Mat Sorensen:
Welcome, everyone, to the Directed IRA Podcast. This is Mat Sorensen, and I have a special guest with me today, Bridger Pennington. I’ve been following him for a while, and I’m excited to have him on the show.
Today we’re going to talk about how to find and analyze private funds. I know so many investors out there are bored with the stock market. It hasn’t performed great this year so far, and many are wondering, how can I invest in private assets, maybe through a private fund?
I happen to have an expert on that here today, Bridger Pennington. He is the founder and CEO of Fund Launch. He also has his own private funds, and he teaches people how to raise capital, optimize, and launch private funds.
Bridger, thanks for coming on the show today and sharing your expertise.
Bridger Pennington:
Yeah, Mat, this should be fun. Thanks for having me on.
Mat Sorensen:
All right, let’s get started.
I think a lot of people are somewhat familiar with the idea of a private fund, but we’re not talking about a mutual fund or an ETF. We’re talking about a non-publicly traded fund.
A lot of people in our audience invest either with personal funds or with a self-directed retirement account. As you know, at Directed IRA, many of our investors are using their IRAs to invest in private funds.
You probably get this question all the time, Bridger: what exactly is a private fund? What should a first-time investor know before investing in one?
What a Private Fund Is
Bridger Pennington:
Yeah, let’s start at a high level.
First, why even approach a private fund? Why even consider this? There are public offerings like stocks and bonds, but there are also private assets.
Think about companies like Anthropic or Stripe. These are privately held companies. You can’t just go buy shares of them on a public exchange. But sometimes there are vehicles or funds that have bought into those companies, and investors may be able to gain exposure through those vehicles.
That’s one example. The same idea applies to businesses, real estate, private credit, and other alternative assets.
Mat Sorensen:
That’s a good example. I think the news just came out that SpaceX is going public. A lot of people had already invested in SpaceX, and they probably did it through a private fund.
Bridger Pennington:
Exactly. They got in early. And then if the IPO values the company at a trillion dollars or more, that creates a huge equity gain for those who invested at much lower valuations.
To give some context, I currently run two private funds. One is about a $25 million crypto private investment fund. We also have a GP stakes fund, which I can explain more later, but both invest in private markets.
Through Fund Launch, we’ve also helped launch around 450 private investment funds.
Typically, what happens is this: someone is an expert in a niche, like multifamily real estate. They’ve done all the deals they can with their own capital, and they say, “We have dozens of deals we could do in the Southeast. Let’s raise a $200 million fund from investors and go buy $200 million worth of multifamily real estate.”
As that portfolio grows and performs, the returns are split with investors.
That’s what private investment management is. You’re selecting experts in a field, like multifamily real estate in a specific region, who live and breathe that asset class. You invest with them, and that gives you access to that opportunity.
Most asset managers are very specific. They’re niche, narrow, and deeply specialized. That’s the core idea behind a private investment fund.
Why Private Markets Matter
Mat Sorensen:
A lot of people are attracted to that model.
Publicly traded companies have gone from around 8,000 down to about 4,000 over the last 20 years. The number of public investment opportunities has been cut in half because fewer companies want to go public.
That applies across the board: real estate businesses, technology companies, and more.
So if I want access to these other investments, but I don’t want to operate a business myself, I’m not going to go run a multifamily deal, own a mobile home park, or buy an office building, a private fund lets me participate while someone else does the work.
But explain how that works for the investor. I don’t really have a say in what’s going on, and I don’t have a job in the fund either. So what does the investor’s role look like?
Bridger Pennington:
That’s actually one of the great things about private funds.
There’s a general partner and limited partner relationship. As an investor, you’re the limited partner. That means your liability is limited, and your decision-making authority is also limited.
For example, I invest in two real estate funds myself. I run funds, and I also invest in funds. I don’t know real estate, and I don’t want to deal with termites, tenants, and toilets.
So I might put $250,000 into a multifamily investment fund. I don’t make any decisions. The managers make the decisions. They handle the leverage, the acquisitions, the operations, all of it.
The most I can lose is my $250,000 investment. Even if they use leverage and the business goes under, I’m limited to that amount. But I also get to participate in the upside.
Now, most funds use a “two and twenty” structure. That means a 2% annual management fee and 20% of the gains.
So, using that same example, if I invest $250,000, they may charge 2% per year as a management fee. If that investment grows and doubles, they then take 20% of the profit as carried interest.
That’s how fund managers get paid. They earn the management fee and the carry. I earn the remaining return as the investor, and I didn’t have to do the work. I basically get a K-1 at the end of the year and file my taxes.
That’s why private funds are one of the most popular business models in the world. In fact, if you look at the Forbes billionaire list, the number one category is people who run funds.
It’s also a great way to get exposure to private assets. I read a Goldman Sachs report that surveyed family offices. Only around 4% said they planned to decrease allocation to private funds, while 48% said they planned to increase allocation in the following year. That means roughly 96% planned to either stay the same or increase.
Right now, about 50% of many family office portfolios are in private investments like private funds and private vehicles. It’s a huge part of how large families build and preserve wealth because of the alpha these investments can generate.
LP Rights, Fees, and Returns
Mat Sorensen:
And we’re starting to see more mainstream investors getting into private funds too.
Traditionally, this was more of an ultra-high-net-worth or family office space, partly because of securities laws. But now even larger funds are trying to raise money from what Wall Street calls the retail investor, meaning people who are not ultra-wealthy but do have capital to invest.
So what are you seeing there? Let’s say I’m an individual investor. I don’t have a family office, but I am an accredited investor. Maybe I make a few hundred thousand dollars a year or have a net worth over a million dollars.
We’ve surveyed our Directed IRA audience, and about 70% are accredited investors.
How do those investors get access to private funds? Can they get into any fund? And then the next question is, how do they actually find these funds?
How To Find Private Funds
Bridger Pennington:
There are a few things to unpack there.
First, even if you’re accredited, some funds only take qualified purchasers, which is a higher threshold. That generally means a $5 million net worth, not just accredited investor status.
But let’s assume you qualify.
I’m not giving financial advice, but I’ll tell you how I think about it. Even when I had very little money, I tried to think like a family office. If I had $10,000, I treated it like a $10,000 family office.
Over time, I decided I wanted exposure to private funds. So how do you find them?
One challenge is that under SEC rules, many 506(b) funds cannot publicly advertise. That’s why you don’t see Blackstone, KKR, or Sequoia running normal ads for their funds. They legally can’t market them the way public securities are marketed.
There are newer 506(c) rules that allow some advertising, but most funds still operate through private offerings.
So how do you actually find these opportunities?
The first thing I tell people is this: there are a lot of deals out there. Just because you don’t see them every day does not mean they’re scarce. Don’t think the first real estate fund you come across must be the best one.
A family office might look at 100 deals to make one investment. You should take a similar approach.
For example, our own fund looked at around 2,000 inbound deals and invested in only 14. That’s the funnel.
You should do the same thing. If you want exposure to crypto, don’t just invest in one fund because you like the manager. Go online, search social media, use AI tools, find 15 crypto funds, and narrow them down from there.
That’s how a family office would approach it.
Today there are tools like Perplexity, Claude, PitchBook, and others that can help you find funds and asset managers faster. But even beyond tools, if you start telling people, “I have capital and I’m looking to invest,” deals will find you.
Tell people you’re looking to allocate $100,000 into real estate or another asset class, and operators will start coming your way.
But the key is to be slow to invest. Look at a lot of deals first.
Mat Sorensen:
Yeah, that’s a great way to frame it.
You need a wide funnel at the top. You’ve got to talk about the fact that you want to invest. You’ve got to use the internet, AI, and networking events to bring in opportunities and learn.
Private investing is not like going to a broker-dealer platform and picking a ticker symbol off a shelf. You have to do some work.
And as you said, once you’ve built that funnel, the goal is to distill it down. You’re not going to invest in everything, and you definitely shouldn’t invest in the first thing you find.
I’ve said it before: public market investing feels like farming, but private investing is more like hunting. You have to go find the opportunity.
But then once you do, you need to narrow the funnel and determine which one or two managers or funds actually deserve your capital.
I’m curious, from the fund side, when you’re talking to prospective investors, what kind of funnel are you seeing? How many people do managers typically need to talk to before someone invests?
Bridger Pennington:
It’s a funnel on the fundraising side too.
For our funds, once someone gets to a formal pitch stage, our close rate is pretty high. A large percentage of people we formally present to end up investing. That could be 75% for us, though it might be 50% or 25% for other funds depending on the audience and the offering.
But if we go back to the investor’s perspective, I see a lot of people make the mistake of investing with someone they know personally, like a brother-in-law, just because he seems like a nice guy. That’s the only deal they look at, and then it turns out to be badly managed or even fraudulent.
So here’s a simple filter that has saved me from a lot of trouble.
I had a friend who had made 12 investments. Eleven of them turned out to be disappointing or materially different than promised. He told me our fund was the only one that had actually been run the way it was presented.
He asked, “How did you avoid all the deals I got into?”
And I told him it wasn’t that complicated. There were two main filters.
First, do they do annual audits? And can I review the last audit and the one before that?
If the answer is no, or “we don’t do audits yet,” that’s a hard pass for me.
If they say they’re too small, or it’s just a little deal, or they’re too early to justify audits, I’m out.
Bernie Madoff went 30 years without an annual audit. Not once. And it took another firm turning him in to the SEC before things unraveled.
After Bernie Madoff, audits became much more standard. They matter.
Second, do they have a real fund administrator?
And I don’t mean just software like AppFolio. I mean a true fund administrator: a third-party back office team handling money movement, reconciliation, reporting, and oversight.
If the answer is no to either audits or fund administration, it’s a hard no for me.
Those two filters alone will save you from a lot of bad deals and a lot of scams.
Mat Sorensen:
That is really good advice.
I go to a lot of institutional events where private fund managers are raising capital through financial advisors and the wealth channel. I was recently at two of them, and those two things you mentioned, audits and fund administration, are table stakes. You can’t even get in the room without them.
They represent third-party oversight. Maybe “trust” isn’t the exact word, but it is third-party verification. And it also signals professionalism and seriousness.
Deeper Manager Due Diligence
Bridger Pennington:
Exactly. That’s the first bar a manager has to clear.
From there, the next question is alignment.
How much skin do they have in the game? How much of their own capital are they putting into the fund? Are they running this full-time, or is this just a side business while they run three other companies?
I want to see that they are truly aligned with investors.
From there, we look at previous track record, the team around them, whether there are any problems in their background, and whether they have a clean operating history.
At our level, we even review personal balance sheets of managers when we’re partnering with them. We want to understand how leveraged they are personally and whether they’re financially stable.
I also want to see their investment process. If you say you’re looking at multifamily real estate, show me your process. Are you reviewing 250 deals to select one or two? Why did you choose those? Can I see your investment memos, your team discussions, your underwriting, your committee notes?
That’s how serious diligence should get.
Ask managers to walk you through every fee they collect, when they collect it, and how they earn it.
I saw one manager advertise a standard two-and-twenty structure. But when I read the documents, they had front-loaded five years of management fees into year one. That meant investors were effectively paying a 10% fee upfront just for joining the fund.
That’s not a normal two-and-twenty arrangement, even if it’s technically disclosed in the documents.
Some investors didn’t even realize it because they hadn’t read the documents carefully.
That’s why this level of diligence matters. You need to understand incentives, process, track record, and professionalism. You want to walk away thinking, “These people are true experts. They’re disciplined. They’re meticulous. I can trust them with a meaningful portion of my capital.”
Mat Sorensen:
That’s such a great point.
As a lawyer, I’ve read a lot of these documents, and the devil is always in the details.
If someone says they’re charging two and twenty, but they’re front-loading fees or hiding unusual economics in the docs, that’s a red flag. Even if it’s technically disclosed, it’s still bad form if they didn’t communicate it clearly.
I’ve also seen this in real estate funds. They may charge acquisition fees, development fees, brokerage commissions, property management fees, and more.
Those things can be okay if they’re properly disclosed and if there’s a valid reason. Maybe they do need a broker or a property manager. But I still want to understand exactly how they’re making money and why.
Bridger Pennington:
Exactly.
The question I’d ask is: “Walk me through every single way you make money.”
That cuts through almost everything.
Then compare what they tell you verbally with what’s actually in the documents. Today, tools like ChatGPT and Claude can even help you review documents and flag unusual provisions. But you still need to ask the question directly.
Mat Sorensen:
I also tell investors this: I want to be making money with you, not just have you making money off of me.
I understand the manager needs to earn fees and run a business. But if they can make a lot of money regardless of whether the fund performs, that’s a problem.
If the fund goes flat for 10 or 20 years and they still do great through fees alone, that’s not good alignment. I want the manager to have a strong incentive to make money with me, especially through the carry.
Macro Timing and Vintage Years
Bridger Pennington:
One hundred percent. Alignment matters.
But another important layer is macro.
A manager can clear all the micro-level diligence checks, audits, administration, incentives, process, and still perform poorly because of macro conditions.
There’s a quote I love: macro trumps micro.
What we’ve been discussing so far is micro. But macro matters too.
If you invest in southeastern real estate and that market has a terrible decade, even the best manager may underperform.
On the other hand, bad managers can look good in strong markets.
That’s why being a good allocator means understanding the bigger picture. What macro wave is forming? What sectors are likely to benefit?
For example, I believe robotics is a major wave right now. That would lead me to look for managers who are investing into companies riding that trend.
A great example of macro timing is vintage year in venture capital.
Several studies have shown that the year a venture fund launches has a major impact on returns.
Researchers looked at venture funds launched each year going back to the 1990s and found a clear relationship between launch year and performance.
For example, venture funds launched in 2001, right after the dot-com bubble peak, generally underperformed funds launched in 2003 or 2004, when valuations were much lower.
The same dynamic showed up with 2021 and 2022 vintage venture funds. Those were peak valuation years. Even strong managers launched into an overheated market.
So from an allocator’s perspective, you can invest with very smart managers and still get mediocre outcomes if you invest at the wrong point in the cycle.
Mat Sorensen:
I love that point.
You have the manager, the asset class, and then the strategy within the asset class.
I know a lot of real estate operators who made a lot of money in multifamily but pivoted when pricing got too aggressive. Some moved into industrial. Some are looking at office now because it’s trading at a steep discount and below replacement cost.
Oil and gas is another example. Some funds got hurt when oversupply pushed prices down, but then geopolitical events shifted the environment and improved performance.
These are macro calls. The manager still has to execute, but timing and market positioning matter a lot.
So where do you think opportunities are right now?
Bridger Pennington:
As of today, here’s how I’m thinking about it, though none of this is financial advice.
Venture capital looks expensive again. The last two years offered better entry points when valuations were lower. Now we’re seeing very high multiples in some areas.
The stock market also looks richly valued.
Real estate is interesting. If we get significant rate cuts, that could benefit real estate meaningfully. There’s still a bid-ask spread in many parts of the market, so maybe prices fall more first, but lower rates could be a tailwind.
Private credit is showing some stress. In markets like that, where things are cracking and liquidity is tightening, you sometimes find good entry points or attractive secondary opportunities.
Crypto is another one. It’s been down significantly from prior highs, and while it can certainly go lower, there are some historically compelling price levels there.
So I’m watching where markets are stressed, where prices have reset, and where macro conditions may improve.
Mat Sorensen:
That makes sense.
A lot of people say they wish they had bought crypto or another asset when it was lower, but then when the price actually drops, they get scared.
That’s the hard part of investing. Buffett’s quote about being greedy when others are fearful sounds simple, but emotionally it’s difficult to do.
When you think about private funds, the same principle applies. You don’t necessarily want to invest where everyone is already excited and valuations are stretched. You want to find managers in areas where there is real value and where the macro setup may improve.
Bridger Pennington:
Exactly.
And one more thing: predicting the future is very hard.
There is always a bull case and a bear case for every asset class. So rather than trying to perfectly time everything, you can dollar-cost average into alternative asset classes.
If you like venture capital, maybe you invest this year, then again next year, then again the year after that. The same approach can work with private equity, private credit, or real estate.
That way, you spread your exposure across multiple vintages instead of trying to bet everything on a single point in time.
New Managers and Where To Learn
Mat Sorensen:
Final question, and I really appreciate you sharing all of this.
What about the new manager?
A lot of people are hesitant to invest in a first-time fund. They hear “first fund” and immediately think there’s too much risk. I know you work with many managers launching their first fund. How do you think about that from both the manager and investor side?
Bridger Pennington:
That’s actually where we specialize.
Most of the deals we’ve backed have been first-time fund managers. But in many cases, they still had track records. They had done deals before. They just hadn’t formalized those deals into a fund structure yet.
So we underwrite prior deals, prior team experience, the market they’re entering, and the manager’s long-term commitment.
What’s interesting is that emerging managers actually have some structural advantages.
There was a study comparing funds under $1 billion in assets under management to funds over $1 billion. Funds under $1 billion significantly outperformed larger funds.
That makes intuitive sense because smaller funds can operate in less efficient niches. They can find more alpha. Once a fund gets very large, it has to deploy capital into bigger, more efficient markets where it’s harder to outperform.
That’s why some venture firms and other managers intentionally cap their fund sizes. They know they can generate more alpha at $50 million or $150 million than they can at several billion.
So there can be a lot of upside with emerging managers and early funds, provided all the earlier diligence points still check out: audits, administration, incentives, track record, and alignment.
Mat Sorensen:
I saw that report too, and I think that’s exactly right.
You want inefficiency as a fund manager. That’s where the value is. In private equity, that might be the lower middle market. In real estate, it might be a niche size bracket where mom-and-pop buyers are too small and institutions are too large.
That’s often where emerging funds win.
So where can people learn more about you?
Bridger Pennington:
There are two free ways.
First, we built a free educational platform on private investment funds called AltStreet. It’s at AltStreet.com. It includes eight full masterclass-style courses featuring different fund managers explaining how they think and how funds work.
Second, there’s my YouTube channel. Just search Bridger Pennington or Fund Launch on YouTube. I’ve got hundreds of videos there teaching how private funds work, how to evaluate them, and how to avoid getting scammed.
I care deeply about helping people understand this space. We teach a lot for free, and if someone wants help implementing or launching a fund, that’s where our company comes in.
Mat Sorensen:
Well, thanks so much for being on, Bridger. I really appreciate all your insights.
Thanks, everyone, for tuning in to the Directed IRA Podcast. We’ll see you next time. Until then, stay calm and self-direct on.
