Michael Episcope is the Co-CEO of Origin Investments, a private equity real estate firm designed for the needs of high-net-worth individuals, family offices, and wealth management firms. We discuss ways business owners can remove investment bias from their processes, why you need to consider investing in a fund, and how to make better decisions in business.
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Remove Investment Bias with Michael Episcope
Our guest is Michael Episcope, co-CEO of Origin Investments, a private real estate manager that builds, buys, and lends to multifamily real estate projects in fast-growing markets throughout the U.S. Michael, welcome to the show.
Steve, thanks for having me back.
It’s great to have you. It’s great to have you. And since we last spoke, things have changed. I was wondering if the introduction was even appropriate in a private real estate manager, or now you are a public real estate manager. I don’t know what it is. But tell me a little bit about your story. How did you get into starting Origin Investments and what’s been your entrepreneurial journey?
Yeah, well, first of all, the introduction still is correct. We’re a private real estate manager. We do build, buy, and lend to multifamily real estate in Sunbelt States. And I’ll take you back, I guess, I mean, not all the way back, but kind of to where we started origin. And that really happened in kind of 05, 06, 07, it was formalized in 07. But I came out of the commodity trading industry, so I had a very non-traditional route into real estate. I had cut my teeth down at the Chicago Mercantile Exchange, I traded interest rates and that’s where I made my wealth down there.
I think as a wealthy person, especially young, you become a little bit paranoid about making sure that you keep your wealth and you never say the five words of, “I used to be rich.” Trust me, I’ve known a lot of people who have said those words. My partner and I, we’re just trading investment ideas back and forth and we wanted to be in alternatives. We didn’t want to just be passive investors and put our money in the 60-40 portfolio. We believed in alternatives and especially in real estate and just the power of its ability to protect, to grow wealth, to produce income. And that’s when we started, was in 2007. But it wasn’t, we didn’t have a very, what I’ll call coherent vision back then.
The idea was just to invest our own money in real estate and protect it and grow it, produce the income streams, all the reasons why people get into real estate. I think as we were looking out at the market and evaluating the competition and we had both invested, we just realized that there weren’t a lot of great opportunities for individual investors like us. We weren’t big enough to have a true family office buying deals directly, but we also weren’t, you know, kind of on the small end investing $50,000 to $100,000 into deals. And what you find is that either, you know, the institutions really, they are the ones who command the leverage because they’re putting out so much money. And if you have $50,000 to $100,000, at least at that time, in ‘06, ‘07, you really didn’t have a lot of options out there.The idea was just to invest our own money in real estate and protect it and grow it, produce the income streams, all the reasons why people get into real estate. Click To Tweet
The options weren’t that great. And if you were somewhere in the middle, had a million or two million to invest kind of where we were in a deal. Even the good sponsors out there, what you would find, the ones who were marketing towards the retail investor, the individual investor, their fees were just incredibly high. They had great deals, but you didn’t really create any wealth. And it was a buy, fix, sort of sell type model. And we were just like, “Look, we can do something better here as a group.” And what we decided to do is create an institutional real estate firm for the individual investor. In the beginning, in 2007, 2008, it was an amazing time period to learn, to put money out. It was more of a pricing exercise and we were agnostic about the type of real estate that we’re buying because back then, everything was trading so far below replacement costs, amazing opportunities.
And we really took our risk management and our entrepreneurial experience from the trading floor and applied it to real estate, right? Getting edge, you know, and generating investment returns by protecting downside. And I think that’s something that he and I are really, really good at, is protecting downside and risk management. And so if we fast forward during that time, we were growing the platform and we were obsessed really about two things. One was generating returns, and the other one was customer service. I think you have to, as an investment manager, hit that on both sides. It was in 2015 that was a true inflection point for us. We were, like most companies, we’re growing. We’re growing in personnel, we’re growing in assets, we’re growing and we wanted more growth. And you can grow in two ways. You can keep doing what you’re doing, or you can go into the institutional world. And our team really wanted us to go into the institutional world because that’s where they write the big checks.
Candidly though, we did not have the pedigrees. We did not have the resume. I wasn’t from the real estate industry. My partner wasn’t from the real estate industry. We were sort of banging our heads against the wall, going out to these different institutional investors, pitching them, not having a lot of luck. And they kind of did us a favor. And so there was just this moment where we said, “Look, let’s just go all in on the individual investor and take advantage of the jobs act, the ability to market.”We saw some firms being successful and we said, “Okay, like, let’s do this.” And we did, and we started building infrastructure at the firm and investor relations and marketing. And the idea is if you have a great product and you put it in front of a lot of people, you’re going to get more customers. And it started working.
And we went from, at the end of 2015, we had about 90 investors at the firm, Heinet Worth, Alter Heinet Worth, family offices. By the end of 2017, which also coincided with our fundraiser, Fond 3, we had close to 500 investors. So you can, you know, it took us eight years to get to 95 and it took us two years to go from 95 to 500. Then, you know, fast forward and we sort of then started getting our product mix right. And 2019, we came out with our Income Plus Fund, we also came out with our Qualified Opportunities Zone Fund. And so we had open product on the shelf. And today I’ll just fast forward. We have four products. We have 3,200 investment partners. Our fastest growing segment is two registered investment advisors. We have 52 team members located in Chicago mainly, but we also have four other offices around the country in sort of Sunbelt markets down there. And we manage close to 10,000 units.
And there are some various stages of development. Some are stabilized and built and producing cash flow and others are in the pre-development phase. Others are going vertical right now. And we do also a tremendous amount on the debt side, but very proud of it. And I think that one of the proof points that we always like to point to is that we have been consistently ranked as a top decile manager. So beaten 90% of the competition over the last six, seven, eight years, really for the consistency. And there’s not one fund that hit it out of the park, because we just don’t take that much risk. We’re not gonna be the manager where you come to and you make the most money, but in times like this, they’re very precarious. I’ll just call it that. We’re gonna be the best relative value around.
And so last year, for example, in a market where capital markets kind of went a little haywire, you had interest rates increased, you had cap rates increased, you had valuations come down. Our flagship fund still made 9.3 percent for the year. And the year before that, it made 21 percent. But I would say the 9 percent is even more impressive because assets everywhere went down. And and that was because of our defensive positioning over the last couple of years. So long story for kind of how we got to where we are. It’s never, you know, your entrepreneurial journey is never a straight line. Lots of learnings, lots of failures, lots of successes and a lot of great people. And we certainly can’t take credit for everything that’s gone on, but very pleased to be where we are today.
Well, it certainly sounds like you had quite a ride. And it’s impressive to stay in the top 10 percent of all the fund managers and provide this great return last year, which was really was a tough year for your industry. So so what I’d like to switch now our attention to is is this framework. So this broadcast is all about I could imagine blueprints. It’s the framework of what entrepreneurs came up with that helped them to be successful. So what is it that has helped you? What is kind of, is it a mental model or some kind of a business framework that you came up with, you discovered along the way that helped you accelerate? You know, you said that it took you five years to get to 93 investors, and then a couple of years you went to 500 from there. So what clicked and what, you know, do you have a framework that maybe others can also use to align their thinking on how to become successful?
Steve, I think the one thing, I’ve heard this in business, you have to stay in business long enough to get lucky, and everybody needs a little luck on their side. And from the beginning, I think every stage of the business has a different thing that you need to be focusing on. And in the beginning, you build a business because you’re solving a fundamental problem. And you have to go out there and decide what problem you’re trying to solve. And for us, it was very easy because we are the consumer. We knew what problem we were solving for, and that was protecting and growing the wealth and creating this institutional product, bringing transparency into the market. And so you have to be able to bring that honesty into the market.
And so you have to be obsessed and potentially paranoid about some things along the way and believe with ultimate conviction that you are right. But learn along the way. We call it failing forward. And I always tell my kids, this is interesting, but I listen to Masters of Scale, how I built this, things like that. And you hear about these ideas and how many were turned down by people and you want to get advice from the right people, but a lot of times, if you ask your opinion, “Hey, what do you think about this?” 99% of the people only can imagine what’s already been done and when you’re doing something new and innovative, they’re going to be like, “Yeah, I don’t know about that, I don’t know” because they lack the vision to see what’s possible that rather than just seeing what’s happened in the past. You have to be careful about that. If you have a conviction about something ,go out and do it, because there’s some crazy ideas out there that have made people a lot of money and a lot of freedom as well.You have to be obsessed and potentially paranoid about some things along the way and believe with ultimate conviction that you are right. But learn along the way. We call it failing forward. Click To Tweet
So as you’re building a business, you go from sort of product idea, development, is scaling up the business and bringing in team members, building a culture, bringing in processes. And for us, I think it was always about listening to the consumer for the first, I would say, six, seven years of the business and continually meeting their needs where they were and being innovative about that. Once you’re innovative though, in any organization, you only have to be innovative once. And then it’s about improving the product sort of at the margin, right? And you can look at Apple for this, right? Apple only, you know, they made an iPhone and then they just kept improving on the iPhone over and over and over and over.
I’m sitting here with a MacBook in front of me and they continue to improve that. The iPhone was the biggest revolution. For them to come out with another revolution like that probably won’t happen, but the one that they’ve come out with is great. When I think about what guides us today, it’s about the people, building the right vulture, making sure there’s clarity, understanding the customer and what their needs are and making sure thateverybody is rowing in the same direction after the same thing and in harmony within the business. Because you really do go from an entrepreneurial organization to a professionally managed organization that has hierarchy.
And a lot of people, they don’t like that. That’s the scary word, right? Bringing hierarchy into an organization, but it’s sort of a necessary evil to specialize and make sure that you’re really doing everything better than the competition. So long-winded way, right? I’m not going to distill this down into like three words. There’s no shortcut in business and you get lucky along the way, I think, a little bit, but you keep trying and when you fail. And for me, it was never about the money, never. You can’t think about that. You can’t say, “I want to start a business to make a lot of money.” You have to start a business to solve a problem and then buildand iterate along the way.
Yeah. I love that analogy. I always think about tennis as kind of an analogy to this whole idea of not losing, staying long enough to be lucky. I mean, you see in tennis tournaments a lot that someone saves several match points in the second round, the third round, and then they end up winning the whole tournament because they just stayed in the game. It just didn’t lose, you know, and eventually they get lucky. They get a day when everything works and you can you can hit those red lines. Now, one thing that I picked up in our conversation last time, which is kind of a framework in my mind, is when you said we are removing investment bias from our process. So maybe tell us a little bit about how you remove the investment bias. How do you generate the 9% in a down year? How do you make yourself lucky with the process that will help you not make mistakes? So tell me a little bit about that.
Private real estate is active management. And I think that when we designed our strategy, right, we talk about building, buying, and lending. So, we have three strategies, and I think it’s a huge advantage to our organization, because what a lot of sponsors do is they have a single strategy, and they get sort of pigeonholed into doing one thing. So, no matter what is happening in the world, they have to do this one thing, or they have to be pencils down. And for some organizations, they can’t afford to be pencils down, meaning they’re not working, they’re not producing anything, because they have people to pay. So it creates this inherent conflict of interest. In our world, we’re able to kind of move across different sectors, up and down the capital structure, different strategies. And that is what gives us a big advantage in being able to produce returns.
And so in the last three years, we haven’t bought a single deal. We’ve really been a barbell approach between ground up development and debt. And, you know, it’s about listening to data. And when you see the markets, like today, for example, in real estate, I’ll tell you, the market, this is a quote from Howard Marks, the markets go from pretty good to not so bad. And today, I would say real estate is not so bad, but it’s also not so good. And when you’re looking at things like, you have interest rates that are more expensive than cap rates, that’s called negative carrier, borrowing costs are more than what your cash flow is. That’s not a good sign.
And you have to listen to that and look at it and say, okay, this is not a good place to be buying and putting money into common equity. When existing properties are trading 40 percent above what you could build them for, then you have a choice. Do you buy an existing property or do you build? And in real estate investing, it comes down to protecting your basis. And so for us, it was all about building. When we can build a property for $300,000 per unit, we always equate it to a value per unit. So if it’s 200 units in a property, that’s $60 million. Well, if we go out and buy something brand new today, a 200 unit, and we’re going to pay $80 million, that makes no sense to us, right? Yes, you’re getting to cash flow. Yes, there’s maybe less risk because it’s a built property, but our job is to manage that risk, right? The other thing that we do, we have boots on the ground.
We have people who are in their markets, who understand their markets block by block. And we’ve introduced something to the market called Origin Multilytics. So this is actually a tool that we’ve developed over the last three years. We hired two data scientists from the University of Chicago, and they built a forecasting tool. It’s basically, it’s machine learning. It analyzes about two and a half to 3 billion pieces of data every month. And it’s a forecasting tool that shows the rent growth potential one year, three years, five years out in each and every market we’re in. And we use that for decision-making because in finance, one of the most important variables that you really need to get a handle on is growth. Because if the market grows at 1% per year versus 5% per year, that produces a very different amount of wealth after 5, 10, 15 years. It’s important for us to get the market right, then we have to get the sub-market right, then we have to get the property, execute, all that.
And so all of this is saying that, you know, what we think about in all of this is decision-making. And decision-making, your proof point is really in your returns in both up markets and down markets. And let’s be honest, in the last 12 years, there are a lot of sponsors who made tremendous money in an up market. But you have to ask, how did they do that? Were they taking excess risk to be able to produce those returns? Because if two sponsors have the exact same strategy and one is generating 25% returns and the other is generating 16% returns, the only answer is usually risk, that the one is taking a lot more risk. So to me as an investor, your job is to protect the downside, let the upside take care of itself. You’re already probably wealthy and you don’t need to take outside risk.
And if you ask people, yeah, well, protecting capital is the most important thing, but then they chase the bright and shiny. So there’s bias within investment making that happens as well, and people oftentimes don’t take enough time to understand how returns are being generated. We’ve always taken, you know, the mindset that we’d rather make consistent returns, not be at the top of the heap over long periods of time, but consistent returns in both up and down markets. And that’s really what our differentiator is and why we’ve been able to achieve top decile performance where other managers, they might have one great fund, but then three years later, the fund is in the bottom quartile because the strategy changes and we can move. We’re an agile investment strategy and designed to be so.Protecting capital is the most important thing. Click To Tweet
Yeah, so that’s fascinating. What I really like about this idea, I mean, several things, but one particular that kind of perked my ear was this idea of getting the wind behind your sail. So going to the markets, which are growing, because if the market grows 5%, that gives you a 5% buffer, right? Even if things go wrong with your your real estate because the market is growing the demand will pull up the valuation and you’re gonna be fine.
Then you go you go to the submarket you want to make sure that within the fastest growing markets you’re gonna hit the fastest growing submarkets and then you already got two gusts of wind in your sail so to say and then if you manage it well, then the downsides can be minimized. So I love that. Now, one thing you mentioned at the end of your argument was this whole idea of fund investing. So I’m curious about what’s the benefit for an investor from the investor’s perspective to investing in a fund as opposed to investing in specific deals? Why would they want to do that?
Yeah, so we create investment products we want to invest in, right? And we create it and then we do, right? That’s our saying is that, you know, my partner and I have invested more than $75 million of our own capital. And we didn’t create funds because they’re better for us. And I think this is a little maybe a misnomer in the market by investors. there’s clearly an advantage to the investor in a fund structure, and actually a disadvantage to the manager, right? The advantage to the manager is that we have committed capital, that we can go to the market, that we can show them that we have money to close on deals. And yes, we have some fees, but the way we structure it is a little bit different. I’m not gonna get into those nuances.
But the big advantage to an investor is that performance fees are cross-collateralized under a fund structure. So imagine if we had 10 deals, and five of them do very well, and five of them don’t do very well, right? And so we only deliver a 5% return to investors. Guess what? We don’t earn a performance fee on that because our hurdle rate, depending on the fund, is six, seven, 8%. We only earn a performance fee if we get above that. If we took all of these 10 individual deals and we said, “Okay, we’re going to syndicate these” and five of them did really well and five of them didn’t do well, we would get paid a performance fee on those five deals. Because in that case, the performance fees are not cross-collateralized like they are in a fund. And that’s a huge differentiator. So you can think about it. Here’s where it really matters though.
Think about the mentality of a manager who has a fund. We, as an investment manager, we cannot afford to have a bad deal in that fund because it taints the entire performance fee pool. Whereas if we were doing deal by deal, you’re like, “Oh well, that deal didn’t do great, but we still got these other eight over here. These are gonna pay the bills and make us wealthy.” So I can’t underestimate that enough, that a fund is a way better way of investing. Now, do people do both? Sure, we have individual deals too, that sometimes we will bring out a sidecar opportunity if it’s too big for the fund. Personally though, I will tell you, I invest in our funds and I invest with others in their funds.
So when I’m doing private equity, when I’m doing venture, when I’m doing seed, anything outside of origin in my own portfolio in the alternative space, I would never do a deal. I don’t know what a good deal looks like. And the only time I’ll do it is I’ll bet on a manager who does this on a daily basis and wakes up every day looking at deal, deal, deal, deal, deal, because chances are if somebody’s sending me a deal, it’s already been picked over and passed by multiple managers out there and it’s gotten to me and I’m like, no thanks. Yeah, it looks cool, but I don’t know the other 50 companies out there that look just like it or who’s going to lead this. “I’ve learned over the years,” I think the most important word an investor can say sometimes is “no” and be disciplined about how they’re investing and structure matters, and whether they’re investing through a deal or a fund. It really does make a difference over long periods of time.
Yeah, that makes a lot of sense. So, if you had the individual deals and some of them you are over the hurdle rate, so you are making your profit share or whatever you carry the interest, they call it in private equity. And the other ones are underwater. Maybe you don’t have any more interest to manage the underwater one because it’s not going to bring you any money anyway. You take it from 2% to 3%, it doesn’t make any difference. But for the fund investor, it will make a difference because it will improve the overall return of the fund. So essentially, you’re not going to have these neglect properties.
Steve, sorry, there’s another fundamental. I was just thinking about this because when an individual deal goes bad, that sponsor has no choice but to reach out to the individual investors to ask for more money. A fund is a company. When you think about it, right, if we have 10 deals underneath there and one of the deals goes bad and we have capital from another deal or we’ve just made a sale or something like that, in a fund structure, we can take from one property and lend to another.
We’re always going to make an independent decision. We’re not going to throw good money after bad money, but it’s a big advantage in going into COVID, and even in ‘08, ‘09, and those periods, being in a fund structure greatly benefits investors. I’m sure investors have been around long enough, especially in the cycle that we’re in right now. If they’re in individual deals, chances are they’re going to be called by the sponsor, look for more money, rescue capital. Goes my, yeah, rescue capital on some of these deals.
That’s a really interesting insight. So other than the fund structure, which is not necessarily unique, what is it that Origin Investment is doing to transform the way people invest in real estate? So this is one of the things that really struck me on your website, this idea of transforming the way people invest in real estate. So what are you doing that is unique in the market?
This goes back to what I said in the beginning, which is about creating an institutional platform for individual investors. And it’s delivering the highest risk adjusted return we can to investors. And last year was an example of that, delivering 9.3% in a market where bonds and equities both got kind of destroyed. And here’s, you know, like we got a lot of really, really nice calls from investors. And I’ll never forget one that just I’m driving to my car and I don’t recognize the number and I pick it up and he says, “Hey, Michael, how are you? I just want to tell you and your team that I had my portfolio review with my advisor and the only thing that was standing out and really helped the portfolio during this time was the investment I had with you guys.” Everything else in the portfolio was red, red, red, red, red, and this was green and helped buoy his portfolio. And that’s what real estate is supposed to do when you do it right.
But we’ve all been in bad real estate and we can talk about things kind of esoterically at the 50,000 foot level. But it comes down to the manager who you’re with. You can lose a lot of money in real estate even though multi-family real estate has never lost money over any 10 year period in history. Plenty of people have lost money in real estate because they were in an overleveraged deal with an undercapitalized sponsor with somebody who was maybe inexperienced or they haven’t made a lot of money because the fees were too high. This is the thing that we balance. We really think about, for me at least, if I didn’t work here at Origin, would I invest here? And it’s unequivocally yes. We are producing efficient returns, high risk adjusted returns to the investor.
And it’s the value that we provide that is really helping keep, you know, protect wealth, grow wealth, create income streams for individuals who are retiring and allowing them to get the full benefit of investing in real estate. And when we talk about transforming the way people invest in real estate, a lot of it is about the returns. It’s also about the experience, you know, making sure that when they’re calling somebody at the firm, they’re getting somebody knowledgeable, that there’s that relationship, that the whole process from investing with us is simple, it’s easy, we’re holding your hand, you understand what we’re doing, and then it’s ongoing communication.
Last year alone, we hosted 40 webinars where it was me and my partner, other people at Origin, doing intermittent updates about funds to keep people informed. And I don’t think that can be underestimated. And I talked earlier about the fact that we’re obsessed about the customer journey. And the customer journey starts from the day that you interface with Origin, coming to our website, all the way through to investment and beyond till the day you sell your investment. And the other thing is the returns. And that’s the thing. Those are the two things that we think about constantly and just making an amazing experience for our investment partners.
That’s a great way to finish on, being obsessed about the customer journey. It’s all about the customer and you’ve really figured out how to please them in the investment space, which is fantastic. So if listeners would like to learn more about Origin Investments, maybe want to connect with you, where should they go, where can they reach you?
Websites always the easiest, origininvestments.com, you can go there. We make it super simple to download our investment materials. If you want to see one of our funds, learn more about us, you can. And you can always just email me, email@example.com. That’s one of the advantages I think of Origin over maybe some of these other groups is we’re very accessible, my partner and I. And I’ll either respond or I’ll put you in touch with the right person. So appreciate you having me on here today, Steve.
That’s fantastic. Well, thank you, Michael, for coming and for sharing your unique approach to real estate investment. I’m sure the listeners will agree. So thanks for coming to the show. And for those of you listeners, two things. One is stay tuned because every week I’m bringing an exciting entrepreneur and they are getting better and better as the show matures and we have now over 150 episodes and we can attract better and better people and more and more successful entrepreneurs. So stay tuned. Also stay tuned for my new book, it’s just come out, Strategy OS, which will help you take your business to the next level. So thanks Michael for joining and thanks for listening. So thanks Michael for joining and thanks for listening.