Active vs Passive Bets

Making bets

I met both contacts in 2019. Both through trusted friends. The first I’ll call Vinnie is a deal maker in the finance space. The second, I’ll call Freddie, a dentist by trade who does property developments projects. Both intelligent and successful in their own right.

In 2019 I had commercial discussions with both. The term sheet with Vinnie fell through mostly because of outlandish valuation driven by stakeholders. The finance deal materialised with Freddie as a critical element to unlock an idle project that had an expiring build permit.

Key considerations for financing the development projects were:

• Capital outlay
• Investment return
• Investment lifespan
• Operator competence
• Assurances and recourse
• Learning opportunities

Originally the capital was to be funded by myself and another party. With the beginnings of COVID-19, along with other financial commitments, the other party had pulled out. Freddie opened the return at a single digit annual rate. The lifespan of the investment was expected to fall within 12- 18 months. Freddie got his start in property development while he studied dentistry. He recounted his journey, highlighting profitable projects, collaborations with his dental friends and learnings. We established a standard agreement with safety provisions. With all this said and given the developing risks and eventual impact of COVID-19 on the economy, the opportunity was average at best. The key variable and tipping point was our communication styles and acknowledgement that I wanted an insiders’ view on how property projects are run. Handlings with council, builder and tradespeople.

Fast forward nine months later to December 2020. The development is near completion. And scheduled to go to market in early 2021. My main learning highlights:

• Property development is fraught with challenges and risks from project feasibility calculations, sourcing suppliers to development lead times. The odds are stacked against a novice developer. The markets saturated with participants competing for deals and the high capital requirements can potentially translate to huge pains on missteps.
• Learning on the sidelines, while better than a black box is not enough for the observer to reenact. For one to learn, one must have the opportunity to get hands-on and experience the outcome of their discoveries and decisions. It’s near impossible to learn to drive a manual car by reading a book or even in a manual car while needing to learn and adapt to the road rules and traffic.
• To consider serious commercial pursuit, understanding of the rules & requirements and risk mitigation should be in place. Guardrails and guidance are needed for a chance to learn the area and its mechanics.

I caught up with Vinnie mid-year, he’s asked whether I’d be interested to invest in a venture capital fund. Their first fund had done well with a 35% return. While there are risks and implications involved. Reading monthly briefs and monitoring the investment sound low maintenance. Leaving me free for other pursuits. Though with finite capital, typical investment outlays and limited time. I’m obliged to understand the opportunity cost presented. It was tempting to relinquish the burden of performance and take a passive approach to grow the capital base. The “convenience” comes at a cost and with risks. Critically, beyond potential returns at minimal effort, the capabilities and value have I may add to my repertoire would also be minimal.

With the property investment nearing the end. Freddie and I have also had discussions. Main talking point is that Freddie can look for project opportunities where I can lead the project with his support and guidance to minimise errors and work towards generating a material revenue shared return.

With input-process-output, not only is the process stage where the transformation and value add is. On the broader spectrum, it’s where experience and knowledge are compounded. That is a return no passive bet can outperform.