Chapter 6
The Ladder
The last signature page for Fund IV’s second close came in from a foundation in Tulsa at twenty past three on Wednesday the thirty-first of March. Anika carried it up from reception herself, set it on Beth Ann’s desk and went back to her office without a word. By four o’clock Tom had matched every wire against its subscription documents, and Beth Ann knocked on the glass of Andy’s office and came in with one printed page.
“Four ten,” she said. “Without them.”
She stayed standing while he read it. Most of the names on the page were families and foundations that had been in Fund III, a few of them since the syndications. Near the bottom were three he had never heard of in January: an endowment in Ohio, a regional insurance company, and the Tulsa foundation, whose investment officer had met Beth Ann for coffee in an airport in December and told her he would think about it.
“That’s good work,” Andy said.
“It’s good.” She looked at the page in his hand for a few seconds before she went on. “The documents give us until the end of June for the final close. We won’t be at five hundred by then. Better you hear it from me in March than in June.”
“I know.”
“I know you know.” She took the page back from him and folded it once. “I’m telling you anyway.”
She went back to her desk and opened her list of LPs, and Andy turned to his screen.
Tom came up at five with the management fee notices for the second quarter. The firm billed its funds in advance, on the first day of every quarter, and Tom liked Andy to read the notices the afternoon before they went out. He set them on the round table in a fan, one per fund, and stood beside it with his hands in his pockets.
“Two things you’ll want to know about,” he said.
Andy got up and came to the table.
“First, the new investors pay a catch-up. Fees back to the first close, as if they’d been in since June.” Tom touched the Fund IV notice. “So April’s going to look like a very good month. Maggie’s already marked the catch-up as a one-time item. She wanted me to tell you that before you saw the total.”
“And the second.”
Tom slid the Fund III notice out of the fan and set it on its own.
“Investment period ended today,” he said. “From tomorrow the fee on Fund III runs on what’s invested. The commitments come out of it.”
Andy read the notice. The line was smaller, and he had known it would be. He had known the date since the LPA was signed. He looked at the line anyway.
“It’s been in the LPA since 2023,” Tom said.
“I negotiated it. Across a table in Houston, with the lawyer for the biggest family in the fund.”
“I remember,” Tom said. “You were very pleased with yourself.” He went back to his desk.
Andy pulled a chair out and sat down at the table with the four notices.
He laid them in a row in the order the funds had been raised. Fund I’s line was the smallest. That fund was selling now, a building at a time, and every sale took a piece of the fee with it. Fund II had stepped down a few years ago and was smaller every quarter for the same reason. Fund III had stepped down today, and from tomorrow it would go the way of the other two. The only line on the table going the other way was Fund IV’s, the fund Beth Ann had been carrying around the country since January of last year, and in a few years it would step down as well.
He had known every one of those facts for years. Maggie had already taken this step out of the eleven million on her typed page. She had priced the year ahead on what the fund documents said, and he had nodded when she told him in February. On a notice with a space for his initials at the bottom, it looked different, and nobody at the firm had done anything wrong.
He initialed each notice in the bottom corner, Fund III’s last, stacked the four of them and carried them down the floor to Tom’s desk.
He called Lorraine at seven the next morning from the back lot, with the engine off and the hills going from gray to green beyond the fence.
“Fund III stepped down yesterday,” he said.
“I know. I placed it.” She sounded as if she were already at her desk. “How did the second close come out?”
“Four ten. Without them.”
There was a pause long enough for him to hear her turn a page. “That’s not why you called.”
“In October you said some firms get more than six and a half, and that it would keep for another day.” He looked at the building. “I’d like to have that conversation now.”
“One of my managers has its annual meeting at a hotel downtown on the fourteenth,” she said. “Two o’clock. I’m flying up that morning. Pick me up at the airport at a quarter past ten, and you can have me until a quarter to two.”
“I’ll be there.”
“Bring that pad,” Lorraine said, and was gone.
The bluebonnets were out along 71, blue in the medians between the airport and the river for a mile at a stretch. Andy was ten minutes early. He waited in the cell-phone lot with the window down until her text came.
Door 3.
She came out through the sliding doors with her leather folio under one arm and a small bag on wheels, and she had the passenger door open before he could get around the car to help her.
“You found it,” she said.
“Door three.”
She buckled her belt and set the folio on her knees. “Where are you taking me?”
“Somewhere quiet near downtown, with a patio.”
“Quiet’s good,” she said, and looked out at the flowers going by.
She asked about Maya, and about Diya, and he told her. She did not ask about the fund again until they were sitting down.
He had picked a café east of the interstate, a few blocks up from the river, with a covered patio and ceiling fans that turned slowly overhead. At eleven on a Wednesday the patio was nearly empty. Lorraine ordered black coffee and eggs, a woman with a two o’clock. Andy ordered breakfast tacos and kept his legal pad on the chair beside him, and when the coffee came Lorraine took her glasses off and set them on the folio.
“Ask your question,” she said.
“What do the firms that get more have that I don’t?”
“Start with what you have,” she said. “From the spare bedroom, in order.”
He told her. Deals one at a time from 2014, with Greg, money raised from people they knew and people those people knew, one building and one set of investors at a time. Then Fund I in 2019, a hundred million. Fund II at two hundred million, Fund III at two seventy-five, and now Fund IV.
“Every firm like yours is climbing a ladder, whether it knows it or not,” Lorraine said. “Write it down. Start at the bottom of the page.”
He took the pad off the chair and looked at her.
“The bottom,” she said. “You’ll see why.”
He turned the pad to a clean sheet and, on the last line at the foot of the page, wrote Syndications. On the line above it he wrote Closed-end funds.
“That’s two rungs,” Lorraine said. “Most firms your age are standing on the same two. Take the first one and tell me what a syndication needed.”
“A deal, and a lawyer to paper it.” He thought about it. “A list of people who would take my call.”
“And what did it pay you?”
“A fee when we bought. A fee every year for running the building. A fee when we sold. Then it was over.”
“So nearly everything came in with a closing, and every building had an end.” She took a sip of coffee. “And the list of people who would take your call was yours.”
“Mine and Greg’s.”
“Somebody buying that business would be buying you and your phone.” She nodded at the pad. “Write down what it took.”
Beside the bottom line he wrote a deal, a lawyer, my list.
“Now the second one. What did Fund I need that the deals never did?”
He did not have to think long. He remembered 2019 very well.
“An administrator,” he said. “An audit every year, for the first time. Fund documents thicker than anything we’d ever signed. An advisory committee of LPs we had to go to before we could do certain things.” He thought again. “Quarterly reports that went out on a schedule.”
“And a written valuation policy.”
“We set marks every quarter, Lorraine.”
“You did.” She did not take it further. “Write it down anyway.”
He wrote it beside the second line, after the administrator and the audit and the committee: valuation policy (written).
“And the fee,” Lorraine said.
“On commitments while we’re investing, then on what’s invested. Then the fund sells its last building and the fee stops.”
“Every fee on that rung has a date on it,” she said. “You met the first of yours two weeks ago. So every few years you go out and raise another fund to keep the firm where it was. That’s the second rung. A buyer will pay you for those fees, because they do come in for years. He pays a good deal less for every dollar of those fees, because he can see the end date on every one, and he knows you have to win the next fund just to replace them.”
“Six and a half,” Andy said.
“For a firm on that rung, with you deciding everything. Yes.”
The waiter brought the eggs, and Lorraine ate while she talked.
“Third rung,” she said. “One institution, usually a pension, likes what you do enough to want some of it in its own name.”
“A separate account,” Andy said. “Or a programmatic JV, where they’re your partner on every deal. Joanna has them.”
“Then ask me what it pays.” She set her fork on the edge of her plate.
“What does it pay?”
“A fee on what’s invested, for as long as the account runs. There’s no fund life behind it waiting to end it. This is where the fees stop expiring.” She let him write that. “If you do it well, they add money. When it’s full, they talk to you about the next one before they talk to anybody else.”
Andy wrote Separate accounts, programmatic JVs on the line above the funds.
“Now what it demands,” Lorraine said, “because here’s where it starts to cost you. You’ll have a fund and an account that both want the same building. Somebody decides which one gets it, by rules that were written before the building showed up, and there’s a record of every decision anybody can read. Conflicts get the same treatment. Their reports come in their format, by asset, on their schedule, and their diligence team comes to see you every year.” She waited. “Every year, Andy. They don’t come once and go away.”
He wrote it down beside the third line. “And a buyer?” he said.
“More of what you earn comes in without a closing, and it comes in on a contract he can read. The growth is written down. He can see the money that’s going to be invested before it’s invested, and the fees that come with it.” She tapped the table once beside the pad. “He’ll pay more for every one of those dollars. And it’s the first rung where the investor’s people expect to deal with somebody besides you.”
Andy looked at the page. Three lines climbed it from the bottom, each with its note.
“Fourth,” Lorraine said. “A fund with no end date. Open-end, core or core-plus. Buildings that are already stabilized and held for income, with low leverage. Investors come in and go out every quarter, at a price you set.” She waited. “What does that ask of you?”
Andy looked at what he had written beside the second rung. “A value on every building every quarter,” he said. “Outside appraisers who sign it. A written rule for the line of people who want out.”
“And a team that isn’t living from one closing to the next. Nobody who invests in that fund wants you to sell the building.”
He wrote Open-end funds on the fourth line and his own three answers beside it.
“The money can leave,” he said.
“It can. That’s what they’re buying from you. You’d better be able to keep that promise in a bad year, because a bad year is when they’ll ask.” She watched him write. “A buyer likes those fees best of all. No one investor can take them away with a single letter.”
“And the top.”
“Somebody buys a piece of the management company. A minority stake, usually. Sometimes the whole thing, now and then a listing.” She opened her hand toward the pad. “Everything you’ve written down the side of that page gets read at once, by people who are paying for it. The company has to stand up on its own, with its own margins and its own people in the seats and decisions that get made when you’re out of the room.”
He wrote the fifth line at the top: A stake in the firm. Beside it he wrote stands on its own. Then he set the pen down, sat back and looked at the whole page. Five lines rose from the foot of the sheet, and the notes beside them grew longer the higher they went, until the notes beside the top two crowded against the edge of the paper.
“How long does it take?” he said.
Lorraine turned the cup a quarter turn in its saucer.
“Longer than you’d like. Blackstone is one of the biggest real estate investors in the world.1 Its first real estate fund was smaller than the one you’ll raise after this one.”
Blackstone is named once in the narrative, here. The line about the first fund holds for any BREP I figure under $600 million (the model compares it with Fund V at $600 million, ‘Ladder’!C29).
“That small,” Andy said.
“That small. Every fund after that was a modest step up from the one before, for decades, and they added each new kind of fund one at a time. They started building the next kind while the last kind was still paying them.” She looked at her watch, and then at him. “Which one is next for you?”
He looked at the fourth line. He wanted it, and he could see she knew he wanted it. He thought of the quarterly marks he had signed since Fund I, in his own office, on numbers Scott brought up the stairs.
“The third,” he said.
“Why?”
“Because it’s the first one where nobody writes an end date on the fee, and the first where somebody’s diligence team comes back every year.” He picked up the pen. “If we can’t stand the diligence, we have no business asking anybody to trust a price we set every quarter.”
“Then tell me what the third one will take from you,” she said.
He drew a line under his note beside the third rung and wrote under it only what the page did not yet say: a valuation policy someone outside the firm could check. Then one more line: somebody besides me they can call.
He turned the pad around so she could read it the right way up. She read it all the way through.
“Who do you know at a pension?” she said.
“Beth Ann will know.”
“Then you know what you’re doing this afternoon.” She put her glasses in the folio and closed it. “Drive me to my meeting.”
He dropped her at the hotel on Congress at twenty to two. The doorman came down the steps for her bag, and she let him take it this time.
“Thank you for the ride,” she said.
“Thank you for the hours.”
She had one foot on the curb. She leaned back down to the open door.
“Tell Beth Ann the second close was real work,” Lorraine said. “Without a placement agent, in this market. Tell her I said that exactly.”
She shut the door and went up the steps behind the doorman, and Andy sat in the loading zone with the legal pad beside him until a taxi behind him touched its horn.
Beth Ann was at her desk when he came up the stairs at a quarter past three, with a spreadsheet of LP names open on one screen and her notebook beside the keyboard. He put the pad down in front of her with the third line circled.
“Lorraine says to tell you the second close was real work,” he said.
Beth Ann looked up from the screen at that, and then down again. She read the page from the bottom up, the way it had been written, and when she reached the circled line she read it twice.
“A separate account,” she said.
“Who do we know?”
“There’s a state pension I met with in October.” She turned from the screen. “Their head of real estate liked us. She liked Fund III’s reporting, and she liked that we’d done one thing in the same markets for twelve years. She passed on Fund IV because their smallest commitment is a bigger share of a fund our size than their board lets them take. When she told me no, she said that if we ever wanted to talk about an account of our own, I should call her first.”
“Did you call her?”
“I was waiting for you to have a reason.” She picked up her phone. “She keeps four o’clock open on Wednesdays for managers. I’ll ask if she has ten minutes.”
She had twenty. They took the call at Beth Ann’s desk on speaker, with Andy in the chair from the empty desk beside hers and the pad on his knee. The pension’s head of real estate had a dry, unhurried voice. She asked how many people worked at the firm and who decided what it bought, and Andy told her. She asked whether the firm had ever run money for a single institution, and he said no. She asked who on his team would be her first call when something went wrong at a property on a Saturday, and Andy found he had to think before he gave her a name.
“I’ll be honest with you both,” she said near the end. “If we did this, we’d be thinking about two hundred fifty million, put to work over about three years. That’s a long way from yes, and our board has never done one this size with a manager this size. Our own diligence people would come to see you before anything else happened.”
“We’d expect that,” Andy said.
“Good. Most managers say that, and then they’re surprised. Beth Ann, send me the Fund III reports for the last two years, and whatever you’d send a new LP on how you value the buildings. Let’s talk again in May.”
When the call was over Beth Ann sat for a moment with her hand still on the phone. Then she turned her chair to face him.
“Two things,” she said. “Their people will come in the way Renata did, and then they’ll come back every year. And it will be most of a year before anybody signs anything, if anybody does.”
“Then we’d better start.”
“And she’ll want a valuation document we don’t have.”
“I know,” Andy said.
She opened her notebook to the page where she kept the pension’s notes from October and wrote the date under them, and the word May.
Andy carried the pad back down the floor to his office and sat at the round table. Beside the circled line, under everything he had written at the café, he added 250 in small figures and Beth Ann’s initials after it. Then he propped the pad against the glass beside the round table, the five lines facing the floor.