After investing $100M+ in real estate for our investors, I feel a tad differently about this topic.

Real estate is a great asset class, but it’s an operationally intensive business. A lot of the job is damage control because sometimes… things go horribly wrong.

Here are my top 10 investment property nightmares:

1. A Texas tornado.

I received a Google alert about a tornado in Austin, TX where we owned some property. Anxiety inducing, but I thought, “Hey Texas is huge, what are the odds”...and then went back to work.

A few hours later, I received pictures of my now roofless house.

“Mailbox money baby!”

It could have been much worse, thankfully everyone was fine.

Ended up being $50K in damage. Insurance wanted to pay $12K; I fought them higher but had to come out of pocket ~$30K.

2. Tenants turned house into a dog breeding business.

This was not cool.

Dogs are great. I love Lucky, our golden retriever. Maybe that’s why I tended to look the other way on tenant rules involving pets.

But 10-20 dogs in one home!

The smell was so bad contractors refused to enter for basic repairs. When the tenants moved out we did a ton of rehab work. The home looked spotless, but nobody would rent it. No matter what we did, the smell flat refused to go away.

Ultimately, I ended up paying up to replace all interior surfaces including ripping up the floors to swap out the subfloors. One year of zero rental income.

3. Hurricane Irma.

24 hours of watching the storm torpedo directly toward our property like it had a tractor beam on it.

Direct hit...you sank my battleship.

Stressful couple days. Pictures from the staff looked bad, but the damage was actually pretty minimal - just a couple days of clean-up and rehab work. Crisis averted, but new grey hairs never turned back.

4. An Ivy League lawyer tenant with a biker-gang boyfriend

Perfect tenant on paper. But her new boyfriend, not so much. Lots of Police reports and property damage. My favorite was they decided to set up their own net-less driving range on the roof. Frequent calls from the neighbors yelling about all the golf balls flying around the community. Neighbors must not have been golf fans.

This led to a drawn-out eviction from a professional tenant that could do her own legal work. Good times.

5. Getting sued over a ~1 inch “curb” at a property management office.

Speaking of legal, these fun frivolous lawsuits are typically lawyer driven scams. They’ll send staff to properties looking for fringe ADA access violations and then recruit tenants (who were not at all handicapped) to manufacture a complaint.

I fought it for awhile on principle, but ended up writing a small check to make it go away / avoid wasting more time.

6. A lift station failure.

If you don’t know what a lift station is, I envy you.

Hydraulic pump failure + sirens in the middle of the night followed by “Black-water” overflow. Which is a nice way of saying there was ‘you know what’ all over the property. Environmental agencies, city involvement and a couple scary letters with large proposed fines if not resolved quickly.

There was a much cheaper way to solve, but ultimately went with a more permanent (expensive fix) as I was losing sleep over the possible fines.

7. The Hoarder

Basically needed a hazmat suit cleanup crew. They found a surprising number of cats.

8. The flood that wasn’t possible

Property was near a river but not in a flood zone. Had engineers assure me a flood would never happen. Well, things happens. Got the call about the flood the first day of a summer vacation. At least the wife and kids had a nice time. I think. I was glued to the hotel room all week dealing with the resulting fallout. Then spent much of the next year coordinating with various state agencies to rebuild infrastructure / trying to fix the property.

9. Property Manager theft

She was leasing vacant units, not telling us and instructing these tenants to pay her management company directly. Small oversight in her genius plan: when there is a plumbing problem and you don’t answer the phone, angry mothers will go to the edge of the earth to find and yell at the actual property owner to fix it.

10. The mystery water leak from hell

Utility bills started spiking from $5K to $30K per month. Couldn’t find the leaks for months. I can still remember the sting from seeing that bill each month. We had a revolving door of specialists at the property with state of the art diagnostic / leak detection equipment. They each spent days onsite, looking like Landman wildcatters searching for oil.

What did they find? Bupkis.

Still not certain, but it was likely pin hole leaks in the galvanized pipes throughout the property.

It took a ~$250K water pipe replacement for the entire 10 acre property to resolve.

Conclusion

Most of the time real estate works out great. But unless you get really lucky, bad + annoying + expensive things are going to happen. These events seem to compound over time by the number of properties you own.

Don’t get me wrong, it was worth it for that part of my career. The returns were stellar.

But over time I started caring about something else.

Hassle-adjusted returns.

Today we still invest heavily in real estate. However, we only partner with talented, regional operators (who love the game) instead of running properties ourselves.

We invest via real estate debt and income strategies that tend to generate monthly cash flow without the operational headaches.

Same asset class, just without the drama.

That shift led us to build Evergreen Income for our clients, which is a model focused on private income investments designed to produce defensive cash flow at much higher potential yields than bonds.

If you’d like to learn more or see what we’re currently recommending to clients, reach out to our team at info@evergreencap.com

- Brad Johnson

People want things to be binary, but life is a spectrum.

Investing would be simple if we could just rotate back and forth from 100% exposure to 0% exposure. All-in when values are cheap, all-out when things get expensive.

Unfortunately, that is an impossible way to invest. Nobody can time the market with any real consistency. Even if they could, the ongoing capital gains taxes would erode much of the benefit.

But…if you were dead set on trying.

I think you’d have a decent argument to dump your stocks and head to the beach.

Ok, so the market is rich.

Does that mean bubble go pop?

Nope. The market is maddening in this way. Markets can stay expensive for years. Or longer.

• Maybe this time is different.

• Maybe this is a new paradigm.

• Maybe these are dangerous words and these firms are grossly overspending on AI infrastructure? Who knows.

What we do know is most of the Mag 7 are far better businesses than the average S&P holding over the last 100 years. Plus, today’s valuations are being supported the constant bid from passive ETF flows (that could care less what valuations are).

In other words, irrational and unstoppable are two entirely different things.

However, if your portfolio is 100% the S&P, you are very long and very correlated to just a handful of mega tech firms.

So what’s the alternative?

1. You can white knuckle the volatility and hope the music keeps playing.

2. You can can ping-pong between total exposure and zero exposure.

Thankfully, there is a 3rd option. You don’t have to sell everything.

You don’t even have to guess if the market is expensive.

You can just trim.

If your target allocation is 60 percent stocks and it drifted to 80 percent, that extra twenty percent is no longer a reward for being right. It’s concentration risk well outside of your investment plan.

Rebalancing is what endowments and the largest family offices do. They don’t chase heat. They harvest it.

And while the US looks expensive, other pieces of the puzzle are not. Small caps are priced near recession territory and real assets including real estate, infrastructure are among the only areas that screen cheap on a relative basis.

We’re not trying to make a heroic call on small caps. The point is simple. You don’t want a portfolio that only works if US large caps stay hot.

Rebalancing doesn’t mean selling stocks and sitting in cash. It means redirecting gains into areas that are actually priced for forward returns rather than past performance. That’s what professional allocators have done for decades while the rest of the market piles into the same handful of mega cap names.

That doesn’t require a prediction. It just requires acknowledging that the next decade may look different than the last. If your entire plan depends on the same winners repeating their last decade of returns, you’re not diversified.

So instead of timing, we trim. Instead of predicting, we process.

That is how you stay invested without being reckless. That is how you compound without pretending you have a crystal ball.

Best,

Brad

PS - If your stock exposure has drifted way above target or you feel stuck because of embedded gains, reach out. We can walk through options that manage taxes and rebalance to a diversified portfolio.

Click here to schedule a strategy call.

“There are only two places where socialism will ever work - in Heaven where it isn’t needed and in Hell where it’s already in practice!” - Churchill (allegedly)

Utopia is a lovely thought.

But, I’m hopeful today’s youth will grow up, get married, have kids and realize socialism is a pipe dream.

You can’t vote your way to prosperity.

But I get it. The “promise” of a college degree landing you a high paying career and a home with a white picket fence isn’t panning out for a huge percentage of the population.

And they’re not happy about it.

The restart on student loan payments is probably adding fuel to that fire.

Politics is a nasty business best ignored most of the time.

But professional investors don’t get to dismiss the widening gap between the ownership class and the labor class.

Because this is a slow-motion train wreck.

Owners have largely sidestepped rampant inflation thanks to booming financial markets. The “wealth-effect” is powerful. It’s a lot easier to stroke that big vacation check when your net worth keeps climbing.

But as the wealth gap and fiscal deficit widens, the political response is following a predictable (and brutally effective) script: promise more free stuff!

• More spending.

• More redistribution.

• Higher state taxes (at least on the coasts).

• And more creative ways to paper over the imbalance.

Just as you can’t vote your way to prosperity, you can’t print your way either.

And yet, every political party seems comfortable with both.

It’s just taxation by another name.

Conclusion

Local politics are weird - especially in large cities - so I don’t want to place too much importance on recent headlines, including New York’s mayoral election.

My guess? The story fizzles in a few years with a new moderate Mayor just like San Francisco’s flirtation with outright socialism.

It situations like this it pays to remember: America remains undefeated.

However, if your mission is to deliver after-tax alpha over decades, you still log the data point.

It’s a reminder that the people voting for “free stuff” don’t own anything - and ownership is increasingly the only way to win in the modern economy.

Because Politicians preaching discipline, austerity, or self-reliance don’t get elected.

So while artificial intelligence remains the wild card, the current path is clear:

1. Persistent inflation (in the headline numbers or just in the services you care about…like health insurance).

2. Growing pressure from city and state politicians to raise taxes on high earners.

Tax rates should obviously stay flat in more business-friendly states and under current Washington leadership, but excessive spending and money printing still function as a stealth tax on anyone earning ordinary income or holding dollars instead of productive assets.

Monetary debasement isn’t a tail risk; it’s policy.

What are investors to do about this?

Accumulate more tax-efficient ownership and investments. That’s what the government wants and incentivizes, so lean into it.

Whatever comes, the antidote to excessive inflation and taxation is simple: own scarce, high-quality assets that work when you don’t.

Best,

Brad Johnson

Evergreen Capital

info@evergreencap.com

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The information discussed herein is for informational purposes only, and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The contents of this presentation are not provided regarding your specific investment objectives, financial situation, tax exposure or particular needs. Past performance as well as any projection or forecast used or discussed in this presentation are not indicative of future or likely performance of any investment product. To the extent provided, target returns are presented in order to help prospective investors understand the applicable investment strategy in comparison to other investment strategies. Targeted investment characteristics and return profiles are for informational purposes only, are not indicative of future results, and are not guarantees.

If you’re a father, you probably have all the required skills to be a world class investor.

Don’t believe me? Here’s my proof:

1. Dads remain calm under fire.

Situation: Your wife panics over the news that plastic is apparently in “everything.”

She goes on a 10 minute tirade, something about how we’re all being poisoned. At one point she casually throws you under the bus for “buying all that cheap water in plastic Arrowhead containers instead of glass.”

Maybe she’s right.

But as a kid you basically drank lead from drinking fountains and ‘the hose’ and you’re fine (probably). Are Dads wild about consuming plastic, no but we don’t immediately panic and start boiling our bottled water.

This is no different than the market freaking out (aka crashing) over the latest headline in the Wall St. Journal.

The Dad / investor solution:

Let her (the market) rant and rave and wait the crazy out. Dads don’t panic.

Okay Brad…I think I get the premise of this article, what other proof you got?

2. You read. This includes boring things like instruction manuals, contracts and financial projections.

Case in point, YOU’RE ACTUALLY READING THIS!

Who reads to learn anymore? Dads do.

ChatGPT be damned, reading is still a core skill for elite investing. Most legendary investors were described as books with legs sticking out of them.

Because with investing, the devil’s in the details.

The Dad / investor solution:

We print out an offering deck, a contract or a prospectus and snuggle up to the fireplace with our dog at our feet, a single malt scotch at our side and read every single word against the crackling light of a holiday fire….like a complete psychopath.

Sure, Dad will likely take a halftime cat nap, but dollars to donuts, he’ll get through it eventually.

Because Dads have a high pain tolerance for boring text. This is probably a boring investing newsletter, yet here we are.

Because there might be a faint, tiny, sliver of a nugget of wisdom in here that could improve our ability to generate wealth for our respective families. So we read.

Okay, that’s a good point, what else?

3. The one time that pretty Starbucks Barista said that nice thing to you and you didn’t proceed to blow up your life.

You walked away with a skip in your step thinking, “hey, the old man’s still got it!” Conveniently ignoring that she works for tips.

She’s the equivalent of that alluring copper mine investment your buddy keeps telling you about. It’s the siren song of quick riches tempting you to risk it all.

The Dad / investor solution:

Stay the course. Stick with diversified investments that generate a lot of cash flow. Not that this was even remotely an option, but Dads don’t get to run off to Mexico with Coffee Lady. Nor can we bet the farm on long-shots.

However, apparently we CAN mix metaphors - sorry, I’d edit more, but it’s Sunday and Dad’s got a hot date with Home Depot.

“Ummm, #3 was a stretch, but we’ll allow it. What else?”

4. Your family spends money like it’s burning a hole in their pocket.

Sports clubs, private school, summer camps, health insurance, home renovations, the extra winter vacation (where the heck was “Ski Week” when we were kids?), etc. etc.

Nobody is going to shed a tear for high-class problems. But no matter what wealth category you’re in, the level of spending (and price increases) is crazy and will not stop.

Sound familiar?

Even if you’re not a Dad, you feel this. This is our government.

Therefore, you have to factor insane fiscal spending and expense inflation into your investment decisions. You’ve achieved a lot. But these days staying still is going backwards. You have to compound capital.

You need to own quality assets that have pricing power to outpace inflation.

The Dad / investor solution:

Dad occasionally puts his foot down on some nutty expense, “NO, for the love of God you cannot have a third Virgin Pina Colada!”

Then you mutter something under your breath about how your childhood “luxury” vacation involved an RV, a tent and a sack lunch…

AND THEN, you go make more money.

You get a promotion, you expand your business and/or you make new investments that bring in monthly income not tied to your effort.

Because at the end of the day, Dad gets it: nobody cares if the goal line keeps moving, just do your job.

5. Dads take calculated risks

• When there’s a scary sound coming from the garage who grabs the bat and answers the call?

• When it smells like something died in the attic, who investigates?

• When a giant spider darts under the bed, who grabs the flashlight and an old shoe?

Well it’s not mom. It’s Big Poppa.

Is this sexiest? Yep, this definitely sounds sexiest. Sincere apologies to our one female reader. I get this isn’t written in stone and obviously women are capable of handling these things. They’re probably too smart to deal with this nonsense.

Regardless, all I know is, just like scooping up rotting dead animals, investing is not for the faint of heart.

The Dad / investor solution:

You take calculated risks. Dad doesn’t get to put his head in the sand. It’s uncomfortable making new investments that may or may not work out. But as my Texas investor friend says, “You have to risk it to get the biscuit!”

“100%, great we’re back on track, now let’s land this plane. To your point, I also have a lot of Dad stuff to do.”

6. Dad pays up for quality

Dads will cheap out on plenty of things (ex: haircuts), but they don’t cheap out on things like tools, suits and golf clubs.

If it’s important - and we expect to use it often - we’ll pony up.

The Dad / investor solution:

Dads pay for quality items and quality investments. Because quality endures and outperforms when the market inevitably turns.

Now, not every Dad is a great investor. We can’t do it all and some Dads aren’t as interested, so they outsource.

But somewhere in every great investor lies a devoted and patient Dad.

Best,

Brad Johnson

Evergreen Capital

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The information discussed herein is for informational purposes only, and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The contents of this presentation are not provided regarding your specific investment objectives, financial situation, tax exposure or particular needs. Past performance as well as any projection or forecast used or discussed in this presentation are not indicative of future or likely performance of any investment product. To the extent provided, target returns are presented in order to help prospective investors understand the applicable investment strategy in comparison to other investment strategies. Targeted investment characteristics and return profiles are for informational purposes only, are not indicative of future results, and are not guarantees.

Should happen never means will happen.

I can already hear my kids saying, “Um….thanks, Dad.”

But internalizing this obvious statement is critical to investing and life.

Why? Because there are a ton of downstream lessons that flow from this simple truth:

• The deal isn’t done until the wire hits your bank account.

• Nothing is a sure bet; there are no guarantees.

• Never quit early - fight and claw until the end.

Warning: Sports Analogy

I love the Ryder Cup.

If you’re not a golfer, stay with me for a bit.

Yes, it’s just getting a stupid little ball in a stupid little hole. I admit, most tournaments outside of the majors are boring. Want a great Sunday nap? Turn on the golf and melt into your couch to the soothing sounds of Jim Nantz.

And this is coming from a huge golf fan.

But slap a Team USA logo on it, and I am all-in. Watching guys team up and play for their country just hits different. It turns nerdy, robotic golfers into Captain America.

If you didn’t watch the Ryder Cup, here’s the gist:

America was supposed to win. The US had seven of the top ten golfers in the world, including number one.

They should have won by a lot. They did not.

They were flat out embarrassed the first two days.

I usually only watch Day 3, so I almost skipped it. Why bother? Why suffer when the US “will” lose by a landslide?

But something crazy happened.

The US put together the most impressive final day in Ryder Cup history. They nearly ran the table on Sunday’s 12 singles matches.

They were literally a couple inches from the biggest comeback in the history of sports.

My likely Sunday nap turned into the most fun I’ve had watching sports, probably ever.

Grown men were giddy watching this thing.

I know, it’s just golf, but man was it fun.

Of course, my point would be a lot cooler if they actual won. But whatever, I was moved watching our team fight like a cornered raccoon despite impossible odds.

You just never know. Crazy things happen all the time.

So keep showing up.

Because the ability to persist in the face of setbacks, unexpected events, bad news and long odds - to pursue your purpose despite lousy conditions - seems to predict success.

Yes, they lost, but heads were held sky high. Nothing left on the table.

That’s how you lose Son.

(and Daughter if you're still actually reading this).

Evergreen Companies?

The Mag 7 should remain dominant and continue to print money. At least for the foreseeable future.

That certainly seems probable. Of course a lot of people felt that way about the elite companies of prior eras (The Nifty 50, The Four Horseman, etc.).

Yet precisely zero of the top companies of 1985 and 1995 are in today’s top 10 today.

And only one from 2005 (Microsoft) and four from 2015 are on today’s list.

And yet, its really hard to image these firms being overtaken or disrupted. History suggests they will.

Then again, “history suggests” is just a fancy way of saying “should”.

So while Evergreen has an opinion on the market, we’re not going to pretend it’s correct.

And thankfully, we don’t have to. We can take whatever may come.

That’s what asset diversification (real estate, private equity, debt etc.) is for.

Off the Trail

Watching Apple lose its innovation edge shows how hard it is to stay atop the mountain.

Also, how great is this plaid shirt guy?

Of course, I’m biased. I basically have a closet full of the same navy dress shirt and the same navy golf shirt. Just a sea of sameness.

I should go shopping, but…I probably won’t.

Best,

Brad Johnson

Evergreen Capital

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The information discussed herein is for informational purposes only, and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The contents of this presentation are not provided regarding your specific investment objectives, financial situation, tax exposure or particular needs. Past performance as well as any projection or forecast used or discussed in this presentation are not indicative of future or likely performance of any investment product. To the extent provided, target returns are presented in order to help prospective investors understand the applicable investment strategy in comparison to other investment strategies. Targeted investment characteristics and return profiles are for informational purposes only, are not indicative of future results, and are not guarantees.

Avoid crazy at all costs. - Charlie Munger

This is one of an endless string of Munger quotes I plan to drill into my kids until it sticks.

That means readers of these notes will get more than their fair share as well - sorry in advance.

But this one is always worth repeating.

It was a throwaway line in Charlie’s last interview with CNBC’s Becky Quick (one of the few respectable “financial journalists”) shortly before he passed away.

It has so many applications:

• don’t be erratic

• don’t make crazy bets

• don’t use crazy leverage

• don’t date crazy women, etc., etc.

Speaking of crazy….

Evergreen Signals

This is one of the wildest stock charts I’ve ever seen.

I want to meet the man who held through this volatility.

I’m sure there are more but they probably held the stock in a brokerage account they forgot they owned.

That, or they’re deceased.

HOW else could someone have held through this insanity? The chart (not the company) reminds me of the few brave investors that held Amazon through its ~95% drawdown in 2001.

I won’t opine on whether Carvana is overvalued or not (although at a ~100 P/E multiple you can guess which way I’m leaning).

However, I am a happy customer.

I just sold my second car to Carvana, which was the catalyst for me looking up the stock (and then falling out of my chair when I saw it had surged back to $390).

I don’t know what this says about today’s market. Plenty of meme, retail-favorite stocks like Carvana seem to be booming as of late.

Generally not the best of signs, but don’t forget:

Out of the Woods

When I was young and broke, I too ate at Chipotle 75+ times in one year.

But I didn’t have a convenient “research” excuse.

This analyst might be crazy - or he might be a genius. It’s a fine line.

Brad Johnson

Managing Partner & CIO

​Evergreen Capital​

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The information discussed herein is for informational purposes only, and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The contents of this presentation are not provided regarding your specific investment objectives, financial situation, tax exposure or particular needs. Past performance as well as any projection or forecast used or discussed in this presentation are not indicative of future or likely performance of any investment product. To the extent provided, target returns are presented in order to help prospective investors understand the applicable investment strategy in comparison to other investment strategies. Targeted investment characteristics and return profiles are for informational purposes only, are not indicative of future results, and are not guarantees.

“I am an old man and have known a great many troubles, but most of them never happened.”

Any man who has lain awake with his mind racing at 2:00 a.m. knows this feeling.

It’s an unbelievable time to be alive. Life is very good for most of us, which makes it easy to start looking for storm clouds.

Case in point: according to JPMorgan’s Jamie Dimon, the economy is wobbling and could be heading toward a recession.

But it feels like I’ve seen this same headline from Mr. Dimon every quarter for the past decade. Signs of weakness are always present, but even at his lofty perch (with incredible data on the consumer), it’s still nearly impossible to make consistently accurate macro calls.

In other words, yes - there are warning signs. But Recession? Who knows, his educated guess is as good as yours.

Famous investor Bill Miller put it best when asked what worries him about the market:

“The answer is nothing, because everyone else in the market seems to spend an inordinate amount of time worrying. And so all of the relevant worries seem to be covered. My worries won’t have any impact except to distract from something much more useful, which is trying to make good long-term investment decisions.”

Now, a little paranoia isn’t the worst thing in the world - it was pretty useful during the Ice Age. Without it, we were saber-toothed tiger snacks.

But constant worry is not productive.

Thankfully, I don’t spend time worrying about markets for myself or our clients. That might be my Nordic genes. Or more likely, our long-term, highly diversified approach to investing.

The S&P 500 is just one piece of the pie. If it tanks 30% tomorrow - it will get my attention but not my panic.

Yet, I am a far cry from worry free.

If you’re an entrepreneur and/or a parent - worry just comes with the territory.

But, once again, it’s not super productive.

On the rare occasions when my wife or I find ourselves worrying a little too much (about the kids, or anything else), I try to remember that scene in Bridge of Spies, when Tom Hanks asks his client:

Evergreen Signals

The following is from Goldman Sachs’ yearly Family Office Insights Report. They interview ~250 Family Offices on various investment and allocation topics.

The below is one of my favorite questions as it shows the relative comfort of family offices investing in various asset classes.

The amount of family offices that invest directly into growth and venture capital deals (21-25%) is pretty surprising to me.

I believe most are quite bad at venture investing (aka they are lighting money on fire) and are mostly just doing it for fun.

This percentage is likely to decrease the next few years as a ton of the 2019-2022 vintage deals will lose money / underperform.

On the opposite side, I’m surprised 26-30% of Family Offices are not investing in Private Credit (debt) or Secondaries. Given the lower risk return profile / higher cash flow I expect these percentages to increase this cycle.

Out of The Woods:

This one got me.

My desk is spotless, but my browser is…not.

If you love research, this is a common problem. I’ve never been that bad, but 5 open tabs is too distracting as far as I’m concerned.

Thankfully, AI has pretty much solved this for me. If you still struggle with tab management, I strongly suggest replacing chrome / safari searches with ChatGPT or Gemini.

That or just shut the screen off more often and get outside, you’ll probably worry less.

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Brad Johnson

Managing Partner & CIO

​Evergreen Capital​

What can you stick with for an unreasonable amount of time - do that.

• This one is tough to internalize - starting is so easy. Showing up a few times is easy. Every day is HARD. Yet that's where the big money is. Skills, networks, knowledge all compound for those that stick with it.

• So while we always strive for the best investments, it’s the ones we know we can hold when times get tough (aka - you're losing a TON of money) that do the heavy lifting in the portfolio to keep investors from panic selling.

BTW - while I'll share each of these notes with my kids, I too am guilty of forgetting these principles at times.

Aka these notes are just as much for me as they are for them.

Evergreen Signals:

Robinhood was added to the S&P 500 this week. Yes...Robinhood.

‘Wall Street Bets’ favorite weapon is now one of the most valuable companies in the world.

Sidebar - I had an interviewee (who was 10 mins late) tell me this week that he LOVED Wall St. Bets and supported its mission to take down traditional finance.

To which I replied, “you know we’re an investment company, right?”

Anyways, I'm not in love with the Robinhood news.

Gamified investing, short-term thinking, zero-day day options (ZERO!!!).

This is not investing. This is a casino.

No literally. I’m not being dramatic. Robinhood takes sports bets now. Soon we’ll see Robinhood pushing parlays on Nvidia options and the Over/Under on the Broncos game.

That being said, I reluctantly like how it's teaching the next wave of investors to be more comfortable with investing concepts.

Frankly, it's better a 22 year old with a $500 account lose their shirt on an options strategy they learned on TikTok vs. $50,000 when they’re 45.

This is the touch “the hot stove” style of teaching, which is a painful but incredibly effective way to learn.

Out of the Woods:

Apparently a company named Applovin also joined the S&P 500 this week.

Unfortunately, I still can't take this company seriously as every time I hear its name I just think of Fogell from "Super Bad" aka "McLovin".

In one of my very few rebellious teenage moments, a couple buddies and I "borrowed" my Dad's Crown Victoria (a boat of a car) and drove to a Swap Meet in Pico Rivera to try and score our own McLovin fake IDs.

An older, cooler kid told us we just needed to drive around flashing our hands up as if we were holding an ID and some nice criminal would flag us over to help us secure our ticket to high school popularity.

Well, this didn’t work.

I was later told that we must have looked like idiots driving in circles flashing signs as nobody was going to try and sell fake IDs to an undercover cop car.

Not my finest moment.

But I desperately wanted to be able to buy the cool high school girls Boones Strawberry wine (don't laugh, this was big in 1995). For some reason I thought this would be easier than just talking to them.

But through sheer grit and determination (sticking with it), I was able to secure that cheap booze soon enough.

On second thought, I might not share this note with my kids.

Anyways, we all do dumb things in our youth. Active trading on Robinhood probably fits that bill.

But if we’re lucky, Robinhood will age about as well as Boone’s Strawberry Wine - which is to say, not at all.

Brad Johnson

Managing Partner & CIO

​Evergreen Capital​

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This summary is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. The information and statistical data contained herein have been obtained from sources that we believe to be reliable but in no way are warranted by us as to accuracy or completeness. Historical examples shown do not, nor are they intended to, constitute a promise of similar future results. Each investor’s return will vary based on a variety of factors.

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Investing is mostly about temperament and patience. Can you stay disciplined and keep your head when others are losing theirs?

It also doesn’t require greatness or tightrope-level risk-taking. You don’t have to do anything miraculous. Simply committing to quality assets for the long-term works like magic. No heroics needed.

Think of investing like ping pong.1

Unless you’re playing a ping pong nerd, the easiest path to victory among casual players (99% of people) doesn't lie in serving aces, or spectacular forehands. Instead, winners consistently return the ball and let their opponent blow it.

Consistent solid performance is a more reliable path to success than flashes of greatness.

Thankfully, elite outcomes in investing don’t require a miracle or exceptional talent year in and year out. It just requires consistently solid performance.

Not too hot, not too cold.

Some can pull off sporadic greatness, but it’s always hit or miss. Take your friend that loves telling you about his long-shot venture capital investments “I can probably get you in if you can wire funds today.”

No thank you!

Instead, you can do laughably simple things and still outperform almost everyone.

Sort of like this Gen X Olympic shooter (2024 Silver Medalist):

Anyways, I’ve tried to internalize this principle, in part because I first learned it from the late Charlie Munger:

Simple enough, but this is a damn HARD lesson to learn, because it took a little brilliance and hard work to acquire the money in the first place.

It’s logical to think you’d need that same intellect and effort to multiply it.

Yet growing wealth requires a lot less skill. You only need elementary school math and laziness (don’t sell early) to 20x that wealth via your investments over long time horizons.

Therefore, the question isn't "How can I get smarter?" but rather "How can I be less dumb?”

Because the most damaging word in finance is ‘FOMO’: the fear of missing out. When you see others achieving sudden wealth in high risk investments FOMO kicks in and it’s surprisingly easy to lose all reason and good judgement. This emotional response feels strategic, but it’s just a useless form of anxiety or fear of falling behind.

Lean Into Your Ignorance

You might think the jury is still out, but I’d like to think I’m not an idiot.

Yet, when considering a new investment, I try to assume I’m the ding-dong in the room. I’m the sucker at the table. This is effective at keeping me and our investors out of sexy investments I’m not equipped to evaluate and stay invested in our durable, quality assets. I don’t want to interrupt our compounding.

Sometimes, to drive this feeling home, I’ll ask what would my Golden Retriever ‘Lucky’ do. She’s a good girl; but she’s not the brightest bulb.

Lucky’s great, but she sure isn’t smart enough to be fooled by complexity. She keeps it REAL simple. If it’s not in her wheelhouse (food, nap, ball) she ain’t “buying it”.

Channel your own Lucky when it comes to investing.

Portfolio Construction: aka Ding-Dong Insurance

If that doesn’t work, adding uncorrelated return streams is another line of defense against…..yourself.

I (and most of Evergreen’s investors) have a diverse portfolio that includes a basket of equities, a healthy serving of income focused investments, some private market funds and a few other uncorrelated assets.

This is the endowment investment approach (built for the long-term), which might seem contrary to the ENTIRE ARGUMENT I’ve literally just made, but hear me out.

The vast majority of my investments are based on dead-simple / advantaged business models I understand clearly. Those are the rules.

As counter examples: I can’t own Snowflake as I don’t know what the hell a “data lake” is. I can’t make Biotech or Pharma private equity investments as I don’t have a snowball’s chance at valuing patent pipelines or FDA approvals. I also don’t love binary type of bets.

These businesses - while great for humanity - are beyond my intelligence.

If Lucky doesn’t “get it”; Lucky doesn’t “buy it”.

But I want a lot more (diversification and higher returns) from my family’s investments than just an ETF can provide.

Because while I'm comfortable with volatility, adding diverse private investments allows me to focus on future vs. current values and ignore daily market drama.

This approach helps foster a long term view that treats market “corrections” (which is a nice way of saying: losing a lot of money quickly) as opportunities vs. problems.

An endowment style portfolio may or may not be suited for you, but either way - to avoid FOMO - I think it’s critical to focus on your personal financial goals rather than others' apparent successes.

And remember, remarkable things come from diligently and consistently avoiding stupidity.

Best,

Brad Johnson

Evergreen Capital

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The information discussed herein is for informational purposes only, and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The contents of this presentation are not provided regarding your specific investment objectives, financial situation, tax exposure or particular needs. Past performance as well as any projection or forecast used or discussed in this presentation are not indicative of future or likely performance of any investment product. To the extent provided, target returns are presented in order to help prospective investors understand the applicable investment strategy in comparison to other investment strategies. Targeted investment characteristics and return profiles are for informational purposes only, are not indicative of future results, and are not guarantees.

“My God, it is good to be a general partner.

It’s truly a tails I win, heads you lose proposition.”

- Hamilton Lane (~$1 Trillion Asset Manager)

What makes GP Stakes investing so compelling:

Bond-like cash flow with equity optionality.

GP stakes combines the durable income of bonds with the upside potential of equity via direct ownership of private equity firms.

A Better Way to Invest in Private Equity

You get a seat at the table of legendary private equity firms without having to fly to New York for the board meetings or do any of the hard work to generate their top-tier returns.

You don’t have to visit Omaha for a steak dinner with the 80 year old owner of a manufacturing business hoping you can talk him into selling. No all nighters working on an Excel financial model for tomorrow’s stressful investment committee meeting.

A GP Stakes investor leapfrogs that brutal work and jumps straight into senior partnership. It’s effectively a do nothing ownership role typically reserved for the grey-haired, bushy eyebrowed founding Chairman that just collect checks.

Or if you need a metaphor, pretend that Taylor Swift offered to let you buy 20% ownership of:

• her label

• her entire music catalogue

• her brand and all intellectual property…

…and you get to pay her a below market multiple on actual cash flow.

As a minority partner in “Taylor Swift LP”, you’d get 20% of all her song royalties, concert ticket sales, merch sales, book sales, corporate partnerships.

Everything she makes, you get your share.

And you collect those checks from here until eternity.

In other words, a growing cash machine that should perform in both boom and bust times (i.e. low correlation to stock market).

Would you ever sell that?!

Or would you just collect larger and larger checks until you gifted the ownership to your kids and grandkids at a stepped up tax basis?

In our view, that’s GP Stakes.

Cool Metaphor ‘Swiftie’, What Exactly is it Though?

GP stakes investing involves acquiring minority ownership stakes (typically 20% or less) in institutional-quality private equity, private credit and real estate investment firms.

These are non-controlling interests in some of the most respected money-making machines on Wall Street. Many are proven brand names like Silverlake, Vista Equity and Starwood Capital.

The magic? You're buying a discounted minority stake in the PE firm itself, not just a single fund.

You’re not an investor or limited partner. GP Stake investors become a non-voting owner (with protection rights) on day one.

This means you're collecting your pro rata share of all management fees, performance fees, and any appreciation in value from the firm's growth.

Why Do General Partnerships Sell Stakes?

If these businesses are so great, why would GPs ever sell a single share?!

There are three primary motivations for private equity firms to sell stakes:

1. Growth Capital: As funds expand, managers require capital to fund operational growth and meet increasing fund co-investment requirements. They have to invest in each of their funds. Despite their substantial success, 3% on a $10 billion fund ($300 million) is still a lot of money for these partners. Needless to say, most partners don’t have that lying around, especially if they just had to pony up $200M three years ago for a prior fund.

2. Strategic Expansion: Firms seek resources to penetrate new geographies or asset classes (ex: a new debt fund), demanding significant investments in talent and infrastructure.

3. Generational Transition: With many private equity pioneers now in their eighth decade, GP stakes sales enable leadership succession. In other words, they need a capital-infusion to cash the old guys out.

   If their firms were publicly traded this would be easy, but since they are private this usually requires outside capital. The younger partners have most of their wealth tied up in the firm as well.

Revenue Streams in GP Stakes Investments

GP stakes benefit from four primary revenue streams:

1. Management Fee Revenue: The most predictable and stable income source in a private equity business

2. Carried Interest: Performance-based fees that can be substantial but are more sporadic based on the sale of the firm’s underlying investments.

3. Balance Sheet Returns: Profits from the GP's own co-investments in their funds (the profits on the $300 million investment in the previous example).

4. Enterprise Value Growth: Appreciation from growth in assets under management “AUM” or multiple expansion (realized in a refinancing, IPO or sale to another asset management firm).

The most important of these four streams is management fee revenue as those fees provide significant downside protection.

This is a structural advantage - when a private equity firm closes a 10-year fund, its fees are contractually set in stone, providing a durable cash flow stream backed by some of the world's most sophisticated institutional investors (large pension funds, sovereign wealth funds and endowments).

Provided a target firm is successful in raising just one more flagship fund at roughly the same size or larger to the prior fund, the GP Stakes investor should get most of their capital back on contractual management fees alone.

Even if they don’t raise another penny, fees from existing funds should still return upwards of 80% of the invested capital (in an unlikely PE firm liquidation scenario).

Asymmetric Return Profile

Typical target return profile:

• Target equity multiple: 3.0x - 3.5x

• Cash flow returns similar to private credit investments along the way

• Potential for multiple expansion on exit

Long Term Returns

Assuming economic theory holds, given their extreme diversification and much lower risk profile vs. individual PE Funds GP Stake investments should warrant a lower return vs. less diversified investments.

That’s not the case today, as we believe 20%+ returns are still within reach this cycle (~the next 10 years). However we believe the longer term returns will likely stabilize in the range detailed on the chart below vs. other segments of private equity.

Diversification Across Managers & Fund Vintage Years

Each GP Stake investment gives you exposure to all the PE firm’s underlying funds. Therefore a portfolio of 50 GP ownership investments is likely to give you access to hundreds of individual private equity funds.

Investor Efficiency

Not only is GP Stakes the most diversified way to access the world of private equity, it’s also the most efficient way to put that capital to work in PE.

Given you’re buying into the Partnership, a GP Stakes investor might have their capital invested in that great business their entire life. When you can find great assets that compound cash flow, a buy and hold strategy is how you achieve life changing outcomes, vs. having to trade in and out of various funds.

Investing in a series of private equity funds and recycling capital frequently creates all kinds of problems for non-institutional (retail) investors. They have to keep track of too many capital calls and end up holding excess funds in cash to meet those future commitments (thus dampening return performance).

In private markets, staying fully invested is the best way to compound returns.

See the chart below. For a given evergreen fund’s return (top row), the required equivalent return on a traditional closed-end fund to reach the same dollar-on-dollar multiple is shown in the bottom row.¹

Closed-end fund refers to a traditional commingled private equity fund that calls it’s capital over time (often less than 100% called) and liquidates in 10 years.

At the risk of beating this horse to death… if you’re a minority owner of a portfolio of private equity firms, (historically money printing machines) why would you ever want to sell? This is especially true when you’re receiving high and growing monthly distributions.

This makes GP Stakes investing ideal for high net worth investors without their own family office staff to deal with this issue or the drag on investment returns for keeping for already committed funds idle in cash.

Evaluating GP Stakes Investments

So, how do you compare various GP investment opportunities?

1. Limited Partner Stability

The quality of a firm's limited partner (LP) base is critical. GP Stake investors must analyze:

• LP turnover & re-investment rates (a good sign the investors are happy)

• The caliber of institutional investors in each fund

• The potential for geographic or strategy expansion

• The track record of (ideally) increasing fund sizes

This process is about gauging the firm’s ability to consistently grow assets under management and thus a GP Stakes investor’s cash distributions.

A PE firm might have a great track record, but if they can't scale their funds from $1 billion to $5 billion over time, they’re constrained and not an attractive long-term GP Stakes investment.

2. Team Quality and Succession Planning

Like any business, it’s about the people. Assessing the quality of the management team and their plans for leadership succession can’t be overlooked, especially for firms founded several decades ago.

Is it clear the younger partners have played a critical role in sourcing and running each investment? This is less of a risk than a hedge fund where the track record can literally hinge on one person, but it’s still critical to evaluate the “bench talent”, aka which individuals are in-line to run the private equity firm over the next 10-20 years.

3. Valuation

You can always spoil a great business by dramatically overpaying. Therefore GP Stake investors need to evaluate each entry valuation relative to peer firms and the potential for multiple expansion. Thankfully, most GP Stakes trade at a large discount to public market comps (i.e. Blackstone, KKR, Apollo). The metric typically used for this is price to distributable earnings, or the cash flow the business generates.

The Broader Context: Why Private Equity?

Private equity has consistently outperformed public market indices, offering:

• Substantially higher historical returns

• Access to a much larger universe of companies (80%+ of large $100M+ EBITDA companies are private)

• With far lower market volatility

All Private Equity 10-Year Rolling Returns:

Private equity has regularly outperformed public indices over almost every 10-year period, which aligns with typical private equity investment horizons.

Investor Implications

The data is clear that private equity boosts portfolio returns across cycles.

Historically, "now" has consistently been a great time to invest money in private equity, regardless of the entry point over the past 25 years. The elite firms have delivered great long-term results under various market dynamics, in both rising and declining interest rate environments.

Alternative Assets Growth

According to Preqin, private assets have seen substantial growth, which is likely to continue for the foreseeable future. This bodes well for GP Stake investments.

Why are private markets growing so quickly?

Allocators Love Private Markets

Adding private assets to investor portfolios improves overall return performance vs. a traditional 60%/40% (stock/bond) portfolio.

So returns have been higher, yet volatility has been lower.

That should be the opposite, which is why investors continue to grow their allocation to alternative assets.

And finally, there are 7x more private companies (over $100 million in revenue) than publicly traded companies. It’s easier to generate alpha when you’re not restricting the size of your market.

Conclusion

GP stakes investing represents a unique opportunity to participate in the economics of world-class investment firms (private equity, credit and real estate), historically offering investors durable cash flows, capital appreciation, and significant downside protection.

Evergreen Capital

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1 Cambridge Associates and Partners Group - returns shown are net of fees and expenses. Closed-end fund capital calls and distributions based on real historical cash flow patterns from Cambridge Associates and adjusted based on Partners Group’s forward-looking expected returns framework.

Now I think it's only 80% bullshit.

Because some of the greatest investors in the world (ex: Druckenmiller, Bill Miller) use it in their process to avoid "falling knives".

The chart helps them decide when to start buying discounted assets while avoiding a further free fall in price.

Such investors are content to miss bottom-of-the-barrel pricing by waiting for prices to stabilize and start ticking upwards.

Before they pull the trigger, they want to see "signs of life".

Given that animal spirits, investor confidence and debt markets drive P/E multiples and cap rates, this element of the investment process shouldn't be dismissed outright.

Because “narrative” drives price over the short term.

All of this is difficult for a cash flow investor to admit. But completely dismissing the human element of investing in favor of pure math is outdated.

Plus it rarely pays to be dogmatic in markets. Market dynamics change.

Otherwise you run the risk of becoming the value investing purists that only invest in super cheap stocks well below book value. A metric that is now completely meaningless for most asset-light, technology companies.

Many of these poor souls completely missed the unreal returns in most asset classes the last 14 years. They were waiting for deep distress vs. discounts (stemming from temporary setbacks or the market underestimating future cash flow growth).

There are orders of magnitude more opportunities to buy such great, discounted assets vs. deeply distressed assets that will one day become great.

Personally, I'd much rather feed my family fishing for tuna than Moby Dick.

That being said, the deep value investors will likely end up being right about today’s Magnificent 7 valuations (which appear frothy as of 11.26.24). But even so - given the record gains for mega tech the last decade - such investors will have won the battle but lost the war while they were waiting for “blood in the streets”.

The Distress That Never Came

Firms dedicated to distressed investing can deliver great returns, but they are sporadic. This is a god awful way to build an investment business.

Case in point, not only are the opportunities few but sometimes the distress is a mirage. Countless distress focused real estate funds raised since COVID will likely end up returning most of their capital to investors. That’s not fun.

Distress investing is also one of the hardest ways to consistently compound capital. Reason being, once the price corrects and the asset hits full value, you have to sell to adhere to the strategy.

That means to be a focused distress investor you have to:

• constantly find new distressed investments to replace the ones that worked (no flywheel advantages).

• use prior profits to float payroll and operations during bull market runs where the firm has to “sit on its hands” and can’t deploy capital.

• overcompensate for tax drag (ordinary income or cap gains) vs. letting evergreen investments compound “friction free”.

I get it though. The siren song of fire sale prices calls us all. Who doesn’t love a smoking hot deal?

However, we still prefer the less sexy strategy of investing in great assets that stack cash flow year in and year out at high returns on invested capital (aka the “quality investing” investment style).

These high-quality assets are potential forever holds as the consistent cash flow growth gives you the confidence to hold through broader market volatility. The problem is, such assets almost never fire sale.

Which is why none of our GP Stake investments are with general partners that focus exclusively on distress funds.

Some of our GPs might raise the occasional special situation distress fund, but that’s a small part of their main investment business. We prefer general partners whose flagship funds reliably “make contact” on every at bat, delivering doubles and triples over home run specialists that go long stretches with zero production.

When To Buy Discounted CRE?

But back to knife catching….

Waiting for an uptick in price tends to be an even more reliable buy signal in commercial real estate vs. the stock market - especially given the former's glacial transaction pace the last few years.

Case in point - the chart below suggests the pain for CRE is in the rearview.

We talk to a lot of operators who could have spent the last three years on the beach vs. banging their heads against the wall trying to do deals.

However, today they’re all starting to find a few opportunities that make sense and not one of them is pessimistic about the next five years.

That is not a recipe for distress investing. You need despondency for distress.

There remains a wall of capital ready and willing to transact for deals that can support reasonable leverage. Therefore, excluding office buildings, there are only discounted opportunities (vs. peak pricing); there are very few distressed opportunities.

This herd mentality / consensus confidence is often a sell sign in public markets, but in private markets renewed animal spirits is good for business at this stage in the real estate cycle.

Uncertainty (especially from lenders) sucks liquidity out of the market and tanks pricing whereas “good vibes” boosts liquidity and tends to create a floor on valuations.

“Good vibes” sounds stupid as an investment consideration, but I don’t make the rules.

So while the courageous firms buying real estate a year ago likely “bottom ticked” the market on price, those investing today might be taking far less "risk" of actual capital loss.

As ex-post, nobody knows how high inflation and interest rates might have gone.

In other words, was the distressed buy decision smart or lucky? How many times out of 100 would the investment worked out?

Not to get weird, but you don’t know because you obviously can’t see those alternative realities….unless you’re into psychedelics, in which case perhaps you think you do. If so I’m happy for you, but please don’t share your magical visions with me and no I don’t want to do an ayahuasca idea session with you.

Anyways, most distressed buying opportunities seem obvious after the fact, but they never do in the moment. Therefore, I deeply respect those able to consistently venture out into the fray, not knowing what’s on the other side.

I’m good at finding that courage in spots - namely when something is dirt cheap in my direct circle of competence (e.g. asset management firms, niche real estate, Chipotle burritos, etc.)

However, I generally prefer the fog start to clear to see if the intrepid distressed investors are still standing.

Best,

Brad Johnson

Evergreen Capital

https://www.evergreencap.com/

Critics might cringe at that statement, but most of them have never had skin in the game as a General Partner.

GP Stakes is quickly becoming an institutional asset class because it solves very real problems.

And if you haven’t noticed, real estate has some problems.

Real estate transaction volumes are finally ticking up but not enough to sustain bloated head counts. And recent vintage funds seem unlikely to deliver meaningful carry anytime soon.

Consequently, plenty of real estate PE firms should consider selling a piece of their General Partnership interests.

Real estate firms are a tiny fraction of many GP Stake funds. Most funds are chalk full of private equity firms with some infrastructure and credit firms sprinkled in for diversification.

Yet I’ve only seen a handful of real estate dedicated GPs across a number of large funds.

This is fairly odd given the size and number of large real estate focused GPs that are often only wealthy “on paper”. Or at least much more so than their private equity counterparts.

This is a especially true of real estate firms addicted to tax deferral via 1031 exchanges.

Injecting unsecured capital could be a powerful tool to level up into new real estate sectors or institutional investor relationships during a extremely difficult (but opportune) time to raise capital.

Why do real estate firms hold out? I suspect, it’s just real estate being real estate.

In other words…painfully SLOW.

Having spent most of my career in private equity real estate, I can attest the industry is hesitant to embrace change.

Plus the ethos in real estate is ownership / equity is sacred. Older partners might get ill thinking of selling a minority stake of their “baby”.

Because, unless you’re a mega firm, you invest in RE for carry. Often you need a big team to find and manage the assets so the fees just keep the lights on. But technology and software is improving margins. Outside vendors can reduce overhead. Profit margins on fees are improving in real estate.

Yet many real estate partners don’t see increased management fees from AUM as a viable pathway to boost returns and drive future fundraising. And yet, the biggest firms have the most impressive and expensive staffs.

Real estate partners should ask themselves a question. If selling a minority stake is good enough for CVC, SilverLake, Vista Equity, etc. then maybe…just maybe… it’s good enough for a portfolio of ugly (but highly profitable) industrial buildings.

This is especially true for those real estate firms with perhaps an uncomfortable amount of office exposure.

Who should take a lifeline to weather the storm.

Other Considerations:

Thriving real estate firms should sell minority stakes for the same reasons the best private equity firms do (succession, drive new AUM, accretive M&A, hire superior talent, etc.)

But perhaps the best reason to sell a stake is to fortify the business when your competitors are on defense. This is how firms leapfrog peers coming out of downturns.

And even if a RE firm is not struggling with obsolescent office, floating debt or other portfolio problems, they should still considering selling to reduce existential risk for the next crisis.

Because real estate is accident prone:

• Savings & Loan crisis

• Subprime crisis

• COVID

• 2022 floating rate spike

REITs have already gotten this memo. They learned their lesson from 2008 and dramatically improved / fortified their balance sheets.

REITs obviously don’t need to sell minority interests, because they already did. Their ownership (stock) is for sale every day. They can also issue new equity (shares) on a moments notice using “At-the-Market” offerings.

Private real estate firms don’t have that luxury. If cash is low, they can find themselves pushing debt / leverage in order to win deals and maximize IRRs. They might also be doing this with a thin or largely outsourced staff. That can work in bull markets, but is not a sustainable solution.

Enterprise Value

If it’s not repeatable, it’s not sellable.

Far too many real estate GPs are a collection of properties that would be worthless once they liquidated their portfolio. The value is only in the assets.

That makes them vulnerable when capital markets freak out.

That forces them to be highly reactive to the labor market vs. keeping the team in place and active across cycles.

Such firms aren’t the sexiest targets for GP Stake firms, but even the most established real estate GPs - that would be viable stake investments - could stand to improve on this front.

Why GP Stake Funds Should Invest in RE GPs

Some GP Stake funds might be hesitant to add real estate positions because of the above or increased cyclicality of the business. The office nightmare probably isn’t helping.

I can hear some saying, “higher risk for lower returns, great where do I wire the money?!”

But I think this is would be a mistaken opportunity to add high-quality firms / management teams with a lot of growth opportunities at (perhaps) lower multiples vs. PE general partnerships.

Plus, the correlated return stream on real estate fees and promoted profits should add additional diversity and resiliency to PE heavy GP Stake funds.

Private Real Estate Diversification Benefits:

Staking firms will obviously need to pick their spots to avoid a value trap on firms with over-leveraged portfolios and declining track records. However, large investors are not going to stop allocating to real estate anytime soon.

And (right or wrong) plenty of institutional investors will ultimately give RE funds a pass on their latest vintage given the industry took the brunt of the pain from the government induced inflation debacle.

The key is to invest in the real estate firms that have an established track record of operational alpha and didn’t just ride the longest interest rate bull market.

If you’re a real estate GP and wondering if there is a little bit of truth to the above, it might be time to level-up your game with some growth (interest-free) GP capital.

Brad Johnson

Evergreen Capital

Well it helps if your business model:

1. Has massive + free leverage

2. Attracts and keeps elite talent

3. Distributes high current cash flow with 20%+ total returns on partners capital

4. Operates in an industry with unlimited growth opportunities

I’m talking about a world-class investment business.

To be specific: A general partnership (GP), which is the ownership entity of a successful private equity or real estate private equity firm.

Caveat: the word “successful” is doing some heavy lifting in the sentence above. If you can’t deliver great returns, you don’t pass go, you don’t collect $200.

But if you put up consistent numbers, GPs tend to hit escape velocity around Fund 4 or 5 and often build a perpetual cash flow machine.

This is why the Forbes Billionaire List is chock-full of fund managers.

Case in point:

Blackstone started with $400K.

They now have $1 trillion in assets under management (“AUM”) and will probably post ~$10 billion in revenue next year with 65% of that stemming from long-term management fees.

That’s without:

• building expensive factories or supply chains

• selling a tangible product or holding inventory

• having to maintain or upgrade software code

The business is just people and brand.

Which is why some GPs earn a staggering 40% return on the partners’ invested capital in the company.1

It’s also probably why they feel confident enough to put these Christmas videos out into the world.

We’ll tick through each of the above five characteristics below. But at a high level, large GP’s print money because of the efficient flywheel embedded in the business model.

If you’re not familiar with the Flywheel concept, here is the most famous business flywheel from Jim Collins’ brief but excellent book on the topic:

Now here is a General Partnership flywheel (from Alix Pasquet of Prime Macaya Capital Management):

This is hilarious, but Mr. Pasquet is only partially kidding.

Higher AUM enables firms to attract and keep investment talent, which is the intellectual property (“IP”) behind every great GP.

So, what makes general partnerships such beautiful businesses?

1. Free Leverage

There’s obviously debt at the individual property or company level and sometimes even a little at the fund level.

But the compelling leverage here is Limited Partner (“LP”) capital. If you think about it, this money is a form of off-balance sheet financing (aka an awesome loan).

And it’s the oil that makes the flywheel turn faster. Without it there isn’t a business so the best investors treat LP capital with the fiduciary respect it deserves.

PE firms also use more subtle forms of leverage like subscription financing and scale economics - as it doesn’t take 10x the staff to go from a $100M to $1B in AUM.

Private equity firms typically put up 1-5% to launch a fund. The rest of the money (95%-99%) is non-recourse leverage for the GP.

Hence the sky high returns (often 20%+) on partners’ capital.

It’s good to be a GP.

Thankfully, it’s also lucrative to be an LP of these firms. But if you want the moon, you want GP economics.

2. Magnets for World-Class Talent

Private equity has consistently delivered outsized returns (even in rising rate environments), making senior partners tremendous wealth. Consequently, they can afford A+ talent.

These elite employees drive even higher returns, which increases fundraising, which attracts other killer employees. Hopefully you’re starting to see how this works.

Please don’t make be drag out the flywheel picture again.

3. Massive Call Options on GDP Growth

Heads GP wins, tails GP wins BIG.

The best PE and Real Estate shops drive operational improvements to increase asset value. But, even if they can’t operate their way out of a wet paper bag…they still get another bite of the apple: above average GDP growth or multiple expansion.

For example, a standard roll-up of smaller assets into a large portfolio (a common tactic) attracts a premium multiple. Buy a bunch of small deals at 5x, sell portfolio at 10x.

Or this could be good old fashioned Federal Reserve induced multiple expansion.

Given our likely higher for longer rate world, help from the Fed might not be there this cycle, but it will return.

Regardless, the best GPs seem to always find a way to outperform and capitalize on the massive free call options (the profit promote) embedded in every fund.

And even if they completely whiff on a fund:

They can still collect 10 years of fees on a $1 billion fund, which at $200 million is still a decent chunk of change.

In their defense, they’ve earned it. The top-tier PE firms have delivered outstanding returns to LPs across cycles.

Underlying PE deal returns by vintage year:

But the GP returns are just a tad better.

For example, on an 18% gross IRR for a 10 year fund, the GP probably posted a 39%+ IRR on their 5% co-investment.2

Once again, it’s good to be the GP.

4. Giant Runway for Growth

Will investors ever get tired of making passive money? Will LPs every say, “you know what, we’re getting bored with all this money you keep sending us”.

Probably not.

• There will always be new funds to raise

• There will always be new investors hungry for non-correlated returns

• There will always be more companies and properties to buy and loans to be made

And these funds are not just replacing each other every 10 years. Most large PE firms are now focused on growing permanent capital.

Consequently, GPs - with their lucrative and contractual management fees - are starting to look a lot like enterprise software (without the threat of AI disruption).

Great businesses are built by going ridiculously far in maximizing 1-2 things.

At the end of the day a GP is a simple business:

1. Deliver top-tier returns to LPs

2. Drive AUM growth

Conclusion

To be honest Google Adwords / Online Advertising is probably the greatest business model every created (assuming AI doesn’t kill search).

But the general partnership, which has near perfect market fit for institutional LPs, is definitely on the short list.

I can’t think of many business models with such powerful, structural advantages as a well-run General Partnership.

That’s why we have such strong conviction in GP investing (GP Stakes).

It’s an opportunity to sit on the same side of the table as world-class GPs and enjoy their economics.

Therefore, we don’t need to question their motives or alignment with our capital.

It’s one and the same.

And best of all, we don’t have to wear Patagonia vests or make goofy corporate Christmas videos.

Best,

Brad Johnson

Evergreen Capital

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Finance students are hungry for real world advice given they’re drowning in equations and theories.

So this year for the Mergers & Acquisitions (M&A) class I tried to share practical knowledge on doing deals.

Plus it was a cathartic for me personally. I’m no longer in the daily deal knife fight. I miss it and I don’t.

Below is the gist of that lecture.

First Some Context:

I sold 20 properties in 12 months (mostly in 2021) largely via individual transactions.

The market seemed frothy so I pushed hard to sell each one. This was dumb (vs. selling via a portfolio) but the portfolio bids weren’t as high. The process consumed most of my year.

I’ve also worked as the point-person on $3 billion+ in large joint ventures and portfolio deals sold to PE firms and publicly traded REITs.

Made countless mistakes along the way.

So keep in mind these lessons were learned via real estate, but I think most apply to buying businesses too. A deal is a deal.

Anyways, the point is I’ve seen my share of deals blow-up that didn’t have to. I’ve seen many more successfully close but with unnecessary hassles.

Your mileage may vary, but these are my takeaways on how to minimize deal drama:

1. Put the Ugly up front.

Sellers often hide things. Perhaps not always with malice, but its hard to see “the dog” in your deal. That’s the "‘endowment effect’ in action, we all have a hard time viewing the things we own with objectivity.

But the market is brutal: it will tell you your baby is ugly with a straight face.

The problem with sugar-coating the deal is the skeletons almost always surface in due diligence. These cause fights, delays, occasional lawsuits and plenty of cancelled deals.

If that info was presented up-front the buyer might have been fine with it. Or perhaps their price would have been lower but acceptable.

Because in a competitive process, the market can “price” the impact of that skeleton and the animal spirits of an auction might have caused buyers to overlook it.

But say you’re in day 60 of a deal when a problem surfaces. The buyer tends to have a bit more leverage (you want to sell and would rather not start over). The problem is you now have no idea how the market would discount (price) your skeleton.

You’ll only know how your buyer feels about it - NOT GREAT - when they come back with a huge and perhaps vindictive price cut.

You’ll blame them for “re-trading” but it was probably your fault for not putting the ugly up front.

2. Your Job = Herding Cats

This applies to the point person on both the buyer and seller side. There are a million tiny things that need to get a deal across the finish line. You don’t control a lot of them.

Getting vendors, lawyers, lenders, title agents, 3rd party consultants, etc. etc. all lined up and in the right sequence to close is a minor miracle. Every single time.

I just tried to avoid being the bottleneck on anything. Fire back quick responses and clear timeline communication to everyone early and often. Check in frequently so they don’t forget your deal. Don’t assume they care or are diligently working away on your precious deal.

People get busy. You’re not their only deal. Gentle check-ins and getting to know them personally (when you don’t need something from them) go a long way here.

3. Time Kills Deals

The longer things drag on, the more shit (sorry) can go sideways.

• Interest rates move

• Better deals surface and distract buyers

• Life gets in the way - sometimes people get really sick, divorces happen

All sorts of things pop up with time. Deals have a momentum to them, keep pushing.

4. Don’t Marry the Model

This is probably good relationship advice too.

Some buyers (including me when I started) over index on the financial model instead of getting out in the real world to diligence the deal, meet with vendors, sellers, lenders, etc.

The answer is almost certainly not in an Excel spreadsheet.

5. The Broker is Your Buddy

I don’t care what side you’re on, the broker works for the deal. This is a good thing as that’s kind of the whole point. You need to treat these people well. They are absolutely essential to your success.

The pros and those with long-term mindsets have internalized this. If you want to do a lot of deals realize this is a multi-player, multi-level game. Those that treat the deal as a life or death, one-time game probably aren’t thinking clearly.

6. Ditch the Pitch-book

The offering memo with the pretty pictures and fluff about the local economy and burgeoning craft brewery scene are nice. However, you’ll be far better off taking the broker out for one of those beers than pouring over every page of the marketing materials.

7. Refrain from the Re-Trade

Sometimes it’s unavoidable (especially if the seller hides things or giant material capital items surfaces). But I think it’s best to go in with this thought as a default and only ask for credits on major surprises that kill the numbers.

8. Don’t Get Cute on the Goal Line

Please don’t throw it on “the one”.

Give the ball to Beast Mode and PUNCH THAT THING THROUGH. Sorry, this will be the only sports metaphor.

The deal only counts when the wires hit.

Somebody flags a ticky-tack issue that might delay closing a day??

“No. Who cares. Pound sand, we’re closing.”

Fire off those wires, bombs away!

Tiny things can be cleaned up post closing.

I know this sounds like the rantings of an investment guy. But I’m biased as I cut my teeth on acquisitions not asset management. And I’ve seen two lenders back out of deals the last second due to random macro issues.

So don’t take lightly to someone with zero skin in the game saying, “Ummm, we’re getting pretty tight on timing, let’s just push closing two weeks”.

Push everyone to the agreed upon closing date for as long as you can. The second you say, “okay that sounds fine, I guess” is the second everyone take their foot off the gas and procrastinates until that next deadline.

Close that puppy.

9. Leverage Your Edge

This is timely. Deals are hard to do right now.

I think they’re easier if you have some sort of secret sauce. The holy grail of acquisitions is when edge lets you buy market rate deals (or even those with a slight premium).

Having a unique advantage (whether it’s operating skill or a lower cost of capital) that helps you hit your numbers easier than everyone else is a super power that greases the wheels during deals.

If you have zero operational alpha, due diligence becomes life and death when the market is tight. If you’re a Beta Buyer praying for rent growth or cap rate compression to hit your hurdles, you have very little margin for error. That ends up killing a lot of deals.

Look at the best software roll-up firms for inspiration here (ex: Constellation Software). They are acquisition machines in large part because they can hit just about every “bid” knowing what their operations team is capable of post-closing.

10. Keep a Tidy War Room

A small point, but file hygiene in the due diligence portal matters. You don’t want people relying on 10,000 emails flying around for the correct documents.

This cuts back on the “Can you send me….” requests.

You also don’t want to be searching for random things constantly. Get clear lists over to the buyer or seller at the start of diligence.

When in doubt, default to DropBox.

11. Leash the Lawyers

I loved our lawyers. If you’re a lawyer, I’m sure you’re excellent. Please don’t sue me.

But maybe don’t let the lawyers run the deal until you’ve worked with them a long time.

Their incentives are drastically different than yours and they have a tendency to fight the wrong fights (if they don’t know you and what you care about well).

12. Diligence is Art & Science

The key to diligence is being detailed enough to catch everything, but then knowing what to ignore.

Diligence is about risk assessment.

You can’t get rid of all risk so decide what you can live with, then ask am I being compensated for that risk?

14. Fight Small Battles, Win Small Prizes

Pretty self explanatory, pretty hard to remember.

15. Cap-Ex is King

If you’ve gotten this far, you probably know I’m a bit obsessed about cap-ex when it comes to investing.

16. Quality = Liquidity

The easiest deals to buy and sell are the highest quality assets. It’s the ones that are a bit shoddy that are a hassle and take a few attempts to sell. Anyone whose ever had a lender property tour go south knows what I’m taking about.

Life’s too short. Go for great.

Conclusion

If I had to pick a short-cut common thread to success here, I’d say:

Figure out what’s critical to move the deal forward and do it with urgency while ignoring the noise.

And the next time you’re in the throes of a deal that’s falling apart, I hope you keep your sanity and that something above is useful.

Best,

Brad Johnson

Evergreen Capital

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Investing success comes down to just a few major things. Understanding the ongoing capital needs of an investment is at the top of that list.

Assets that require little to zero ongoing maintenance capital is the dream, but we’re not always so lucky.

There is bad CapEx and good CapEx:

• Bad CapEx = money spent fixing basic but essential parts of a business that frequently break.

• Good CapEx = capital projects that lead to increased profits at high returns on invested capital.

Real Estate CapEx

Investing in real estate helped crystallize this concept for me.

Because real estate capital improvements are pretty simple. Productive cap-ex adds profits (good) and maintenance CapEx makes you cry (bad).

Good CapEx for an apartment might be adding a clubhouse / fitness center that enables you to charge everyone higher rent.

Bad CapEx is a major plumbing leak that leads to a re-pipe of the entire property.

Because Susie in 3C is not going to pay more rent for new pipes, even if they’re gold plated. And considering where copper prices are today, those pipes might as well be gold.

A functioning plumbing system is a basic part of the core real estate “product”. Every tenant expects the plumbing to work flawlessly at all times.

And, they tend to freak out when such systems stop working. Don’t ask me how I know this.

Company CapEx

Chipotle adding a new store is an example of GREAT CapEx. The payback on a new store is around 2-3 years, which enables the firm to earn a remarkable ~35% on their invested capital. Someday they will saturate demand, but for now each new store prints cash.

Side note - When I was 26 and living on a balanced diet of 5 burritos a week, I wrote Chipotle corporate a mildly humorous letter begging them to let me franchisee some stores. They rebuffed my request. As a consolation, I got to keep the extra pounds from my extensive “due diligence”.

A well-executed vertical acquisition is also an example of good CapEx.

Bad CapEx is when a car company has a major recall. This erodes already thin profits. Every time I get a recall notice for some random non-essential part - aka the car sun Visor recall - I say a prayer for car company shareholders.

The Perfect Business

If we accept this premise, then what is the perfect business model?

It’s a royalty business with built in pricing power.

This business requires nothing from you and yet the money keeps showing up in your mailbox in increasing amounts. This goes on for a unreasonable amount of time.

The Worst Business

The opposite of this is a giant manufacturing plant that:

• is filled with expensive and fragile equipment

• produces a commodity product in a highly competitive market at the thinnest of margins

• requires constant investments in R&D to improve the product just to maintain market share

• is also subject to extreme regulatory oversight

These type of companies are toxic investments that fool countless investors. Why?

Because they’re often important businesses with brand names that don’t look horrible (or expensive) on paper. They earn accounting profits but no actual cash because they are constantly pouring capital back into plant & equipment just to keep the lights on.

They frequently sucker value investors who think they’re getting a deal but are just subsiding management’s lavish compensation plans.

The real estate version of this is the 1970’s office or apartment building whose infrastructure is failing.

It’s not that you can’t make money from these type of investments, but you better make it quick.

Sooner or later the deferred maintenance has to be addressed. But in a hyper competitive market, buyers often have to overlook that CapEx to win the deal (then hope the systems don’t fail before they can exit).

Net Operating Income = EBITDA = Wishful Thinking

The worst companies and properties have something in common.

The profit & loss statement or net operating income look fine, but the cash flow statement is a dumpster fire.

How do companies and properties that burn cash survive?

1. They capitalize EVERYTHING. Any minor repair becomes a cap-ex item and gets pulled OFF the income statement and thrown on the balance sheet. CLUE: balance sheet assets keep ballooning while cash keeps plummeting.

2. The income statement “profits” allows them to consistently issue new shares (equity) and dilute existing shareholders.

3. They sell to a greater fool on a multiple of EBITDA or Net Operating Income, dismissing all cap-ex as “one-time” non-recurring expenses (ex: WeWork’s “community-adjusted EBITDA”)

Plenty of firms get away with #1.

If a company capitalizes every light bulb replacement, that doesn’t necessarily make them Enron. The executive team is probably incentivized to play these games - stock option grants are often tied to profit margins or EBITDA growth. Frowned upon, but if the underlying business is great the investors will still do well.

#2 is far more concerning in my opinion - absent of major earnings per share growth or M&A deals, constant new share issuance is death by 1000 cuts. This is especially true when the stock is trading at a low historic multiple.

When that’s the case management should buyback their stock. If instead they choose to fire sell their equity (by issuing more shares), that’s a pretty clear sign they have a hidden cash flow problem.

In other words, management doesn’t have a choice.

I’ll add more on the share issuance / dilution topic in later post.

Low Maintenance CapEx = Higher ROIC

To hammer home this point, below are returns on invested capital (ROIC) by industry over the past 30 years. As you can see, industries on the left are heavy on intangible assets that don’t require much ongoing capital maintenance expenses.

Whereas, asset heavy industries on the far right such as utilities require constant upkeep and huge surprise capital maintenance outlays (often after a lawsuit).

This is why utility stocks high dividend payments are often fool’s gold.

ROICs by Industry for the Russell 3000, 1990-2021

Bottom Line

We care deeply about CapEx because we focus on long-term investing.

Over the short-term investors can get lucky and avoid capital problems. If you time the market right you can buy old and/or cheap assets with giant deferred maintenance, lipstick the pig and sell in couple years.

But if you want to own something for a LONG time, capital allocation is going to be responsible for a huge percentage of your returns.

You want that cash flow spent on growth not maintenance.

Brad Johnson

Evergreen Capital

My favorite day of the month was when Beckett Baseball Magazine - which listed card values - arrived in the mail.

I’d race to my room and go through my collection one by one, updating a makeshift ledger with the new values (even including 5 cent increases)…like a psychopath.

One month my Mark McGwire rookie card “skyrocketed” 5 bucks and it blew my mind.

I did nothing, time passed and somehow I was a little richer.

I’ve held on to that thought ever since.

Of course, this wasn’t actually investing. This was speculating.

A cheap piece of cardboard that smells like stale gum doesn’t have intrinsic value. It doesn’t generate reliable cash flow.

Buying baseball cards is the same thing as collecting beanie babies, art, or bitcoin: they are only worth what someone else will pay for them. Speculative assets are subject to “animal spirits” and lead to boom and bust cycles.

Sometimes they make people lose their minds.

Yet there are still some valuable investing lessons to be gleaned from card collecting.

Investing Lessons

I’m currently trying to brainwash my 10 year old son by getting him into card collecting. Somebody has to take over Evergreen Capital someday (A dad can dream).

We are going through old boxes of cards and updating values just like I did 3+ decades ago. He is loving it.

I highly recommend doing this with your son / daughter or grandkids.

Here are the investing lessons I’m hoping sink in:

Lesson 1: Endowment Effect.

My son has found a bunch of the below cards. Ten year old Brad thought these would make him rich someday.

That kid didn’t know squat about investing.

I had to do a bunch other stuff to make money. The above cards are collectively only worth ~$700 some 35 years later. Or it might be $500, or perhaps $300. I am probably overvaluing them. Why? Because I own them.

This is called the “Endowment Effect.”

It’s the propensity to overvalue things you own vs. the market. The market doesn’t care that I’ve shlepped these cards around for 30+ years. The market isn’t sentimental.

Regardless, these cards probably made a solid single digit return compounded over ~3 decades.

BUT….it took a pandemic to reignite interest in cards. Nostalgic middle-aged men across the globe were either so bored (or desperate for home office space) that they busted out the old boxes of cards.

Lesson 2: Assets detached from cash flow are highly dependent on momentum and supply.

This is just as true for baseball cards as it is for stocks. Profitless tech companies with horrible unit economics tend to soar not because of thoughtful valuation, but because:

• They have a good story that causes investor “FOMO”

• There’s an oversupply of money (fiscal or monetary stimulus)

Lesson 3: Pick-And-Shovel Businesses = Great Investments

An oversupply of the product also kills value. It’s akin to companies that issue too many shares (dilutes equity / existing shareholders).

This is why 1980s was the worst decade ever to start collecting cards. Baseball cards were hot so new companies flooded the market with new supply. This makes 99% of cards from that decade worthless.

To artificially restrict supply, grading companies (they grade the condition of the card) have stepped in. For the most part, only the absolutely pristine cards (sharp corners, perfect printing, etc.) have value today. Of course, not touching the cards takes a lot of fun out of the process for kids.

This gave nerds a big advantage in the market.

Share

So, in order to sell a baseball card for full value today, it must be graded by a trusted 3rd party. This is so buyers have faith a card is authentic and in mint condition.

This grading costs $20 to $30 per card. This ads up when you want to grade hundreds of cards. Oh, and the two grading companies (Beckett and PSA) also help set the market prices.

Now this is a beautiful business model.

It’s similar to bond rating agencies. For example: Moody’s ($MCO), is another highly profitable picks-and-shovels business in a duopoly with huge returns on invested capital. Large debt buyers and sellers can’t transact without their stamp of approval, which costs Moody’s next to nothing to produce.

It pays to provide the infrastructure for the party.

Lesson 4: Investing Requires Dedicated Patience

With an assist from mom during college + grad school, I hauled my boxes of cards from apartment to apartment and then from home to home.

Had I just thrown them away when they were worth nickels…you wouldn’t have had to suffer through this investing metaphor.

True compounding takes at least 10 years - and more often decades - to play out.

Lesson 5: Selling Discipline

My son wants to sell every. single. card. Like yesterday.

Reason being, I told him he’ll get a commission on whenever he sells a card on E-bay / or at a trade show this spring.

He’s probably right though.

The post-covid air is already coming out of this ballon, just like every other speculative asset in 2022.

This is difficult, because to achieve outlier results, you have to hold assets through uncomfortable periods of overvaluation. Yet, when things get silly, I still prefer to sell outright or “trim” such holdings.

But I still want to keep the best of the bunch.

Lesson 6: Quality Wins

Power laws are everywhere in investing. Over long hold periods, the best of the best deliver a disproportionate amount of the returns.

You only have to compound a couple of percentage points higher than the market over a long time to achieve unreal outcomes. It only takes a few stellar investments.

Turns out this is true for baseball (and basketball cards). All Hall of Fame players appreciated over time but most only delivered average returns.

But - if given enough time - the LEGENDS outperformed by orders of magnitude.

A mint condition Michael Jordan 1986 Fleer rookie card sold for $750K at peak craziness in 2021. One recently went for ~$120K. Poor condition (low rating) even sell for a few thousand each.

So…while few people will care about these things in 50 years - I’m keeping all the Ken Griffeys, Barry Bonds and Michael Jordans.

Lesson 7: Quality Hiding in Plain Sight

Clearly card collectors would have been far better off accumulating a portfolio of the few legendary players vs. the hundreds of pretty good / great players.

And you didn’t need to get lucky or guess correctly to find these players. Jordan was pretty amazing his first NBA season. Same goes for Lebron. You just had to pay market price and hold on.

This holds true with some of the greatest stock investments. Everyone knows these businesses are great so they almost never sell for a price that looks or feels cheap. Yet at the same time, almost everyone underestimates the true value of greatness. Once again small performance gains lead to unreal dollar amounts over long time periods.

But too many of us went hunting and hoping for the next Jordan at discount prices.

We all want a deal.

Of course, this is part of the fun. I do it too and it can certainly pay off, but I’ve learned to make is small part of my investing process.

So speculate around the edges, but make sure your core investments have undeniable quality. Or just buy a bunch and put them a box for 35 years.

Brad

Evergreen Capital

Whenever you're ready, there are few ways Evergreen can help:

1. Higher earners or entrepreneurs: We provide custom investment management and tax planning. Reply to this email to learn more.

2. Accredited investors seeking high dividends, join our Income Fund.

3. Wealth builders seeking growth + accountability.

While advanced investment strategies and guidance are only available to already wealthy investors, pricing out the vast majority of Americans.

We think this is unfair.

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With Evergreen you’ll immediately own a liquid and income producing real estate portfolio, which we consistently adjust to put more money into our most undervalued holdings. We believe this is superior to a basic buy-and-hold approach.

Our core strategy is simple, but not easy:

We analyze and buy world-class real estate assets trading at a discount to their private market values.

Why a Dividend Growth Strategy?

We believe this account can eventually fund your lifestyle via regular income that requires nothing from you.

This separates your income from your time while letting your investment principal keep growing for you & your family.

Compounding income over the long-term without sacrificing growth is the north star for this strategy and will provide the foundation for your investment program with Evergreen.

This strategy generates regular dividends, which will be automatically reinvested to buy you even more dividend income. To add gas to this fire, we suspect most clients will add incremental capital to this strategy each month or year via our auto-investment plan.

The long-term goal is once your account reaches critical mass, you’ll turn off dividend reinvestment and start collecting payments that total an amount (each year) that’s substantially higher than what you initially invested.

Dividend growth investing is a great baseline wealth building strategy because it:

• will help you see the progress of rising income and stay the course by focusing on what matters: cash flow growth vs. arbitrary stock prices (short term volatility).

• has the long-term potential to cover your monthly expenses, which enables you to focus on higher pursuits.

Therefore, we don’t focus on what the market says our cash flow is worth each year. We don’t care about short term performance or volatility - we just want to acquire more ownership shares of great + undervalued assets and let the income grow exponentially.

The appreciation (stock prices) eventually follows the cash flow.

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What Are The Specifics? 

• You’ll be invested in a Real Dividend Growth portfolio which is a long-only (no leverage or options) public real estate strategy. This will hold many of the same REITs and real estate related businesses as our private Income Fund for accredited investors, which has outperformed on both income (~2.6X) and total returns since inception.

• The objective with this strategy is to build long-term dividend growth and realize double-digit annualized returns over many years. Your dividend yield will fluctuate, however short term yield is not what we’re optimizing for. This strategy is for wealth builders. We want to solve for maximum dividend payments for your future. We do that by focusing on cash flow growth, not yield today.

• You’ll have direct access to your own separate account. This is NOT a commingled fund. Your account and its diversified holdings are held in an insured custodial account you own. We can only manage the investments within your account.

• Your account is protected by SIPC, insured up to $500,000.

• You’ll be a client of Evergreen and we must legally act in your best interest.

• Low fees: 1% asset management fee only. No performance fees. 

• Full alignment - the partners of Evergreen are co-invested with you.

• Full transparency - you can log into your account and see every holding, transaction and dividend reinvestment in real time.

• You can close your account and withdraw funds anytime if you change your mind.

Investment Minimum

The minimum is only $10,000 to start an account with Evergreen.

We’re playing the long game here.

So whether you have $10K or $500K to invest - if you’re committed to long-term investing / real wealth creation we’d like to work for you.

We have the exact same goals for your account as you do. We want your account to grow substantially. We are incentivized to help you build lasting wealth.

But obviously one $10K investment is not going to get you where you need to go. Therefore, for sub $50K accounts we recommend setting up smaller monthly auto-investments in your account. You can change this auto-invest setting within your account at any time.

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Bottom Line:

Evergreen can now help both unaccredited and accredited investors. 

You become a client, we become your fiduciary / accountability partner in your growth and build a growing dividend income stream for you, with zero tenant hassles (unlike private real estate).

If that sounds good, click below. We just need your basic info to get your account started.

Sign Up Here

Our onboarding process is fast and simple. After getting your basic info (form button above) we will set up your account and send you an email invitation to create a login. You can have your account up, funded and running in one day.

The team at Evergreen is looking forward to working for you!

Thank you,

Evergreen Capital

FAQ:

How does liquidity work? Can I withdrawal funds if needed? 

A: Absolutely, these are fully liquid investments that are publicly traded, held in a custodial account insured up to $500,000 under your direct ownership. We are managing the investments for you. That being said, this should be viewed as a long-term investment. That’s core to our company and why we exist. This is also why we focus on cash flow, it’s easier to stay invested when you own cash producing assets.

What if I am more risk averse?

A: All investing requires risk taking. If you cannot hold through drawdowns, public markets are probably not appropriate for you. We are buying ownership is real assets that generate cash flow regardless of daily stock price movement.

If you have a long investment horizon, negative stock years are typically a positive as you’ll be reinvesting regularly and buying shares “on sale”. However, for larger accounts we can make custom changes such as adding bonds to reduce volatility. 

What will you do with my money?

A: It will be invested in a diversified portfolio of cash producing assets, namely Real Estate Investments Trusts (REITs) and other real estate related businesses that are publicly traded.

We manage these holdings closely and actively adjust ownership percentages based on valuation.

Is now a good time to invest in public real estate? 

A: Short answer: Yes (as of today) most public real estate is priced at a discount to private real estate, which has historically lead to compelling 3 year returns. However, we don’t have a clue what will happen in markets over the short term. Nobody does.

We believe the specific date of your initial investment (market timing) is unlikely to make a dramatic difference given the long-term focus + dividend reinvestment component of this strategy.

The goal is to methodically accumulate shares of high quality assets that will eventually help fund your lifestyle via large dividend checks when you decide to pull back from your career and stop reinvesting dividends.

Through dividend reinvesting - and ideally auto-deposits of additional funds - we want to be buying undervalued real estate in all cycles (called “dollar cost averaging”), regardless of what the stock market is doing in any given year. The goal is to accumulate a lot of ownership / shares, which has the potential to deliver exponential dividend payments over time. 

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Disclosure: Past performance is no guarantee of future results. Any historical returns or expected returns may not reflect actual future performance. All securities involve risk and may result in partial or total loss. Neither Evergreen Capital nor any of its affiliates represent in any manner that the financial outcomes described herein will result in any particular outcome.

We called high inflation when the Fed claimed it was transitory and predicted CPI would start to turn this summer. These weren’t bold macro predictions on the distant and unknowable future. They were educated guesses based on trended data.

Long term forecasts are a fools errand, but taking action on short-term predictions - using real-time trends - can be extremely useful.

This is especially true with something as dangerous as inflation, which is self-fulfilling, destroys wealth and destabilizes societies at the extreme.

In other words, when driving 100 miles an hour it’s best to react to what’s right front of your face vs. guessing what’s 50 miles down the road.

Unfortunately, our politicians had the “Mission Accomplished”, vibes going yesterday on the inflation news. I don’t think investors can afford to be this casual.

Now What?

Did the Fed tame the beast? Will inflation quickly decline from here to the goldilocks 2-3% we’d all love to have back? Don’t bet the farm, but I doubt it.

The labor market is still surprisingly strong (albeit with signs of softening) and we’ve just started on-shoring supply chains, which isn’t going to be cheap.

Furthermore, despite the recent softness in the housing market, shelter driven inflation is going to be annoying sticky on CPI readings over the next year.

The CPI shelter component is broken. For some reason home price and rent increases are on 12-18 month lag! 1

In other words, despite recent double digit increases in housing & rents, the shelter CPI component has actually been an anchor on CPI readings this year.

This is the reverse from 2010-2020, where rents were one of the few components preventing deflation as inflation struggled to stay above 2%.

But now shelter, which accounts for ~40% of CPI readings, is starting to tick up.

July CPI (8.5%) components and trend:

• Food: 1.5% (falling)

• Energy: 2.4% (falling)

• Used cars: 0.2% (falling)

• Commodities: 1.2% (falling)

• Services: 1.4% (rising)

• Shelter: 1.8% (rising)

Hopefully, these trends continue and inflation readings will taper. But given shelter’s delayed impact, we have a long way to the Fed’s desired 2%.

What to Do

If above average inflation (4-5%) persists, the cost of capital is going to be structurally higher for longer. That means lower multiples for subpar assets.

Investors have two solid options to combat sustained inflationary periods:

1. Up your allocation to real assets

2. And / or focus on companies with pricing power

Expenses are skyrocketing. If an asset or business fails to pass through those costs to customers, the market is going to be especially unkind for the foreseeable future.

Many businesses have actually gotten a free pass on inflation's impact to earnings thus far. Reason being: Americans are flush with cash.2

Companies quickly increased pricing this year without much pushback. That’s not sustainable even if inflation stays elevated. The consumer won’t be drunk on stimulus cash and excess savings forever. Soon enough consumers will start prioritizing their spending on highest value products and services.

• A roof over their head is high on that list.

• Another $1 increase for a massive Chipotle burrito they might turn into two meals? Sure, charge away.

• But an extra $10 for DoorDash delivery?!? I’m guessing consumers can go back to walking if things get tight.

Stubborn inflation means asset quality, smart sector selection and operational excellence just became a lot more valuable. The rising tide that lifted both battleships and dinghies alike is gone.

Brad Johnson

Evergreen

It updates them on the Fund’s performance and provides color on the real estate market & state of REITs. This quarter’s letter highlighted the pain ahead for commodity office properties if the WFH trend doesn’t reverse soon.

Here is a link to our Q2 letter if you’d like to review (click on the “read more” button).

Evergreen Real Income Fund Updates

Income Fund Update - Q2 2022

Hello Partners, Hope this update finds you well. The average annualized distribution yield YTD is 9.1%. Below are the full returns (through 6.30.22) for the Income Fund. As you probably know, the S&P 500 is in a bear market. It ended the first half the year down 20.6%, which was the worst start to a year since 1962…

Read more

4 years ago · Brad Johnson