I’m Ben Summers, the founder of Adagio Group and executive director of Adagio Institute.
I want to share with you my journey around the world...
It's a journey that took me from professional baseball on the West Coast to applying my physics degree to the anti-intellectual business of energy services in Texas, West Africa (where I too often found myself at the literal point of a gun), and Northern Europe (where sailing the Norwegian fjords is awesome)...
...then to the entrepreneurial focus of real estate investing, fund management and ultimately running my own quant-based boutique investment bank from South Florida.
I think you'll find this journey of interest, but more importantly, I think you'll find the lessons I learned very helpful as you strive to grow your business.
It was November of 2004…
Just a couple years previously I was getting well paid to throw a baseball in front of thousands of people.
At this particular moment, however, I was being held at gunpoint in an old flat-bottomed boat in the Niger Delta by group of Nigerian “armed youth”….
How did I get here? The thoughts flooded in, but one stood out above the rest: I wasn’t getting paid enough for this shit.
At that point I decided that no matter how prestigious my position in the global energy services industry, I needed to control my own destiny. So I committed to starting my own business.
I knew that start-up capital was the biggest hurdle for new businesses. Over the years, I’d also learned that creative real estate finance minimized the need for start-up capital.
So, the decision was made.
When I returned to the U.S. after my sixth three month rotation in Nigeria was complete, I registered my new business, Adagio LLC, as a real estate investment company on May 11, 2005.
The name Adagio—which refers to the slower, expressive second movement of works in classical musical—represented my attempt to bring the beautiful incorruptibility of music that I experienced during my formal education to the culture of business.
It wasn’t long before my idealistic enthusiasm took a hit by reality: there were a whole lot of people chasing very few good deals. But the effort that lead to this disappointing realization also exposed me to another eye opening discovery: the “hard money” lender…
There were these hard-to-find individuals who would lend to real estate investors at exorbitant interest rates, for short periods of time. To protect their loans, not only did they demand the borrower to qualify, but they also limited their LTV to around 65%.
They couldn’t lose!
If the borrower paid as promised, the lender was making close to 20%; if the borrower defaulted, he made even more… a perfect win-win!
This was the side of real estate I knew I needed to be in. I also knew that being a lender meant that I would need a lot of money… much more money than I had.
When I looked at the returns and almost nonexistent potential downside of the hard money lending business, I intuitively knew that it was a much better deal than the stocks and bonds being peddled by local financial advisers. I just needed to convince others of this so they’d allow me to put their money to work.
You’d think this would be an easy task… it was not. Securities regulations make it almost impossible for a beginner to raise capital. And even if you can navigate the regulatory gauntlet, belief is a difficult thing to change… especially belief about investing.
It took time and work, but eventually I was able to convert my idea to start a hard money lending business into an institutional-grade fund that thrived… even during the 2008 financial crisis.
My goal is to help you do the same…
I was ecstatic to have discovered a great investment model that few people knew about… returns were much higher than the stock market without the constant downside risk.
As I told people about it, I expected everyone should be lining up to have me put their money to work… but they didn’t… no one… not even my dad was willing to invest a penny with me.
I was missing one huge idea…
The business of raising money is the business of finance. It seems like a fairly obvious idea now, but when I was buried in the real estate business… inundated with guru courses, Realtor propaganda, and the pseudo-sophistication of commercial real estate… that fact got lost.
Fortunately for me, my sister happened to be dating the guy I needed to meet. He was not only a securities attorney with a law degree from Vanderbilt, but he had also worked as both a portfolio manager at one of the big investment banks and an analyst at a hedge fund up in New York.
When I met him, I expressed my frustration with my inability to convince anyone to invest with me. His initial response was disbelief… not that people wouldn’t invest… but that this investment model called hard money lending actually worked.
It just so happened that not too much later he wound up leaving his job on Wall Street. He got shorted on a bonus, and that was the last straw for him. I persuaded him to come down to Florida with me to see what real estate investing and hard money lending looked like first hand.
What he witnessed shocked him… I’ll never forget what he said once he finally realized what I had introduced him to: “This is the f****ing wild west of investing!”
Now I was shocked: He made me realize that not only do real estate people know nothing about finance, but finance people know nothing about real estate.
With my knowledge of real estate and his knowledge of both securities law and hedge fund operations, we partnered to take advantage of this industry divide… we built out Adagio from a single entity private investment company into an institutional grade fund manager.
I took this opportunity to dive into finance, pick my partner’s brain, and learn everything I possibly could.
I read everything from the full set of federal securities laws, Chartered Financial Analyst (“CFA”) exam manuals, and Nassim Taleb’s texts on risk engineering to G. Edward Griffin’s The Creature from Jekyll Island and the works of Mises and Hayek.
Not only did I learn the business of finance and pick up a FINRA Series 65 (Uniform Investment Adviser Law) License, but I also became an advocate for Austrian economics along the way.
While there is an endless amount of information to digest, I came into this effort with the hardest part already down: math.
My degree is in physics (with a minor in music), which requires fluency in mathematics. So when it came to quantitative finance, all I needed to know was what ideas needed translation into numbers… the application of formulas came easy.
One formula not even my well-credentialed partner thought to bring to our efforts was the Capital Asset Pricing Model, or CAPM. While that’s a mouthful that might sound like a turn-off at first, it communicates one of the most important measures of an investment: the return it should generate given its market risk. (It's worth noting that I discovered even more informative third and fourth order risk-adjusted performance metrics later on thanks to Nassim Taleb.)
Armed with these mathematical tools, I could now convert my intuitive feelings about the merits of real estate investing into meaningful financial terms. Even better, I was now able to utilize financial instruments such as derivatives to even further improve the risk-adjusted returns of common real estate investing strategies… from the basic hard money lending model to taking advantage of differences between price and value.
Unlike financial professionals, no one in real estate knows how to price financial instruments… or even cares to for that matter… and this creates tremendous opportunity for those who can.
For example, I was able to buy a simple call option on an undervalued $2MM property for only $5k. The result: I was able to capture $500k of forced appreciation in under 12 months with nothing more than a meager $5k investment… and none of the risk associated with holding legal title.
For those who are counting, that’s a 10,000% annualized return… it’s like betting only $1 on a coin flip and winning $100 if you guess right!
I had all the pieces in place… well… all but one…
There is one set of numbers that hold the key to protecting real estate investors from down markets… they hold the key to raising unlimited capital…
I discovered these number just in time to make sure my investment business thrived during the 2008 financial crisis. These numbers should be highly valued by everyone who participates in the real estate investment market… especially commercial operators and brokers… but they’re not.
So in 2008, while everyone else who was invested in real estate… including the hard money lending crowd… suffered terrible losses, our lending fund generated returns in excess of 30%.
2009 was even better…
When I started investing in real estate as a career in 2005, I immediately noticed that it seemed very difficult to find properties that generated substantial positive cash flow.
At that time, I knew nothing about monetary policy or risk engineering… but I did know that residential properties were generating much less income per purchase price (NOI) than what was described in the books I read on the subject.
Those books were written about a decade previously, and something had changed… something big… but what?
I started researching real estate data… Right around the time I was about to launch my lending fund in 2007, I came across a chart that illustrated two sets of very important data published by the U.S. Bureau of Labor Statistics (“BLS”) and Federal Housing Finance Agency (“FHFA”) [at the time it was the OFHEO]: Owner Equivalent Rent (“OER”) and the Housing Price Index (“HPI”).