Launching an in-house broker/dealer platform is a big milestone for real estate alts sponsors. Platforms can often serve as a steppingstone for more growth. That is certainly the aim for Ballast Rock Group. The investment management company recently announced the formation of its SEC-registered broker-dealer, Ballast Rock Capital.
WMRE recently talked with Simon O’Shea, chief investment officer at Ballast Rock Group to hear more about the firm’s strategic move to create a licensed b/d, and how they plan to leverage it to accelerate growth and expand into other alternative assets. Founded in 2018, the firm offers investment alternatives to accredited investors, including a real estate investment fund focused on workforce housing in the Southeastern U.S.
This interview has been edited for style, length and clarity.
WMRE: What drove that decision for your firm to move from an outsourced, third-party provider to your own in-house b/d?
Simon O’Shea: Our background and DNA is very much Wall Street-based where there is a significant amount of experience in trading and risk management, but also a lot of work around getting your licensing and exams. Those qualifications lapse once you don’t have a licensed broker/dealer firm to hang your license. So, part of it was ensuring that we had a mechanism to maintain our licenses, but obviously that wasn’t the only reason. We’re trying to build Ballast Rock a little bit differently compared to some of our competitors out there. We are entirely focused on providing institutional level reporting, communication, access to our management and also our structures and processes.
When we were smaller, the most cost-effective way to do that was to hang our license at a third party-provider, essentially an outsourced b/d. They do the compliance. They’re helping us with ensuring our communications are compliant and that we are storing documents and records in the right way. But there are limitations with having that outsourced. It only allows you to grow so much, and as we saw success in our real estate business, and beyond real estate in our other asset classes in the alternative space like venture capital and private equity, the time had come for us to bring that functionality in-house. We made the decision last year to form our own broker/dealer, Ballast Rock Capital.
WMRE: Can you expand on how outsourcing b/d tasks was limiting your growth?
Simon O’Shea: The main thing was that we were subject to someone else’s timeline in terms of marketing and engaging with our investor base. There were significant limitations with doing that on a timely basis because we would have to put together our marketing pieces, send them externally to the third party. They sometimes had other things on their plate, so it took longer than was convenient for us to fit into our marketing schedule. So, one part of it was certainly having more control and visibility over the timeline for producing and getting marketing materials out to our investor base.
Another part of it is cost. Most third-party providers do it on a registered rep cost basis, i.e. for every registered rep there is a dollar cost associated with that rep. Initially, when you are talking about one or two or three registered reps, it is relatively cost-effective. But once you go beyond that it starts to make more sense to bring it in-house, because you’re already building the infrastructure for compliance and data storage. So, there are certain economies of scale once you reach a certain point.
WMRE: What are some of the key advantages of having your own in-house b/d?
Simon O’Shea: When we think about the value that we get from being a b/d, there are three main things to it. One, it allows us to attract Wall Street talent as we continue to build our business. People who are coming from Wall Street have worked hard to get their licenses and qualifications, and they don’t want to work somewhere that is going to lapse in a couple of years. So, having the ability to create somewhere where people from Wall Street could come and hang their licenses has been a differentiator as we look to hire the right talent to help Ballast Rock grow. That has really been accelerated the last couple of years with COVID and remote working with people moving away from big cities like New York. For us, that is an opportunity, because we have offices in Charleston, S.C., Atlanta and South Florida.
Two, it allows us to build the business beyond just real estate. That is something that we have always had as a long-term ambition. The real estate business is the first business line that we launched and the core fund strategy, but we have a relatively large, atomized investor base. They are all, at minimum, accredited investors. Increasingly, over the last couple of years they have been asking us for alternative product beyond real estate because they saw we did things differently than some of our competitors, which came through in things like communication and access. Our investors have the ability to call myself, or Tom Carroll our CEO or Brad St. Onge our head of investor relations directly. We don’t want to be that black box asset manager. We want to be open kimono. So, we saw an opportunity to democratize access to those individuals for other private asset classes, like venture capital and private equity.
The third piece is that it allows us to differentiate ourselves versus some of our peers. We believe that we have a best-in-class operating team and a management team that has a huge amount of experience in risk management, in quantitative methods in analyzing investments, but it is very hard for an investor who doesn’t know you to verify all of that. Now all of our investors know that is the case because they have known us for years and seen how we operate. But as we grow the business and we’re attracting more and more fresh investors, there was a value to say we hold ourselves to a higher standard in terms of reporting, compliance and being good stewards of your capital. We’re not just paying lip service to that; we are a licensed broker-dealer, and we are regulated by an agency that ensures that we hold ourselves to that higher standard.
WMRE: Are your primary products private equity funds?
Simon O’Shea: It’s private asset funds I would say, and that’s across real estate, venture capital where we have two strategies—an early stage and a growth stage strategy in two separate funds. In real estate we have a very specific focus in the Southeast on workforce multifamily value add. We are very keenly focused on that specific part of the real estate market. We have an in-house property management team with close to 60 people. So, we do all of the operations in-house.
We have looked at other strategies, but on a risk-adjusted basis, we believe that workforce multifamily in the Southeast is one of the most attractive asset classes in the real estate space, and we want to continue focusing on that until we believe there are better opportunities elsewhere. We also have this direct private equity investment in the carbon capture project, and we are currently in discussion with a number of individuals to come onboard to be an in-house private equity fund manager to launch a small cap private equity focused fund.
WMRE: What’s your minimum investment amount?
Simon O’Shea: Our minimums vary by fund. On the real estate it is $25,000 minimums and on the venture capital funds it is $40,000. Our investors are 100% accredited. As a broker/dealer we are subject to additional regulations. We can’t just rely on them being accredited. We need to follow Reg BI— Regulation Best Interest. We need to work with investors to make sure that the investment is in the best interest of the investor themselves. It is a pretty detailed questionnaire and we run through a checklist to ensure that we know enough about the investor to say that we believe this investment is in the best interest of an investor. Sometimes, even if you are accredited, that may not be the case.
WMRE: Can you share any examples of new investment opportunities beyond real estate that you are pursuing in those other asset classes?
Simon O’Shea: We are investing in a carbon capture project right now called Louisiana Green Fuels in Northeastern Louisiana, which is a $2.8 billion carbon capture project. We initially invested directly in the project itself, and as the project developed, they wanted to do a direct issuance, and we acted as a third-party placement agent to that direct issuance. We would not have been able to do that without having that broker/dealer license.
We believe that in this energy transition space specifically there are going to be huge opportunities in the next 10 to 15 years with best-in-class management teams that are looking to develop next stage technology and processes for delivering the energy transition. We can step in and help them place investments, and that requires us to have a broker-dealer license to do it.
WMRE: What are some of the challenges to creating that in-house b/d?
Simon O’Shea: Beyond the dollar cost there is a significant time component to it. Even getting registered involves a very heavy lift. We all had this background in institutional environments on Wall Street. So, we have had that experience and the ability to respond to regulators and handle their requests and give them the information they need, but even so it has required a huge amount of time. You have regulators at the federal level, you have Finra and you also have to register state by state as well. Some of those are relatively straight forward processes with a form, but other states are far more involved and detailed.
WMRE: How long was that process from start to finish?
Simon O’Shea: We brought in some external advisors to help us with some of the legal matters. So, getting yourself set up with the right partners to help you navigate the different steps of the process can be a big help—or a big detractor if you’re not working with the right partners. It’s important to remember that there is both the federal process and the state processes as well. So, even if you go through the federal process, which can take six months or more, you then have to go through the state processes, which can take another three to six months. Remote working is still playing a part in some states where teams are working remotely, which can also slow down the process a little bit.
WMRE: How many states are you currently approved in right now?
Simon O’Shea: It is around 27, but it is updating almost daily. We are focusing first on where our investor base is concentrated, which is typically the larger states such as California, New York and Florida, but we definitely want to get approved in all 50 states.
WMRE: Were there any other challenges that you had to deal with to become a licensed b/d?
Simon O’Shea: The upfront lift should not be underestimated, but there also is an ongoing burden as well. The broker/dealer will be audited at some point. So, we have to make sure that our systems and processes are totally compliant. We need to make sure our communications are totally compliant. We need to make sure we are following the guidance and guidelines from Finra and state regulators when applicable. So this isn’t a high burden to get and then you can set it and forget it. There is an ongoing compliance monitoring reporting burden as well, but once you have built the critical mass of a team that can manage that, we believe the pros outweigh the cons.