. So it exempts you from having to go through the normal registration requirements to sell your deal. So basically you can sell your deal, but then those exemptions require you to have a lot of rules and disclosures so that, uh, you can help, you can make sure that the only two people that are investing in your deal are people that are number one, smart enough to invest.
Number two, rich enough to invest. Such that they don’t lose all their money for no reason it could still happen, but it’s far less likely so Um, that’s pretty much it. And these are called exemptions and in within any commonwealth country You have the 506c exemption. Well, this is in america alone America is not commonwealth exactly but In America, you have these exemptions, which are the rules by which you can offer your private equity deals.
And then five, the 5 0 6 C by regulation D 5 0 6 C is the most popular exemption in many ways because it allows people to raise an unlimited amount of capital. 5 0 6 C is not a fund, is not a, it’s not a company. It’s not a fund. You’re not registering with the SEC. It’s simply an exemption that exempts you from the registration requirements because it allows you to sell your deal in a private equity market, not publicly listed to investors for whom, for whom those investors were suitable.
And so that’s pretty much all it is. And those are exemptions. It exempts you from having to do that. So that’s number one. Number two is probably the, um, the deal structure and the share structure. So because all these rules, file 60 regulation CF, um, you know, private placement memorandum and all these things, these things are exemptions.
And then the actual deal, the actual shares and the. Those are different things as well. So whenever somebody has a quote unquote fund, all a fund means it’s not a word. So the word fund is not something that is really quote unquote, really that defined the hedge fund and all these things. A lot of these words are not really defined within legislation.
So because of that, a lot of people colloquially use these words to, and then they have a kind of a fuzzy meaning because it’s not like exemption. These are things that are written in law, but then when it comes to things like hedge fund. There is nothing that really says what a hedge fund is. So it has a really fuzzy description.
So, really, when people say fund, or private equity fund, what many people are referring to, they’re referring to having, so the most simple version is having a general partnership. Which is a type of company that takes liability. They take blame for the types of deals that they invest in. And then there’s a limited partnership, which is a company, another company that has limited liability.
They take limited blame for the types of deals and the types of decisions that they make. So. What a lot of people do, they have a general partnership company, which is usually an LLC or a corporation. And then you have a limited partnership, which is actually called a limited partnership. And what a lot of people do, they set up the general partnership as a company that chooses to invest in a lot of their deals.
Like they choose to invest in, um, Like they, they make the decisions in how they invest in deals and they put 20, like, let’s say 10 percent of the money that they’re investing, they would invest. And then they create another company called a limited partnership. A lot of the time where they choose to, um, direct where other people’s investments goes by them.
And in limited partnership, what a lot of people do, they offer shares, not really shares. You can call them membership interests or units of the limited partnership. So, you know, when a company raises, like when a company goes public or when a company is selling its shares, you. You can, you can buy shares.
So same thing with the limited partnership. People are buying units of the limited partnership price, like one unit, maybe 1. And so the units entitled the people to get the return that the, that the deals is promising. So at the end of the day, all that is just really the structure of how the companies are set up.
And people are buying a portion of all the units or sometimes shares of the companies or the partnerships. And so that’s basically all a fund is, is just really just. Being able to buy share access to shares in a company or companies for that to entail you to certain benefits. Many of those benefits are money and whether the money looks like income you get or it looks like something that grows in value that you can sell later, that’s really what you’re getting.
So at the end of the day, the exemptions are things that are how you sell those shares. So the fund is independent of the exemption, right? Because how you sell those shares can be through an exemption or it could be through public listing or it could be through whatever. And shares membership, interest units, it’s really all the same thing.
It’s percentages of a company and at the end of the day, the company has to be registered within, uh, within the country. And a country. That’s the foundation by which companies can be registered because companies are legal entities that are non-human, that are bound by the gov. The government of that regulates it.
And so that’s pretty much it for that. Um, and I guess when you look at it, a fund is really just a loose definition and it could mean all these things. But the only two definitions, the only two or three things that one really needs to know to have the right mental models to navigate this world is really number one, the exemptions and the rules by which you can sell your deal.
And then number two, the actual companies and the companies and the How many companies there are, and then number three, when you sell the deals, how is it being sold? Is it through which exemption or which rule? Is it a public equity or private equity? And what units or shares are being sold? And that’s pretty much it.
And you know, and again, like syndication, all this stuff. It’s just, you’re offering equity units, you’re offering equity units in the form of, it could be shares, it could be limited partnership units, percentages of a company, which entitles somebody to get a benefit. And then that’s pretty much it. And everything else really is just a distraction or a flimsy definition that isn’t created by, you know, a governing entity.
And any word that usually isn’t created by a governing entity can fall subject to a lot of like fuzzy definition or vague definitions. When you look at what the rules say, and then you build your mental understanding around what these words mean, it can help you build like a map for you to understand what the heck is going on and nobody can deceive you.
So this So who am I and what am I talking about? Well, my name is Natum Myers. I run a company called raises. com where we assist sponsors, either real estate investors, uh, and more, you know, to just set up their syndication of funds in two weeks or less and then hit the market and raise them 10 million plus.
And if this is something in the world of what you’re looking for, just head to raises. com to make it happen.
Go to Raises.com/website to book a call as well for your equity fund.
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