Leo Simpser: Alignment, Learning What Drives Success, and Putting Relationships First

Show Notes:

Welcome, everyone, to episode 20 of Offshoot! Today, I’m joined by Leo Simpser, Founder and Head of LLJ Ventures, a private equity firm specializing in real estate, which he established in 2008. Their tight-knit, 8-person team—whom I like to call a SWAT team—delivers exceptional results. LLJ Ventures, together with LM Capital and LM Advisors, manages over $8 billion of high-net-worth and institutional capital. Through their innovative investment strategies, they’ve consistently provided a 24% IRR and a 2.3x multiple on average for their investors. Despite managing $1-2 billion, their approach remains boutique and bespoke. They eschew funds and prefer tailored investment structures, seeking out attractive risk-adjusted returns.

In our conversation, Leo shares his journey with LLJ Ventures, grounded in the lessons learned from his earlier private company, HNMA, which provided residential mortgages to underserved Hispanic borrowers. With a unique mix of “zoom in, zoom out” as described by Jim Collins, Leo remains community-oriented and purpose-driven while focusing on the finer details of execution. His intellectual rigor and ability to connect strategic vision with day-to-day tactics is a cornerstone of LLJ’s success.

Join us as we explore:

• The essential role of failure in the entrepreneurial journey, revealing who we truly are.
• Why taking a step back from the daily grind can be valuable.
• Identifying distressed opportunities in today’s market.
• The challenges of fund structures and their limitations.
• How institutional vs. private capital can shape investment decisions.
• Crafting innovative investment structures, such as deals with zero preferred returns.
• The importance of local expertise in operating partners.
• Co-GP investing, where LLJ may take up to 97% of the equity.
• Aligning portfolio allocation needs with deal risk profiles.
• Balancing flexibility and focus with opportunistic investing.
• Why relationships matter more than transactions.
• Creating opportunities for long-term employees to achieve wealth.
• Giving back through interest-free loans.
• The power of saying “no.”
• Following your entrepreneurial calling, recognizing that this journey happens just once.

Enjoy the episode!

Transcript

[00:51] Kevin Choquette: Welcome everyone to episode 20 of Offshoot. Today, Leo Simpser, Founder and Head of LLJ Ventures, joins me on the podcast.

[01:00] LLJ is a private equity firm focused on real estate that Leo started in 2008. Their eight person SWAT team, my term, not theirs, packs a hell of a punch. As part of three affiliated companies, LM Capital, LM Advisors and LLJ Ventures, they manage a collective $8 billion of high net worth and institutional capital.

[01:22] LLJ has provided their investors a 24% IRR and 2.3x multiple since their 2008 inception. Though they run 1 billion to $2 billion of capital, they are boutique and bespoke by design.

[01:38] They employ one off investment structures, not funds, and pursue an opportunistic investment strategy to find attractive risk adjusted returns.

[01:47] Leo has a lot to say and spends a good bit of time setting the stage to LLG’s success by sharing his experience, starting and then failing with Henny Mae, a private company that extended residential purchase mortgages to underserved Hispanic borrowers.

[02:02] Through all of it, I hear someone who’s attuned to the macro and the micro. He has what Jim Collins describes as zoom in, zoom out. He’s got a clear sense of doing right by the community and bringing that purpose to his day, but he also knows the nuance matters.

[02:17] As just one example, I mentioned how one of their incentive structures sounded like it could be tax efficient for employees. Rather than simply saying yes, Leo says something like well, tax is complicated, but it might be more efficient.

[02:31] That intellectual rigor and his ability to assimilate big thinking with the minutia of day to day execution strikes me as a central component of LLJ’s success.

[02:41] Listen in as we cover topics that include failure as part of the entrepreneur’s journey and how our reaction to failure is what helps us learn who we really are, the value of taking a break from the day to day where distress exists within today’s marketplace, the pitfalls of investing into funds and the fund structure, how the quality of money, namely institutional versus Private, can inform investment decisions and investment vehicles Creating unique custom investment structures like deals with zero preferred return why you pay for local expertise in an operating partner, COGP investing and how LLJ might take as much as 97% of the equity in a deal how to match the portfolio allocation needs of investors to the risk profiles of a deal the trade offs associated with being opportunistic, namely picking up flexibility to chase returns, but giving up domain expertise and some of the efficiency associated with executing in a single vertical.

[03:48] First the partner, then the deal Being relationship oriented versus transactional and making money for your investors Creating the opportunity for long term employees to become wealthy as part of the team Giving back in the form of interest free loans saying no and executing on what calls you to action as an entrepreneur as we only get to go this way once.

[04:13] I hope you enjoy the episode.

[04:19] Leo, thank you for taking the time to join me on the podcast today. I appreciate it.

[04:24] Leo Simpser: Of course, it’s my pleasure. Kevin, thank you for having me.

[04:27] Kevin Choquette: Yeah, I know you’re very busy and I appreciate you taking the time to get us started. Could you just tell us a little bit about yourself and perhaps llj?

[04:39] Leo Simpser: Sure. So I was born and raised in Mexico City. Then I came to the US for both my undergrad and grad degrees and I founded LLJ in about 2008 during the great financial crisis.

[04:59] And LLJ is a private equity real estate firm that invests opportunistically in different asset classes and different parts of the capital stack.

[05:14] Kevin Choquette: And what are you guys seeing right now in the business? What are the opportunities and challenges you guys are looking at?

[05:20] Leo Simpser: Well, the market is transitioning. It seems like interest rates went up very significantly and both the cap rates and valuations have not necessarily adjusted fully to reflect this new interest rate environment.

[05:37] And basically what we see is that people who do not need to transact, who do not need to sell, are not selling. They rather wait until interest rates come down and valuations go up a little bit so there’s not as much liquidity as there was before.

[05:54] And since we’re opportunistic and always trying to find what the best risk reward strategies are, where the best combination of reward versus risk is in the market, we’re seeing some good opportunities in the preferred or debt markets.

[06:16] In other words, we’re able to come in with preferred equity or mezzanine debt and get equity like returns without taking necessarily the equity like risk.

[06:27] So we’ve been seeing some of those opportunities in the multifamily sector, which fundamentally is still very strong.

[06:37] Kevin Choquette: Yeah. And as I understand It LLJ has a pretty significant portfolio also in multifamily. So how do you guys view, you know, getting kind of a late deployment if you. I don’t even know where we are in the cycle, but let’s say we’re late cycle or maybe we’re early of the next cycle.

[06:55] But putting dollars out now might look different than the dollars you put out three or four years ago on, you know, perhaps ground up developments and things like that. How do you, how do you guys kind of reconcile with, with those two competing realities in different vintages, if you will?

[07:12] Leo Simpser: Yes, absolutely. So capital now has more value, there is more demand for capital than there was, more need for capital than there was before.

[07:23] And so you need to price it accordingly. You need to be very selective.

[07:29] Instead of, as I said, instead of going into, let’s say, a brand new development right now or buying an existing asset, you find a lot of very good developers, for example, that are in a little bit of a bind either because construction costs were significantly higher than they had anticipated, so they had a cost overrun.

[07:58] It’s not uncommon to see projects that came out of the ground two or three years ago to end up with significantly higher costs due to the inflation we’ve had on the one hand.

[08:12] On the other hand, their financing costs, if they didn’t have a fixed rate, which is not uncommon during construction to have variable rate, their interest costs were significantly higher too.

[08:26] And lastly, even though rents also went up currently, when you look at the refinancing market, you know, after, after people build and are trying to put on permanent financing, they’re saying that the amount in the new loan, that the proceeds are not necessarily sufficient to cover their existing loan pref or loan mes or simply their senior loan.

[08:58] And as a result of that, they either need to come up with more equity or they need to, you know, or they’re going to lose their project and sometimes they don’t have enough equity to put down.

[09:10] And that offers a great entry point or an opportunity for someone like us that can deploy fresh capital and be in a preferred position above their equity.

[09:22] That’s one of the areas of opportunities we’ve seen. So you have certificate of occupancy, the property is complete, it might be leasing or it might be stabilized.

[09:37] And the sponsor or the owner, the developer does not have enough money to refinance the senior loan. And the senior loan is not, you know, the senior lender maybe is not as flexible as they would have expected.

[09:52] And this has to do also with the context of the Consequences of increasing interest rates. And what happened with the regional banks? A lot of banks are under more scrutiny and you know, if they lent into other sectors that are going through tough times, let’s say they lent into office and they’re having to take significant write downs and so on and so forth, they really want to get repaid and they don’t necessarily have the flexibility to work with the borrower as much as they did before.

[10:25] So that’s one set of opportunities. The other one is people who, as I said, ended up with significantly higher costs than anticipated and they can’t, you know, they don’t have enough money to finalize their project.

[10:38] Maybe they’re 80, 85% complet and you know, they still need a little bit of money to get the project done. They may go to their construction lender and say, hey, can you give me a little bit more proceeds?

[10:52] We’re all better off if we finish this building. If I leave you with an 85% complete building, what are you going to do with it? And again, some of the lenders are not in a position to be flexible and give them more proceeds for a variety of reasons.

[11:07] And that presents another opportunity for us to come in with a structure where their equity is subordinated to ours. And then we can give them money to finish the building and have a lot of downside protection.

[11:23] Those are some opportunities we can get.

[11:26] Kevin Choquette: Into kind of the structural stuff on that. But it’s probably worth also going back to kind of more story of origin of lh, which I’ll get to. But when you guys, you know, I mean, you’re speaking to that opportunity with a lot of fluidity.

[11:43] And my suspicion is you may also have projects where you’re of similar vintage. Maybe it was a 2020 or 2019 apartment construction start and you guys are coming out with your partners into that permanent financing market and finding the same sort of constraints.

[12:04] How does it look from the other side for deals that you might have been principally invested in that are weathering the very same constraints you just articulated, Whether it’s the cost overruns or coming up short on loan proceeds from the permanent market?

[12:20] Leo Simpser: Sure, it’s a very good question. We actually do have some projects under construction. First of all, we try to be disciplined and didn’t necessarily chase the yield like other people were doing or like the market was doing.

[12:42] So we would only look at projects with a significantly higher yield to cost than what the market was trading at. So for example, if people were doing deals that in Excel were solving for a 5% yield on cost.

[12:59] We were not doing those. We were trying to, you know, we were passing on most deals and we were only trying to do those deals that gave us something closer to a six.

[13:10] And so it was difficult because we didn’t deploy a lot of capital and we needed to wait for very, very punctual and specific opportunities. So we are finishing up a project in Lemon Grove, 66 units.

[13:25] It did cost a little bit more than we had anticipated, mainly due to delays. And the delays were related in, for the most part, to a significant rainy season in San Diego in a period of time during the construction where it really affected us.

[13:50] And so, of course, you know, when a project takes longer, it costs more. And we also had an unfortunate event with one of the subcontractors.

[14:00] But what we are, you know, because we were a little bit more conservative going in, the increase in rents is basically making the project still be very attractive. The only thing we had to do was to put in a little bit more money into the project.

[14:23] And the way we did that was by splitting it with investors. In other words, the LPs put in half of the money that was needed and the sponsors lent the remainder money at a relatively low rate.

[14:39] And in that way we were able to ensure that the new money coming into the deal had at least the same returns, if not better returns than the initial money that came in.

[14:54] So not very significant because we. On the road, conservatively, yes, we’re facing the same issues. And now we can actually refinance 100% of the construction loan and the addition loan that we made.

[15:10] So we’re going to stabilize this project and will be in the market probably towards the end of the summer, end of the year. And I don’t foresee any, any difficulties.

[15:21] Multiple other projects that we have in terms of development.

[15:26] We always try to. When we buy land and where we’re entitling land, we, you know, our rule is never to put in, put on debt.

[15:37] And as a result of that, those projects, we have enough capital to entitle them, if they’re entitled, we put them on hold. And because we don’t owe any money to the banks, we don’t have any pressure and we’re only going to start when the numbers make sense.

[15:57] So thankfully, our portfolio is relatively healthy and I guess it’s partly luck, but for the most part, it’s discipline.

[16:06] Kevin Choquette: Yeah, mitigating that tail risk. Well, look, let’s go back. We kind of got started going right into the tactical. You started LLJ 2008. What brought you to LLJ.

[16:21] And I know LLJ operates within an ecosystem of a couple other asset managers. Maybe you could get into that a little bit so people can kind of contextualize, you know, the specifics of these deals.

[16:34] Leo Simpser: Absolutely. I think it’s better to start with the background. So I’ll give you a little bit, a little bit of background of pre llj, because that leads me to how I started the company.

[16:45] Kevin Choquette: Yeah, great.

[16:46] Leo Simpser: So before the great financial crisis, before 2007, I started a.

[16:54] I was one of the founders of a company called heane, the Hispanic National Mortgage Association.

[17:02] My partner and I. Well, actually he identified a market opportunity where Hispanics and other immigrants had significantly lower homeownership rates than the rest of the market.

[17:16] And once you analyze that, you could conclude that it was not due to differences in income and education. In other words, even though there were differences in income and education and those justified some of the home ownership gap, there was something else going on.

[17:34] And I understood it very clearly because I was an immigrant. I am an immigrant myself.

[17:41] And so when I came to the US I couldn’t get a Macy’s credit card, even though I had enough money to pay it out. I was simply not entering the credit system the way everybody else had.

[17:54] And so you had Fannie Mae and Freddie Mac who were at that point government sponsored enterprises.

[18:05] And they basically had an advantage relative to the rest of the financial institutions because the Congress created them. And Congress basically gave them an implicit government guarantee so they could borrow at a lower cost than anyone else.

[18:24] And nevertheless, they were privately held institutions. You could buy their stock in the stock market.

[18:33] And so they always had a conflict. Right. On the one hand, their government sponsorship is what allowed them to make significant amounts of money. But on the other hand, their incentive was to maximize shareholder value.

[18:47] And so they weren’t really serving a social good, even though they spent a lot of money, time and effort justifying that they’re helping minorities and they’re helping homeownership rates and so on and so forth, because that PR justified them having this implicit guarantee.

[19:12] And when I came in and studied the problem carefully, I saw that back in time, Fannie Mae’s average FICO score in their books was over 700. So they had very, very high credit.

[19:26] They didn’t take on a lot of credit risk, and they didn’t really expand homeownership too much, even though they did have some efforts. They were minuscule relative to their size.

[19:37] But they made a lot of noise about them because they knew that that was what justified them having this unfair advantage? And so I came into the market and realized that the problem was credit.

[19:54] The reason why Hispanics and other immigrants had significantly lower homeownership rates than the rest of the market after you adjusted for income, education, and other aspects was because they didn’t qualify necessarily for the mortgage, which is obviously essential in buying your first home in, at least in the US Market.

[20:19] And so I understood it very clearly, and there were a lot of cultural aspects and practical aspects. I’ll give you a few examples from. You know, my father told me, you can buy whatever car you want as long as you can afford it, meaning you buy the entire car.

[20:35] Kevin Choquette: You write the check.

[20:37] Leo Simpser: Yeah, you write the check, and that’s what you do. And in the US System, it’s all about whether or not you can afford the monthly payment, right?

[20:45] Kevin Choquette: Yep.

[20:46] Leo Simpser: So that’s one example. Another example is just the heavy reliance on credit.

[20:51] You know, Hispanics tended at that point in time to have significantly lower use of credit cards and significantly lower number of credit cards because the credit card was seen more of an emergency type of financing than just carry balances in your credit cards.

[21:13] And if you think about it carefully, your FICO score was lower if you only had one credit card and you rarely used it than if you had multiple credit cards.

[21:24] Because in the FICO world, having multiple credit cards gave you a lot of points of, oh, this guy, you know, or this girl really knows how to manage credit properly.

[21:34] Because, you know, they have 20 credit cards and look, they pay them all and they have balances, but they make their minimum payments and so on and so forth. What do you think happens when somebody gets laid off and has 20 credit cards versus a guy that has one credit card?

[21:47] How much more dangerous is having 20 credit cards if you have no income? Right. From a credit perspective, I’ll give you the last example. I mean, job stability at that point in time, of course, they’re trying to qualify you for a mortgage, and they look at your job stability.

[22:05] So you have a person that has been working in Detroit in GM, building cars for 25 years, and that’s considered very stable. And then you have this Hispanic person cleaning toilets one year, and then the next year he was a waiter, and then the following year he was working in a hotel and so on and so forth.

[22:26] And that was seen as very unstable. Right. Look at this guy. He’s jumping from one job to another every year. Guess what?

[22:33] That person was increasing their earnings every year on the one hand. And on the other hand, he showed a bunch of flexibility, which, and honestly also resilience. If he gets fired from one, he’ll go back and clean toilets.

[22:50] He’ll do whatever it is necessary to maintain his or her income. And as a result of that, these patterns that you saw affected people negatively, even though it didn’t necessarily mean that they were higher risk.

[23:09] What you saw in the subprime market is that if you think about it graphically, the Hispanic borrower was a square peg and they were trying to fit in a round hole and it didn’t fit right.

[23:25] So what subprime did was make the hole so big that even though the peg was square, it would go through. So you had a bunch of Hispanics and other immigrants that were going into the subprime market paying very high rates where they were not necessarily higher risk.

[23:44] And so what we tried to do, my partner raised the money and I ran the business and I decided to focus on credit. So I hired a bunch of PhDs and we created this company.

[24:01] And when I went to the large banks and tried to get them to work with us, they were keen on attacking the Hispanic market. And they were just saying, yeah, just bring me data, and if you bring me enough data, we’ll of course partner with you and we’ll do more mortgages to the Hispanic market.

[24:22] And I had to explain to them, you know, why there’s no data?

[24:27] No, why? Because you don’t lend to them. And you know why you don’t lend to them? Yes, because there’s no data.

[24:33] Kevin Choquette: No data.

[24:35] Leo Simpser: Do you see the irony there? How can you innovate in the mortgage market, which is a huge market, if it’s all based on data and you have basically left out a significant portion of the market.

[24:50] Not with intention, but that’s just the way it was.

[24:54] So it was very difficult. And then at that point I realized and understood that even the large banks, and I’m talking Wells Fargo and some of the largest banks, they were not really making the decisions as to whether or not to lend to people.

[25:09] The people making the decisions were the ones buying the mortgages from them.

[25:15] Even if Wells Fargo knew that a mortgage wasn’t very high quality, all they care about is that they could originate at 100 and sell it in the secondary market very quickly for 102.

[25:25] And that is a genesis of the financial crisis, the different incentives that people had.

[25:34] And the banks were originating garbage.

[25:38] And as we were originating, we were very loose on certain criteria, but very tight on other criter.

[25:47] And I saw the evolution of the market where they became loose everywhere. You had NINJA loans, no income, no job, no assets, no assets, Nina loans, no income, no assets.

[25:58] And those loans were being sold in the secondary market. So even though Wells was very well aware that those might never get repaid, who cares? It’s not their balance sheet, let me just resell them.

[26:11] And as long as home prices continue going up, nobody’s going to default. Because if you get into trouble, you just sell your home and you pay off.

[26:19] Kevin Choquette: And there’s another loan right behind it.

[26:21] Leo Simpser: And there’s another loan right behind it. So I didn’t mean to get into so much detail, but this is very important, both at a personal level and professional level. We were doing really well at the end.

[26:36] I was able to do a joint venture. I used to work for Deutsche Bank. They gave me half a billion dollar line of credit and we were basically being that secondary market.

[26:48] As I told you, I understood the golden rule, the one with the gold rules. So the person buying the mortgages was a person saying, this is a way you have to underwrite and these are the mortgages that I’m going to buy.

[27:00] So we became a secondary market player where we went to banks and said, look, if you originate to my standards using my model, I will buy those loans. And they were very happy.

[27:10] And we were starting to do really well. And we had several hundred of several hundred million dollars originated and we were going to go to the secondary market to sell those loans and churn that line of credit again and continue originating.

[27:28] And the crisis of 2007, 2008 came and of course it froze the markets for securitizing mortgages.

[27:37] And as a result of that, the business failed.

[27:40] And it was very interesting because honestly, it was my first failure and it made me grow very significant, very significantly. At a personal level, I first was very disturbed and I viewed it as a huge personal failure.

[28:05] I lost money for investors, the business failed. I spent, I don’t know, five years of my life working extremely hard, and it all came to a screeching halt. And I was not able to initially differentiate between my personal failure and the failure of the business.

[28:23] And so that was the first lesson, trying to understand that I did great things. We innovated. We were a fintech before the fintech term existed. We were innovating, we were putting people in homes.

[28:34] The mortgages actually performed extremely well even after the crisis. So our thesis was right. I did a joint venture with Wells Fargo, one of the leading companies in the space.

[28:46] I did a joint venture with Deutsche Bank.

[28:49] There were A lot of things to celebrate. However, I only saw failure, and I was subsequently, with time and perspective, able to differentiate between the failure of the business and my personal failure.

[29:04] And number two, I thought that the failure would define me.

[29:09] You invest so much into your companies, into your, you know, entrepreneurial endeavors, that you become one with them. They are you, you are them, they’re your baby, they reflect you, they have your values, and so on and so forth.

[29:24] And I thought that I would be defined by that failure because my identity was so intertwined with that venture, if that makes sense.

[29:34] And so I was able to understand that, you know, the failure was not going to define me, but how I reacted to that failure would.

[29:48] And so I became very conscious about, okay, how am I going to react? So what do I have in my current business? So I have investors, I have employees, I have suppliers.

[29:58] How am I going to react with them?

[30:03] Is really going to tell who I am, Right? So I was able to place 100% of my employees with different firms, different opportunities. I worked really hard on that. And several of those are back with me now.

[30:20] After I got stabilized again, I was able to hire them back.

[30:27] We tried to pay every last penny of what we owed to suppliers or we arrived at consensual agreements and we tried to very transparent with our investors. And, you know, we accepted our mistakes and we were able to continue keeping trusting relations with those same investors.

[30:54] For the most part, I would say 90% of the investors are investors that continue investing with us in spite of the fact that we lost money in that venture.

[31:04] Kevin Choquette: What was the timeline? When did you start Hannie Mae? And then when did that. It imploded like 07.08. What was the.

[31:13] Leo Simpser: Yeah, it imploded in 08.09.08.09, yeah, 08 essentially. And I had been working on that for at least five years. So maybe 2004 to 2008. 9. That was more or less a period.

[31:30] So that takes me to how I started LJ Ventures.

[31:34] So at that point in time, interestingly, I didn’t have a lot of time to stop and, you know, get all depressed and, you know, take a lot of time off because I had two kids and two on the way.

[31:50] My wife was pregnant with twins.

[31:53] And, you know, that keeps a lot of pressure. So yes, of course I was sad and maybe somewhat depressed for a few weeks, but I really had that pressure and that incentive and I had an opportunity for the first time in a long time to step out of the day to day and say, what is my next Step and how am I going to be defined?

[32:16] What did I learn from this failure and how can I use it for my next endeavor?

[32:21] So I had a real estate background from a family perspective on the one hand. On the other hand, I really understood what was going on in the mortgage space and how lenders were lending and their situation and so on and so forth.

[32:35] And I said, you know what?

[32:38] I’m going to take advantage of what actually killed my company and use it to my advantage. The knowledge that I have, the contacts that I have.

[32:49] And I had a thesis that the crisis was going to and at some point and that their markets tend to overreact when there are crises and that there were going to be a ton of opportunities.

[33:03] So I said, you know what? I’m going to start buying both mortgages and real estate opportunistically and that’s what I’m going to do. And I’m not going to tell you that I wasn’t afraid because the crisis was ongoing, if you remember.

[33:17] I mean, it didn’t finish in 2008 or 2009. You know, the real estate values were still going down dramatically.

[33:24] And so we started doing that. So I created LLJ Ventures and I told my partner, hey, I’m not going to let you or the investors hanging. I’m going to start this thing.

[33:37] And we ended up doing a deal where we partnered in LLJ Ventures and I partnered in the business that he had started multiple years ago. He started in the 80s, a wealth management firm.

[33:52] And he did the tough part. He started from Z0 to about $500 million in assets under management.

[34:00] And so I basically partnered with him. I wrote a business plan where I wanted to modernize that business. And I said, look, it’s your business.

[34:10] This is a business plan that I would like to execute. If you agree, we can partner. If you don’t, it’s 100% your business. You can do whatever you want. And he said, no, yeah, let’s do it.

[34:19] And so we partnered both on the wealth management side and in LG Ventures.

[34:24] Let me tell you about the design of LLJ Ventures. Early on, philosophically, how I set it up. First of all, I decided not to do a fund.

[34:36] I don’t love investing in funds myself.

[34:39] I like investing in specific opportunities. So there was a little bias there. But the main reason was I wanted to be opportunistic. There was a crisis unfolding. Nobody knew exactly what was going to happen with a different sectors of real estate.

[34:54] And there was a lot of uncertainty. And I did not want to be tied to a box and still be opportunistic. Because if you’re tied to a box, let’s say one of my first investment thesis was to invest in limited service hotels in secondary or tertiary markets.

[35:13] And if I had raised a fund to do just that, I would have been stuck in that. And if the opportunity didn’t materialize there or shifted, I wouldn’t have been able to deploy that money.

[35:25] And as a result, I didn’t want to have that box. So that’s number one. Number two, incentives. I’m all about incentives. A lot of the funds have a life, you know, most funds have a life, you know, have an expectation of timing.

[35:38] So maybe it’s five years, maybe it’s six years, maybe it’s seven years. But at the end of those seven years, they need to sell. And it might not be the best time to sell real estate.

[35:48] Real estate is relatively cyclical. You have highs and, you know, you know, have ups and downs. And if you by mandate are forced to sell during a bad market, you’re not going to do well.

[36:00] And so I hate that incentive on conversely, if you have a fund and you have a lot of money and the market is super expensive, you need to deploy it.

[36:09] So I don’t like that pressure, and I’m not criticizing managers who live in that space. I think as long as you do better than your competitors, you’re okay. But since I was investing my money and my clients money and my clients are friends and family and they’re close people and I care a lot about their money, these are not faceless investors, they’re not big institutions who have maybe different incentives relative to the way they manage the money.

[36:39] I need to look at people in their face and I know them and I view it as my own money. And so I don’t always want to be invested. I want to be invested when things are cheap and I want to be more conservative when things are expensive.

[36:51] And so having a fund might screw up the incentives.

[36:57] Lastly, I didn’t necessarily want to be tied to a particular part of the capital stack. So if you want to do equity, that’s great. If you want to do debt, maybe that’s a great opportunity too.

[37:12] Or if you want to do preferred equity, as we started chatting about, and I don’t need to stick to only one portion of the capital stack. I can be flexible and try to understand where the opportunities are and then move accordingly.

[37:29] So, and the last piece is I always want my investors to.

[37:38] Well, I’ll tell you Two more things. One, my investors, Here’s a specific opportunity. Do you like it? Do you not like it? If you don’t like it, don’t come in.

[37:46] If you like it, please come in. If you have a fund and you make a big mistake on a particular property, investors can say, oh, I wouldn’t have done this or that in this way.

[37:57] I am upfront with them. I tell them exactly what the risks are and they take the journey with us. And the last thing that’s very important is incentives. A lot of the times when you have a fund, you have a fixed compensation structure, let’s say you have a carried interest and a preferred return and so on and so forth.

[38:13] And I think it’s for the most part great.

[38:18] And for the most part it may align the interest of investors and managers, but sometimes it doesn’t. And you have certain deals where you shouldn’t have a high preferred return.

[38:29] If you do, as a sponsor, you’re incented to maybe sell very quickly and do a high irr as opposed to really think about this investment as if it were your own money and go for a large multiple.

[38:44] I think that each deal requires a different structure of compensation to the sponsors or to the managers so that it’s congruent with the business plan. And so that’s the other reason why I set up LLJ the way I set it up.

[38:58] Kevin Choquette: Quick question on that.

[39:00] Leo Simpser: Yes, go ahead.

[39:01] Kevin Choquette: Going back to Hannie Mae, the investors, the macro overshadowing your execution, some of your investors sounds like not necessarily being made whole, but you keeping those relationships intact. Are those some or all of the same investors that have come with you to start LLJ back in 08?

[39:24] Leo Simpser: Absolutely. There’s some, they’re not all of them. But first of all, let me make it clear, we lost all the money.

[39:32] Kevin Choquette: Okay.

[39:35] Leo Simpser: Yeah, this was a startup and it was an innovation, you know, it was innovative and they lost 100% of the money. And for the most part, as I said, people did not lose the faith in us or the trust in us and they continued investing with us.

[39:56] Kevin Choquette: Well, and you stated, is it Louis or Louis like your.

[40:03] Leo Simpser: My partner is Louise Meisel. Yes.

[40:05] Kevin Choquette: Yeah, Luis.

[40:07] So you said Louise had gone from zero to 500 million. I don’t know how up to date the current website is, but maybe 7 billion at this point.

[40:17] Leo Simpser: Well, there’s different businesses. So LM Advisors is an RIA registered investment advisor. We’re regulated by the SEC and we manage money for high net worth individuals. That business was started by luis in the 80s and when I joined it had about $550 million under management.

[40:40] And now we have a little bit over $2 billion under management.

[40:45] Kevin Choquette: Okay.

[40:46] Leo Simpser: LLJ Ventures started from zero and our current portfolio is worth in excess of a billion dollars. But it was probably closer to 2 billion at some point. But we were net sellers during the last years.

[41:02] And then there’s another business that’s related, but I’m not a partner in, that’s Luis and other partners called LM Capital. And they manage, I believe over $5 billion. So the whole group, we probably manage about $8 billion or so currently.

[41:20] But LM Advisors manages $2 billion in public markets and LJ Ventures has a portfolio of around 1 billion, but fluctuates.

[41:30] Kevin Choquette: Okay, so how do you think about starting zero, getting to 2 billion? Now you’re back down at a billion as a net seller, taking the RIA sort of high net worth management business from 500 million to 2 billion.

[41:49] I mean those are all since call it 0809. That’s pretty significant growth. What are you guys attributing success to at this point?

[41:58] Leo Simpser: So let’s say divided on the real estate side and on the wealth management side. On the wealth management side, we have a great team and we have a very good name.

[42:10] And in reality, as I said, the hard work is going from 0 to 500. Once you’re at 500 and you have a bunch of happy customers for a number of years, they start referring people to you.

[42:24] And so if you. We believe in always putting the client at the center of what we do, both on the wealth management side and on the real estate side. We don’t look at these as transactions, we look at these things as relationships.

[42:42] And that’s part of the philosophy in LLG Ventures. Our fee schedule is not very high.

[42:48] I can tell you that. We lose money if we only get our fees. We make our money through our own investment and through our carried interest. So if the clients are successful, if the investors are successful, we’re very successful.

[43:02] But if a deal goes south or it’s mediocre, we don’t make any money with the fees. Why? Because we’re aligned with our investors. These are long term investors and you know, if they make money here, the money is going to go back to the wealth management side or it’s going to go back into another deal for the most part.

[43:19] So I attribute the growth in part to treating always investors in the right way, being transparent, always trying to do the right thing for them, even if it’s not the Most profitable for us.

[43:32] So on the wealth management side, there’s multiple business models. Our business model is we only take a fee of assets under management from the actual clients. We don’t take money from hedge funds or funds or retrocessions.

[43:49] We don’t take money from banks.

[43:51] We are not a broker dealer even though we could be super profitable.

[43:55] But we would have a conflict of interest with our investors. And other competitors are broker dealers and they make money when they’re trading. And we believe that presents a conflict of interest and you know, basically incents people to trade more and to have much more activity and is not necessarily growing the assets of the, of the client.

[44:16] And so that’s one of the key things. And the second is performance. We’ve had good performance both in the public markets and in the private markets. On the, on the real estate side, we have done probably 80 transactions on the real estate side since 2008 or so.

[44:38] Unfortunately we have lost money on three of them.

[44:41] But even after taking that into account, our track record, our IRRs are in the high 20s and our multiples are exceeding two times in the high twos from a historical record perspective.

[45:00] So we have very strong performance and we try to treat clients right. And I think if you do that, assets will, will, will follow.

[45:10] Kevin Choquette: So the, the treatment you gave there of funds, I’ll tell you that I also align with, you know, go through the hypothetical of okay, we’re going to raise $500 million. It’s a five to seven year fund.

[45:26] We’re going to take two points of asset under management. Maybe it’s an 8% preferred return to the investors. 8. We’ll do a catch up and then take 20% of the, of the overall funds project or funds profitability as the asset manager, which means you’re crossed into a bunch of deals that you don’t control.

[45:49] You, you are going to see forced liquidations. They’re going to go well look, it’s, it’s year seven, it’s year eight of this fund. We really need to sell that asset even though the market’s bad so we can catch our promote and wind up this fund.

[46:01] I understand all of the negatives that you’re articulating. I think I got a lot of how you designed around that to kind of fix those problems but without getting sort of into giving the keys to the kingdom away.

[46:16] How much variability do you guys put into different deals based on this is a three year deal, this might be a ten year deal.

[46:25] This kind of goes into your strategy of being opportunistic as well, because I know you’ll do core investments, you’ll do value add investments, you’ll do opportunistic investments. How do you think about changing the single deal structure between you and an investor as each unique opportunity comes up relative to those fund structures that we’re just talking about?

[46:47] Sure.

[46:48] Leo Simpser: So we do change it a lot. The answer is there’s a huge variability. I’ll give you extreme examples.

[46:55] If we are in a very long, you know, we bought a land in Warner Center, 26 acres.

[47:04] It had office in it, low density office, imagine one story buildings.

[47:11] And we knew that there was a plan in Werner Center, a specific plan that wanted to build more housing. This is a long time ago, 2012, 2013.

[47:23] And we wanted to buy these offices, but we saw them as a parking lot. Right. We wanted to re entitle it and then potentially redevelop it or sell it once we were able to add value.

[47:40] And even though there was a specific plan which got approved very quickly after we purchased the property, I knew that we were dealing with the city of la and I knew that they were very slow and very bureaucratic and very difficult to deal with from a development perspective.

[48:03] So I also knew that this location was extraordinary and that we wanted to do a long term hold.

[48:11] So I sat down with the main investors and I said, guys, if you agree that this is a very long term hold and that there might be significant delays and so on and so forth, I don’t want to have a high preferred return because if I do, then we’re going to buy it, we’re going to add a little bit of value, we’re going to sell it, we’re going to do a huge irr and you’re not going to make a lot of multiple on your money and I’m going to put my own money and I want to make a big multiple on my money and I want to have a long term hold here.

[48:42] So we ended up settling and I negotiate against myself as well because I want to do what’s best for investors. And we ended up with a 1.8% preferred return, for example.

[48:55] Kevin Choquette: Wow.

[48:55] Leo Simpser: Treasuries were at 1.8% and that’s what we did. Now of course, our upside was also somewhat curtailed and we did a funky structure.

[49:08] So that’s one example.

[49:09] Another example, we bought a piece of land very cheap, no debt.

[49:17] The idea was to hold it and we said 0% preferred return and we have 20% of the upside up to a certain multiple and a Slightly higher after that multiple is very high, say four times your money or something like that.

[49:43] And if you’re going to hold land long term and you have a preferred return, how can you really optimize your decisions? Right.

[49:53] You get a quick offer that is a couple million dollars higher or that is going to give you a good irr and you’re going to sell it where you have very valuable merchandise.

[50:03] And if it’s not in this cycle, we can wait three or four years.

[50:09] So that’s one extreme. Another extreme is we’re buying. We bought some of the first deals we did.

[50:15] Even though I said I wanted to buy hotels, I couldn’t.

[50:19] The sellers of the hotels wanted a higher price and I wanted a lower price. And the bid ask spread in the market was too wide because there was a crisis and a lot of noise and uncertainty and so on and so forth.

[50:29] So I started buying notes with hotels behind them.

[50:32] And so when I was doing those notes, it was more of a quick type of deal where we, you know, depending on what happened, we could have a relatively quick exit and a relatively quick irr.

[50:46] And so we had a completely different structure there, if that makes sense.

[50:52] Kevin Choquette: It does.

[50:54] I think that we’ll probably talk about alignment of incentives as we talk about your team as well. But one thing I’m struck with, if you guys are, you know, say you have a billion dollars currently deployed in the LLJ platform, if somebody like me comes forward with an opportunity and hey, it’s a $19 million LP check, obviously there’s some discussions you have to figure out if you like the sponsor, the market, the deal, the overall deal structure.

[51:24] But how do you, in this construct that you’ve just outlined, get your investors to move quickly enough to subscribe, say, a $19 million LP check in the timeline that the marketplace would expect, which was say LLJ offers a term sheet, my client signs it and we fund 60 days later, it seems like that could be challenging.

[51:49] Leo Simpser: It could, and it’s typically challenging to most indicators.

[51:53] But remember, we have the privilege of also owning and running a wealth management firm where we have a bunch of high net worth individuals and historically we’ve had much more appetite from them to do deals than we have deals.

[52:13] So that gives us the luxury of being able to behave like a fund. Like you just said, we signed a term sheet and we can close within 60 days with no problem.

[52:23] We try to do only deals that we consider really good. So we basically negotiate everything and then we write a memo and we send it to our investors and it’s first come, first serve.

[52:37] And so far we’ve been able to always fulfill our commitments. Now, is there a limit? I’m sure there is. I’m sure there is. You know, we’ve done deals from, you know, we typically don’t do deals where equities below $5 million, but we have when the multiple is very high.

[52:57] Maybe I’m just a sucker for good deals. I mean, if I find a good deal, I start salivating. And that’s my instinct, is I’m an investor and I get a thrill out of thinking that I’m making a good investment.

[53:10] And I love that process. But we’ve also done, we have a deal with $35 million in equity.

[53:18] With this particular deal that I was talking about in Werner center, we put in $30 million of equity. So we’ve also been able to do those check if I have several $30 million deals in the same year, are my existing investors going to feel that maybe not?

[53:38] I’m sure there’s a limit. But so far we have more demand from investors than opportunities.

[53:46] And that’s a function of us being selective and size of deal that we’re playing in. We try to be larger than what typical high net worth individuals would do on their own in terms of deal size and we try to be lower than what institutional investors would do.

[54:06] And in between, let’s say 8 to 15, $16 million is a sweet spot where there might not be as much competition from institutional guys and there might not be as much competition from high net worth individuals.

[54:23] Kevin Choquette: Yep, that makes sense.

[54:25] So let’s talk about. I heard everything you just said in terms of the investors having more appetite than what you typically are providing them. What’s curious to me, and this also stands in contrast to the fund or a fund strategy, is that LLJ invests across the spectrum in terms of core value add and opportunistic.

[54:46] How do you guys think about being an opportunistic investor and being flexible enough to say, hey, this is a really attractive core plus return, even though that’s maybe a high single digit return versus you just mentioned something where above a 4x multiple we would get a greater promote.

[55:07] How do you think about operating in that space and I guess secondarily how you also find that the capital will take an attractive nine and also go after a forex deal?

[55:18] Leo Simpser: Yes, absolutely. It’s a very good question.

[55:23] First of all, the one thing that is not going to change that LLJ is looking for good risk adjusted returns. So it’s a good, you Know when I ask people is 12% a good return?

[55:36] And they say yes or no or is 20% a good return?

[55:39] That’s the incorrect answer. The answer is it depends on the risk. Right? So that’s how we’re wired, finding good risk adjusted returns, number one. Number two, if you remember, I also am very involved in the running of the wealth management platform, specifically on the investment side.

[56:00] And so being aware of public markets, valuations, REIT valuations, interest rates, interest rate volatility, so on and so forth, allows me to have a relatively good perspective on relative values.

[56:20] Right.

[56:21] So what are things trading for in the public markets? What are things trading for in the private markets? When is one thing more interesting than the other? And that allows me to also, I think, have a good perspective as to what asset class seems to be more attractive at this particular point in time.

[56:38] Now, now you didn’t ask that question and I’m not trying to avoid the question. I think it’s just a prelude to say, first of all, we need to be convinced where the best risk adjusted returns are.

[56:52] And let’s say at one point in time there are in Core plus or at another point in time they’re opportunistic. And once we’re convinced that we have a very interesting relationship between risk and reward, then we go to the appropriate set of investors.

[57:10] We try to choose our investors according to the business plan. Some investors are not interested in a ten year hold, right? They might maybe older and they’re not interested in that.

[57:22] Some investors are looking for cash flow. So if you put them into a deal that has no cash flow, even though it has a lot of appreciation, they’re not going to be happy, it’s not going to be a good fit.

[57:31] So the beauty of doing deal by deal basis is that you can put the right set of investors in each individual deal. So, so you align the capital with the business plan.

[57:41] And that’s essentially what we do. We do tend to look for relatively attractive returns. So when you mentioned 9%, I don’t think we’ve ever done a deal at 9%. Maybe we’ve done deals at 10%, but those are loans in a senior position with very, very good collateral.

[58:01] And we just had a context or a specific opportunity where we were able to lend super expensively. But other than we try to shoot for larger returns.

[58:12] Kevin Choquette: Sure, but I know just from kind of recently browsing the website and exchanges I’ve had with you over the years that value add deals are very much in the strike zone.

[58:24] I believe you’ll take on a land entitlement deal under the right structure, certainly you guys go vertical. So you do deploy across that risk spectrum. How do you think about, I mean I hear what you’re saying, right?

[58:37] We want an appropriate risk adjusted return for whichever portion of risk we’re biting off.

[58:45] But that also can, it has the risk, I would say, of diluting your efforts because you’re not a single focus. You’re not just, hey, we are a multifamily developer.

[58:56] Leo Simpser: Yes, you are absolutely right. There is a trade off and I’ll give you a few of the. It’s a very, very good point. So on the plus side you have flexibility, right.

[59:08] On the negative side is you can’t be an expert at everything.

[59:15] We recognize that, right? While we have a lot of experience in multifamily, we don’t have a lot of experience in self storage.

[59:22] And while we know the San Diego market really well, we don’t know the.

[59:29] So it doesn’t matter the Iowa market really well.

[59:34] And as a result of that and recognizing that we’re not experts at everything and that even though we can measure the risk and reward of things as it comes, you know, when it comes to execution, you really need to be an expert in what you’re doing.

[59:50] It’s a super competitive market. And so what we do is we partner in about 50% of our deals.

[59:58] If I check the data, Maybe it’s even 60% of our deals. So we execute deals on our own, those in which we have expertise, those in which we know the markets well and so on and so forth.

[01:00:11] And we partner, we always partner when we don’t have the expertise of the sub asset class or the market. And even if we know the asset class and a good group that we like to partner with brings a good investment, we rather share or promote and provide the opportunity to our investors to be in a good deal.

[01:00:36] Right. That’s a long game. If I’m just worried if I just start thinking, well, if I do deals on my own I get 100% and if I partner with people I’ll just get 50%.

[01:00:47] As an example, I’m only going to do deals on my own versus giving the opportunity to my investors to invest in great deals always and more deals. I think long term that’s a better strategy.

[01:01:00] If you really have a long term focus, you don’t care about the short term, whether you’re making more money in one deal or another. What you care about is that your investors make money and we invest alongside them.

[01:01:11] So that we make money ourselves.

[01:01:13] And so that’s a little bit of the answer is partnering to fill in the gaps of the lack of focus on the one hand. And on the other hand, yes, it is difficult for the team.

[01:01:28] And I drive them crazy sometimes because, you know, you don’t have a very clear origination strategy. We drive brokers crazy. Brokers like put you in a box.

[01:01:41] Oh, LLJ does this and doesn’t do that. I have a deal for llj. You know what I mean?

[01:01:47] Kevin Choquette: Yep.

[01:01:47] Leo Simpser: And so we. The way I try to describe it is, Kevin, would you put your money in this deal?

[01:01:58] Why do I say that? Because when you say you put your own money and you think about it, you’re thinking about reward and risk.

[01:02:05] And so you say, yes, I would put my money in this deal. Okay, put it, let’s go, let’s do it.

[01:02:14] But, but it is a little bit challenging because, you know, let’s say we only did land entitlement deals. We would be 24 hours of the day running around looking for all the land, looking for all, you know, the players, only talking to brokers that in a particular area.

[01:02:36] Let’s say we only did San Diego entitlement deals, we would have a lot more focus. And so I do believe we’re missing out on some deals. By being opportunistic, we are also maybe a little bit inefficient as it relates to origination and we are certainly not experts in everything.

[01:02:55] So we sometimes share our economics and those are the trade offs that we are prepared to do in order to be flexible, opportunistic and be able to move as the market moves.

[01:03:05] Kevin Choquette: Yeah, but I also hear you saying, maybe not explicitly, there are areas that even that opportunistic umbrella isn’t going to cover. Maybe you’ve done deals in Iowa, but it sounds like there are parts of the market.

[01:03:22] Maybe it’s data centers, maybe it’s ground leases.

[01:03:25] I don’t know that you probably have chosen just to leave alone. You have a lane that’s fairly wide, but you’re not boiling the ocean.

[01:03:34] Leo Simpser: Yes, we’re not boiling in the ocean. And if we were to transact in an area where we have no clue, we would only consider that with an incredible partner with domain expertise.

[01:03:48] Kevin Choquette: Right. So let’s bridge in a little bit to the code GP investing, which I know LLJ has done, and I’ll try to break it down for listeners. Right. Take, take a standard real estate deal.

[01:04:00] We’ve got our senior debt. If we’re going to have a equity Partnership, it’s typically an LP partner who might put up 90% of the capital and a GP partner who’s charged to execute the business plan, putting up a 10% co invest and subject to a bunch of performance hurdles.

[01:04:17] This is the alignment of incentives that you’ve been talking about in order to get paid well for executing the entire project. That’s vanilla. I know LLJ has played in the space where you might partner with that 10% GP equity group, which is kind of what you’re alluding to.

[01:04:35] And hey, there are certain deals in certain markets where there’s a local expert who we can partner with that will get us into that marketplace. It might dilute our returns, but we’re doing right by the investor by getting into a good deal and we’re picking up the local expertise we need in order to feel comfortable executing there.

[01:04:54] How do you guys think about being in a deal where there might be, you know, conventional debt, a big check LP and then LLJ along with a local operator?

[01:05:08] Leo Simpser: Yes. So the first thing is trying to choose your partners correctly.

[01:05:15] First the partner, then the deal. We’ve made mistakes in the past relative to partnering with certain groups that we shouldn’t have. And we’ve also thankfully made some great relationships. And so as I said, we do partner when we need the expertise, either in asset class or market.

[01:05:33] But we also partner with good people who we can partner with on repeated occasions, even if we could do the deals on our own because we value what they bring to the table.

[01:05:44] How do we look at these things? So first of all, we have historically supported a lot of younger folks who are maybe work for a big real estate firm.

[01:05:59] They’re great, they’re very smart, they’re very ambitious. They don’t necessarily have a lot of money or a lot of relationships to raise money or even to put the 10% co invest.

[01:06:08] And so if we see the potential, we would be flexible and say, you know what, we will put part of the co investment and just put a certain amount of money that is meaningful to you, even if it’s maybe for market standards, nothing, and let’s get aligned.

[01:06:30] And LLJ will bring 100% of the LP money and will bring part of the code GP money.

[01:06:37] And we, you know, depending on the situation in the ideal world, we want that group to be able to execute the business plan.

[01:06:47] And we want in the ideal world for LLJ’s job to be supervising and asset managing. That’s the ideal world.

[01:06:56] Now we do negotiate the right to step in and take 100% control because we’re bringing essentially 90, 95%, 97% of the money. And so our investors don’t care about who we partner with, they care about us, they’re giving the money to us.

[01:07:15] And if the **** hits the fan, we need to be able to step in and take control of the situation and try to turn it around. And so philosophically that’s more or less how we partner.

[01:07:27] And we’ve had many partnerships where things go according to plan. And LHJ is not involved in the day to day. We’re involved on a monthly basis. We get transparency with information, we visit the property, if there’s a renovation, we’re there, so on and so forth.

[01:07:44] But we don’t do much more than that, than asset manage. And unfortunately we have also had situations where we’ve had to take over and change, change management companies and change people around, supervise more closely, put in more money and so on and so forth.

[01:08:05] Kevin Choquette: Well, I’m going to transfer a little bit over to the people on your team, right, the LLJ team. I think about eight people exclusively focused on llj. You’re very keenly thoughtful of alignment of incentives.

[01:08:24] How are you getting that team to stick with you through what you just sort of self confessed is at times an inefficient process. Turning over a lot of stones, looking in different pockets of the real estate world with an opportunistic slant.

[01:08:42] How are they aligned with you, with the investors to well, look, go back to the very top here with Hinnie Mae and all of the big banks trading paper for a 102 or 103 fee with 0 regard for how the deal actually comes out at the end.

[01:09:01] I can imagine certain people in certain positions on your team, if allowed to might generate new deal flow, get a fee for putting the deal together when it closes and then six or seven years or more later when it ends up being a capital loss.

[01:09:23] You know, they’ve made their 103, 102, whatever it is, they’ve moved on somewhere else in their career. How do you think about alignment within your own team?

[01:09:32] Leo Simpser: Absolutely, that’s critical.

[01:09:35] First of all, I see the people that are at the higher levels as partners and they are partners so they share a piece of the carried interest that we get.

[01:09:49] So that’s number one, that’s one of the incentive structure that allows them not only to make a salary but to create wealth.

[01:10:02] I’m hoping that long term employee that contribute significantly to LLJ will have an opportunity to become wealthy.

[01:10:14] So that’s number One, number two, I also have a plan that some people get where if they invest in a particular deal, we lend them money to enhance that investment.

[01:10:31] So you’re committing to me, I will commit to you.

[01:10:36] And let’s say you are. You’re in a position where you can invest $15,000 in a deal, $10,000 in a deal, which might seem like an insignificant amount, but if we give you another 10 or $20,000 as a loan against your 10, it’s only you put in 10 and you have 20,000 or $30,000 working in the deal.

[01:10:59] If the deal does well and it doubles its money, then your return is enhanced very significantly. And that makes everyone be very aware of everything that’s going on and try to help.

[01:11:19] Even if you’re in a different position than, let’s say it’s an asset management situation, an asset management issue, the acquisition guys is just as incentive to help or to point out the opportunities and so on and so forth.

[01:11:36] So those are some of the, I guess, structures that we use to incentivize people.

[01:11:46] Kevin Choquette: Given the variability of deal structures that you’ve already outlined, I suspect the answer is it depends. But in a prototypical scenario, if you’ve, say, doubled the investment capital for a team member who maybe put in 10, the company’s providing another 10.

[01:12:02] Is there a preferred return or interest rate that accrues while those dollars are out working on behalf of. Well, sort of on their behalf, but it’s also been borrowed capital.

[01:12:14] I’m just curious about the deal structure there.

[01:12:15] Leo Simpser: Yeah, I mean, with respect to employees, the minimum interest rate by law that they, that they have to pay is what they pay, but they don’t pay it current. So again, let’s do a hypothetical example, $10,000 investment.

[01:12:30] We give them a $10,000 loan. So now they 20. So their investment is worth 40 at the end of, let’s say three years. Just to give you an ex. Or four years.

[01:12:44] Right. So 40, obviously, minus 10, that’s 30, minus the cost of the capital. Let’s say the minimum interest rate in that period was 3%.

[01:12:55] For let’s say three years, it’s nothing. I mean, or four years, what is that going to be? A couple thousand dollars? And so they end up making they invested 10 and they end up making their 10 plus another 18.

[01:13:13] You know, so they triple their money.

[01:13:15] Kevin Choquette: Yeah, it’s huge.

[01:13:17] Leo Simpser: Yeah. And so even though it’s a relatively small amount, I mean, we have limits. So we sit down and the other thing we do is it’s a little Bit of a funky structure, but I’ll try to explain it easily.

[01:13:31] So you have an end of year bonus and you can either decide to take it in cash or you can invest it in different deals. So if you don’t need to take it in cash, you.

[01:13:41] Let’s call it a savings account. You have that savings account and you can decide to deploy it in any particular deal.

[01:13:48] Kevin Choquette: That’s cool.

[01:13:49] Leo Simpser: Yeah. Instead of taking cash compensation, you actually get an opportunity to have that savings box and use it in the next deal.

[01:13:59] Kevin Choquette: Or much more tax efficient.

[01:14:02] Leo Simpser: Sure. I mean, tax is complicated, but there might be ways in which that becomes more tax efficient.

[01:14:11] Kevin Choquette: Right. All right, well, let’s switch to the personal. Thank you for getting so granular in all the technical stuff there. It’s super insightful.

[01:14:20] I know you have ways that you like to give back to the community and share some of what has come your way. What avenues of service, if you will, have you found are meaningful and how do you like to give back?

[01:14:36] Leo Simpser: Yes, absolutely. That’s one of my key drivers and motivators to keep on working aggressively and making money, to have a big and strong impact in my life while I’m here.

[01:14:49] I do believe that my business failure that I discussed a little bit with you also gave me perspective.

[01:14:58] And prior to that failure, I didn’t really have any failures before that.

[01:15:05] And I think I was too arrogant and too.

[01:15:11] Yeah, too arrogant. And, you know, attributed most of the success I had had thus far to myself, as opposed to understanding the element of luck involved in being successful. And as a result of that, I do feel that if I do well, I definitely have a responsibility for trying to help others that didn’t have the same luck that I had.

[01:15:33] You know, the fact that I recovered relatively quickly and very successfully after that crisis is a lot of it has to do with luck.

[01:15:44] Yes, a lot of hard work. Yes, a lot of strategy. But with a lot of hard work and a lot of strategy and bad luck, I would be at zero.

[01:15:52] And so you have to attribute a lot of what has happened to luck and being in the right place and at the right time and so on and so forth.

[01:15:59] And so I have a huge response.

[01:16:04] One of the things other than writing checks, which is great, and everybody should do that if they’re in a position to do so. I started a nonprofit a few years ago, many years ago, actually, called Kavod Fund.

[01:16:20] And the objective of Kavod Fund is to help others through interest free lending.

[01:16:27] The idea being this actually came out of a discussion with a Rabbi.

[01:16:34] And he was telling me, if I knew within the Jewish religion what was the highest level of giving. And I said, oh, I know that it’s giving anonymously. It’s very simple, right?

[01:16:46] Where you’re not looking for the recognition or reward and so on and so forth.

[01:16:52] And interestingly, he said, no, it’s lending without interest. And I said, rabbi, you’re crazy. How can you tell me that if Kevin is willing to give away his money and Leo is willing to provide a loan without interest, Leo has more merit.

[01:17:09] And it really shocked me. I couldn’t believe it. I’m like, no, you’re wrong, absolutely wrong.

[01:17:14] And he said, the problem is you don’t understand this because you’ve never been on the receiving end. It’s all about how you receive with dignity.

[01:17:22] And that is more important than whether or not it’s repaid.

[01:17:27] And so it really, it really was something that was very meaningful to me of, you know, because you’re trying to help people, if you can help in a more dignified way, that would be, that would be more valuable, number one.

[01:17:41] And number two, I have limited resources and you know, I can maybe I’m very wealthy next to somebody, but I’m very not wealthy next to somebody else. Wealth is relative, right?

[01:17:53] The reason I feel wealthy is because I’m happy with what I have. But in terms of dollars, it’s only relative. There’s always going to be someone with more money than you, always.

[01:18:02] And someone with less money than you. So if I have limited resources and I can lend my money and get it back and lend it again and get it back and lend it again, then if I had a hundred dollars or $1,000 or $10,000,000, the impact is going to be multiplied 10x.

[01:18:19] So that made sense to me. And lastly, I said, you know what? Why should I limit my impact to my pockets?

[01:18:28] As I said, it’s very little relative to the impact that I want to have in this world. So I’ve also been given energy and creativity and intelligence and a variety of things other than money.

[01:18:39] And so how can I use those to help? And so I created this concept of a website where you can go on and you can find different people who need money for different reasons and you can lend interest free.

[01:18:55] And you don’t have to be very wealthy because we’re using the model of crowdfunding so you can lend $18 at a time. So if you find somebody that you connect with, maybe is somebody that is in a similar situation that you were, or, you know, you Just have a weakness for education or entrepreneurship or, you know, you once had an issue with your credit cards and you know, you’re helping this person without interest to consolidate their debts and pay off their credit cards, then I wouldn’t be limiting my.

[01:19:27] The impact to my own pocket, but I would open this up to more people and make these a great deed available to others so they can actually do it and experience it.

[01:19:39] So. So I’m very proud of that.

[01:19:42] Kevin Choquette: Yeah. How’s it going? How is that effort going?

[01:19:44] Leo Simpser: Well, it’s very tough because you need to create a marketplace. You need to have borrowers and lenders.

[01:19:52] And I have a very ambitious goal of being a global organization. So I started in the U.S. mexico and Colombia, and we have borrowers in all three countries.

[01:20:04] And I started like that because I wanted to have the problems, you know, as you’re scaling an organization. I knew I wanted to be global. So I’m like, I’d rather have all those issues that are going to come up now when I’m building language, how to transfer money, regulation and so on and so forth.

[01:20:23] So it’s going well. We’ve done more than a million dollars worth of loans.

[01:20:30] The repayment rate is over 95%. So it is working.

[01:20:36] There’s a lot of nuances.

[01:20:37] We have transformed a lot of people’s lives. I started doing this before the COVID pandemic, but during the COVID pandemic, I remember I was super stressed because I thought we were going to have another 2007, 2008 type of crisis and in fact, deeper.

[01:20:54] And, you know, we had a large portfolio with close to maybe a billion dollars in loans, and so a lot of obligations.

[01:21:07] And I was very stressed and I was able to take a step back. And I decided I’m going to do three things.

[01:21:16] First of all, yes, I’m going to spend 30 to 40% of my day in defense, but not 100% of my day in defense. Then I’m going to spend 25 to 30% of my day in offense.

[01:21:27] What opportunities are there? Right?

[01:21:30] Not only defending what I have, what opportunities are being made available?

[01:21:34] And lastly, I’m going to spend a third of my time helping others. Because as much as I am in trouble with this crisis, there’s people that are worse off than I am, and I’m going to try to help.

[01:21:47] And so I really stepped up my efforts of Kavod Fund during the pandemic, and we saved a lot of businesses and a lot of people from getting into deeper trouble.

[01:22:00] So I think that accelerated the project a little bit, and that’s basically it.

[01:22:09] Of course, I am involved in many community projects. I am involved in the Ken Jewish community. I’ve been involved there for like 15 years.

[01:22:23] I try to mentor people as well, and I try to be, you know, I see the opportunities to help, just like I see a business opportunity. Sometimes you’re having a conversation with somebody and for some random reason you have an opportunity to help.

[01:22:47] I think you should seize those opportunities. They’re there for a reason, and that’s how I view it. So just like you should for business, being curious, asking a lot of questions will uncover some business opportunities, and it will uncover opportunities to help others with money, with time, with help, with contacts.

[01:23:07] I think everybody’s in a position to help, and you just need to be a little bit more sensitized to it and be aware and see it as an opportunity. And suddenly you say, boom, I see an opportunity.

[01:23:16] I’m going to help this person. And that leads to other things as well.

[01:23:21] Kevin Choquette: Leo, you mentioned the adversity of that first failure being a real challenge to kind of get over and tested you personally, but you also got some good luck. I wonder who might have helped you along the way.

[01:23:32] Like you. Like you’re talking about, you know, maybe finding ways you can help, but who’s come along in your life and gotten you through some of this stuff?

[01:23:39] Leo Simpser: I think when I failed, I was not ready for success.

[01:23:45] If you think about it philosophically, you may say it’s God.

[01:23:50] I believe in God.

[01:23:52] I believe there’s something bigger than ourselves.

[01:23:56] And I believe that I needed that lesson.

[01:24:00] If you ask me today, I would pay money to get that lesson.

[01:24:04] Right.

[01:24:05] I think that had I been very successful at that point in time, I would have been a worse person and a worse business person and a worse, you know, spouse and father and everything.

[01:24:20] I mean, not that I was a bad person, but I just think there’s a lot of opportunity for growth.

[01:24:25] Kevin Choquette: Well, any key people that have come along, you know, maybe in your early years.

[01:24:30] Leo Simpser: One of my first employees, after doing a few deals on my own on the real estate side, I hired Tommy Norgaard. I think you know him well.

[01:24:42] I actually hired him for something else.

[01:24:46] And I was going to send him to Mexico to do some business. And after I hired him, he told me that he didn’t have a visa, that he couldn’t leave the country.

[01:24:56] So I kept him on the real estate side. He had very strong institutional real estate experience, and he has been one of the key people in helping Me grow LLJ Ventures, my family, for example.

[01:25:15] I remember when I had that failure.

[01:25:19] I have an uncle who lives in Mexico. And he, you know, he was actually an investor. He understood what was going on, and he actually took a plane and came to.

[01:25:29] Came and spent an afternoon with me talking. He had had a failure himself in his life before, a very significant economic failure. I guess at one point, I don’t know all the details, but he felt compelled and he came and he gave me moral support.

[01:25:49] And so that was huge.

[01:25:53] But I think most importantly, maybe my wife.

[01:25:56] So I was relatively successful since a young age. I made very good money and I had never had a failure. So we had a relatively good life, relatively speaking.

[01:26:12] Not saying I was a, you know, I super wealthy guy, but we, you know, for the age I had and the situation we had, we were in a comfortable position.

[01:26:23] And when this failure came, you know, one of the things you start questioning is, you know, what is my spouse gonna think if I can’t provide anymore? And this and that and the other.

[01:26:35] And she was very, very clear and supportive from the beginning.

[01:26:40] No matter what happens, I am here with you. And whatever I need to do to adjust, to do this, that, the other, I am here for you. And having that rock, having that stability when everything else is unstable, I think is what helps you stand up.

[01:26:59] You know, if you get shot in one leg and you have the other one and you’re on your hands, maybe you can, you can stand up again. Right. So having that rock as my spouse was definitely instrumental in me having the confidence of going in again and making a really bald bet because some people thought I was crazy.

[01:27:27] You just failed here, and now you’re going into the place where nobody wants to go.

[01:27:33] You know, you need to have a lot of confidence in yourself to do that.

[01:27:35] Kevin Choquette: Into the burning building.

[01:27:38] Leo Simpser: Yeah, yeah, we were running into the burning building. And I think having a rock and having a good family and good situation where you feel supported allows you to take on that additional risk related to.

[01:27:53] Kevin Choquette: That just managing success. And in your day to day, I imagine you guys are inundated with a hundred thousand opportunities. How do you prioritize things and just get through the day?

[01:28:04] Even if it’s as simple as what you said during COVID where it’s 30, 40% offense, 30% defense, and 30% give back today. How do you manage all the inflow and actually the calendar?

[01:28:16] Leo Simpser: Yes. First of all, have a good team like Tommy.

[01:28:21] Kevin Choquette: Yeah.

[01:28:22] Leo Simpser: So he can filter out a lot of the opportunities.

[01:28:26] And we try to have a More, you know, systematic way. Even though we’re a small company, we’re pretty entrepreneurial, and there’s a lot of discussions, let’s call them water cooler discussions.

[01:28:39] We have a structured once in a week meeting for pipeline, and we have a structured once in a week meeting for asset management.

[01:28:49] And so if there’s a new deal that passed certain filters for Tommy, and that is congruent with our current strategy, he would present it, we would all listen to it and ask questions, typically go back and ask these five things that are critical to us either wanting to continue or not, or, you know what, we’re not going to do that deal.

[01:29:13] But instead of saying we’re not going to do that deal is we’re not going to do a deal at that price, we will do the deal at this price. And, and if it’s a crazy price and people tell us to go away, then we’re okay.

[01:29:26] I’d rather have that. Because in some other instances we’ve thrown out really low prices and in some instances we’ve actually gotten it right, or you stay close to something, even they say, no, you still stay close.

[01:29:41] And once they understand that the current offer they have is not real, and it blows up and they see that you were very diligent, even though you had a lower price, they may come back to you.

[01:29:52] So I think it’s a combination of having the right team and having a more structured way of analyzing opportunities and passing on them. It’s very important to know how to say no.

[01:30:06] Kevin Choquette: Yeah, absolutely.

[01:30:09] I want to be respectful of your time, Leo, so give you the floor. Any message to entrepreneurs that are, you know, early, mid or late stage. Just words of encouragement, advice, things you wish you would have learned earlier, whatever.

[01:30:23] Leo Simpser: You like, I think.

[01:30:28] First of all, let’s discuss failure. It is difficult to be an entrepreneur, a true entrepreneur, and never fail.

[01:30:35] I think most incredible entrepreneurs have had failures.

[01:30:40] When we read, you know, about the one or two entrepreneurs that never had a failure, and they’re billionaires and, you know, that’s not real life. It’s. It’s a fluke.

[01:30:49] Even Steve Jobs, just Steve Jobs had a bunch of failures. So knowing that, then you can see failure as an opportunity for learning. You learn much more about from failure than from success and from success.

[01:31:02] A lot of the times what you learn is that you, you, you think you learn certain things because you think, you start to attribute success to certain elements where they may or may not be the right elements to be attributing the success you might have been lucky but you think it was all because of your brilliant strategy or because you know X or Y.

[01:31:24] So that’s the first thing. If you start looking at failure as something that is part of an entrepreneurial lifestyle, then when you encounter it, it first, learn as much as you can.

[01:31:37] Second, do evaluate what you did wrong. The failure might be 100% because of you, but it might not be 100% because of you. So separate the failure of the business to your personal failure.

[01:31:50] Personal failure for me is you’re a bad person. You disrespect people, you mistreat employees.

[01:31:59] That’s failure. Personal failure.

[01:32:02] Business failure doesn’t mean you failed as a person. Also, because as a person, you have optionality. You can fail 20 times and you can be super successful one time and more than compensate, or you can be successful five times and have one failure.

[01:32:20] That doesn’t define who you are because you can always stand up. If you have health, if you have life, you can redo it again and you can retry. So that brings me to my second point, which is resiliency.

[01:32:35] You need to have resiliency.

[01:32:37] Success is never as easy as it seems. It’s always a struggle. And you need to be resilient and work very, very hard. If you ask me what’s more important, the brilliance or resiliency in being successful in business, I would say resiliency for sure.

[01:32:55] That’s what you need. Because when times get tough, you need to continue waking up and making progress forward, even if it’s at a small pace.

[01:33:09] And lastly, I would say, why are you here in the world? I mean, I think there’s a lot of people that do really well in a corporate job, but there’s a lot of people that are here for other reasons and really have a shot at transforming something, at innovating something, at creating something.

[01:33:29] And so if you have that, you know, that idea in your head, I would say try it. Because we only live once.

[01:33:41] Don’t let that opportunity go. And later on, it’s a little bit more difficult to take risk maybe when you have a family and when you have more obligations.

[01:33:53] So I would encourage people to try to be entrepreneurial as early as they can, once they’re ready.

[01:33:59] Kevin Choquette: I love it. Leo. Thank you for taking the time, listeners. Thanks for taking the time, Leo. I don’t know if you want to throw out the website for LLJs. If somebody could find.

[01:34:09] I’m sure if they just Google it, they could find it. But.

[01:34:14] Leo Simpser: Kevin, thank you for your time and your insightful questions and more than anything else for having interest in me and my story.

[01:34:22] LJ’s website is www.lj ventures with an s dot com.

[01:34:28] And if you do have any questions, please feel free to send them to Kevin. I will respond to any questions you have.

[01:34:38] Kevin Choquette: All right. Thanks, Theo. I appreciate your time.

[01:34:41] Leo Simpser: Thank you. Have a wonderful day.