Cadre: It’s who and what you know

Twenty-nine-year-old Ryan Williams has just raised $65 million in Series C financing for his latest real estate company. The venture capital he has collected is a far cry from the savings he used to corral from his Harvard University classmates for his first property business.

That business was all about flipping homes. Cadre, on the other hand, is a more sophisticated offering. Its premise revolves around a novel fundraising idea and a heavy reliance on ‘big data’ to determine its strategy. Judging by the $800 million valuation it achieved in July during this latest funding round, some altogether more serious money agrees and is now on the hook.

In three years, Cadre has gone from a skeleton crew to 60 staff, although Williams’ Harvard-formed connections continue to be key. It was at the prestigious university that he befriended Josh Kushner and his older brother, Jared. The duo, born into a notable New York commercial real estate family, would prove critical to Williams at multiple career junctures.

One came during a two-year stint working in technology banking at Goldman Sachs. It was Jared who introduced Williams to Jon Gray, Blackstone’s real estate head. Gray hired him and a further two years were spent at the private equity real estate giant, working across different property types.

Williams hatched his idea for a startup combining his background at both firms during a Blackstone investor conference and discussed the concept with friends and advisors, including Mike Fascitelli, the former chief executive of real estate investment trust Vornado, Vinod Khosla, venture capitalist and co-founder of Sun Microsystems, and Jon Winkelreid, a former president of Goldman Sachs and now co-CEO of TPG. They agreed with the Kushners that Cadre was a venture worth a punt.

“Josh and Jared in particular were very instrumental in helping me navigate the network I would need to grow Cadre quickly,” Williams says.

He left Blackstone in late 2014 and raised $18.3 million of Series A financing the following March from investors including General Catalyst, Founders Fund, Khosla Ventures and Thrive Capital, a venture capital firm led by Josh Kushner.

Cadre invests in core-plus and value-added real estate with capital from institutional sources that has been earmarked on a deal-by-deal basis.

Its fundraising intersects both traditional real estate funding and the more nascent, technology-enabled crowdfunding platforms. Investors commit to individual projects or create separate accounts through an online portal. The twist comes in the form of their underwriting by an institutional-grade investor – an unnamed family office with more than $30 billion under management. That investor effectively acts as an equity guarantor for all the assets.

To raise and deploy the capital, Williams has built a team with a laundry list of blue-chip firms on their resumes: Starwood Capital Group, Goldman Sachs, Blackstone and others on the real estate side, and Mint, Square and Apple on the technology side.

“We started off primarily with my network. I had friends and former colleagues in both real estate and tech – the cross-section of my background. What I found was that great talent begets great talent. One of the focuses we have today is hiring talent magnets who can bring in other folks.”

Indeed, the Cadre pitch includes that talent’s ability to source and execute deals; 40 percent lower fees than traditional private equity real estate firms; and transparency with real-time investment updates through its online portal.

Finding the investors
At the start, Cadre’s real estate investors were primarily high-net-worth individuals from Williams’ network and those of his advisors and corporate investors. Now, investors comprise about one-third ultra-high-net-worth individuals, one-third family offices and one-third small institutions, including foundations and corporate pension plans. About 30 percent of the investors are international.

Williams says average commitments are $750,000 per deal and the firm is targeting a “low to mid-teens” net internal rate of return.

“Without putting meaningful dollars into marketing, the investor base expanded,” he says. “You see this dynamic where one investor goes to Europe and talks about Cadre at a family office conference, and shortly afterwards I have 10 emails requesting to speak with our team.”

Matt Botein, the former chief investment officer of BlackRock’s alternatives business, is one of Cadre’s investors and advisors. He started investing with the firm in 2015 after meeting Williams through another investor. Botein was impressed by Williams’ ability to use his relationships to assemble an investment committee and to secure a “backstop” – the institutional investor that acts as an equity guarantor.

“Those are the factors to me that transformed this from an interesting idea subject to a potentially significant adverse selection risk to a great idea with really thoughtful implementation that managed out that major risk,” Botein says. “Now as Ryan’s grown the platform, he’s developed and utilized relationships to expand the roster of investors and to expand the roster of deal sources.”

Cadre further differentiates itself by picking under-the-radar deals guided by technology. Williams details one recent instance of scraping data from sources including social media platforms and online review site Yelp to demonstrate millennials’ movement into and concentration in a suburban market. The firm created its own submarket ranking system using algorithms that incorporate demographic, economic, geospatial, macro and micro-level financial information to determine that this market was worthy of investment. From those, Cadre developed its own property market report and ultimately purchased an office building that “most funds would have shied away from because of the stigma around suburban office,” Williams says.

Botein was attracted to such progressive methods, but underlines how Williams’ relationships should be credited too. Cadre’s head of acquisitions, for example, is Marcos Alvarado, who had the same role at Starwood and boasts a sizeable contacts book.

“The early wave of deal source has been much more relationship driven,” Botein says. “The technology is interesting, but it’s part of the next chapter of being able to focus the efforts better. If they can use the data scraping and the artificial intelligence to hone in on certain markets that they believe will be favored from an appreciation and return perspective, then they can go and point the relationship energies in that direction.”

Such a use of big data offers the most promise for simple transactions, says Will Silverman, a managing director at brokerage Hodges Ward Elliott. But he agrees tech-driven firms like Cadre will need to continue to rely on relationships for evaluating complicated deals that might lack data to feed into algorithms.

“I think that the biggest disruption from technology will hit the most commodifiable asset classes the most where the transactions have the least explanatory nuance. If I’m interested in getting the comparative set for the 20-year Walgreens lease in Tulsa, Oklahoma, that’s information I can look up on one of the public sources. But when the transactions have as much nuance as institutional-caliber transactions in New York have, there’s going to be less disruption.”

Since Cadre’s founding, the firm has closed more than $1 billion in transactions, despite approving only 2 percent of the investments it has vetted.

After Cadre has established itself in real estate, Williams says he is considering expanding into other real assets that have similar characteristics – opacity, inefficiency and illiquidity – to real estate. Before adding other investment strategies, the firm is building a secondaries platform and team to offer investors portfolio rebalancing services.

Whether it is his youthful exuberance, or Cadre’s early support for his ideas and graft, Williams is confident about the future. “I know we’re going to be successful,” he predicts. “But no company can be scaled solely from self-determination. We have an incredible team here that’s accelerated our traction more than even I anticipated.”

Williams’ investors are similarly positive about the firm’s prospects. But as both Fascitelli and Botein highlight, the top metric for success, predictably, will be its performance.

CADRE’S TRUMP CARD
One of its earliest investors has drawn scrutiny because of his father-in-law
Jared Kushner has risen to prominence outside of the New York real estate world thanks to the election of his father-in-law, Donald Trump, to the presidency and his subsequent appointment as senior advisor to the president.

Since then, his connection to Cadre has not escaped notice. In July, governmental watchdog group Citizens for Responsibility and Ethics in Washington wrote to the director of the Office of Governmental Ethics requesting an investigation into Kushner’s failure to disclose his stake in the firm.

Kushner updated a disclosure form later in July, which said he owns a $5 million-$25 million stake in the firm and he “has been and will continue to be recused from particular matters in the broker-dealer, real estate and online financial services sectors to the extent they would have a direct and predictable effect on Cadre.”

Williams likewise says Kushner has no operational involvement, and even before the campaign, he played a more advisory role.

“Jared has an important role in the initial formation and development of Cadre,” Williams says. “He is a close friend and has been for years. That said, Jared does not have operational involvement in Cadre and we’re transparent and upfront about that. We’ve also made it clear to investors to the extent there have been inquiries, which have actually been limited.”

One person with knowledge of Cadre’s fundraising echoes Williams’ comments. “I can name on one hand investors who don’t want to invest because Jared is involved. I think if anything it’s probably net positive – all news is good news in publicity for the firm,” the source says.

“Jared and Josh and Ryan founded the company. It’s not like you’re going to erase history here,” Fascitelli adds. “I think they’ve appropriately distanced themselves from the company so there are no conflicts. I think the history is the history and it’ll be looked back favorably. If you’re an investor, you don’t care about Jared Kushner or Mike Fascitelli or anyone else – you care about the results.”

FIRST EXIT

In April, Cadre made its first sale, achieving above-target returns
In January 2015, the firm picked up a portfolio of four multifamily buildings in Astoria, Queens, a borough of New York City, for $47.8 million, in a joint venture with the Kushner Companies, according to data provider Real Capital Analytics. After $10 million in renovations, the firm sold the buildings for $71.5 million to a local investor.

“We see certain trends that might be counter to what others see in terms of hubs outside gateway markets,” Williams says. “In Astoria, we won the deal because we took a counter perspective on the market and moved with great velocity. At the time, rents were on average up to 15-20 percent below many East and West Village comparable apartments [in Manhattan], and there wasn’t as much supply in Astoria either. This deal was an operator-intensive transaction, similar to our typical deals and broader model, and our focus paid off.”

Cadre realized a high teens IRR on the sale.

The firm sold the Astoria portfolio in a shorter time frame than how long most of its deals are underwritten, with exits typically expected in five to 10 years.

“We are able to provide greater investing alignment for many of our investors, such as family offices, and can support slightly longer hold terms for optimal value creation. We don’t have the same restrictions that funds with a limited life do, and we’re not corporate traders looking to quickly flip a deal either,” Williams says.