In this conversation, Nathan Jameson, founder of ARX's Capital, shares his journey in real estate, emphasizing the importance of personal investment and transparency with limited partners. He discusses his investment philosophy, the significance of communication during challenges, and the need for a shift in the accredited investor criteria to allow broader access to investment opportunities. Nathan highlights the value of integrity and personal connections in the investment space, advocating for a more thoughtful approach to passive investing.

Alignment Over Growth with Nathan Jameson

Joe Guidi (00:01)

Nathan, thanks so much for joining.

Nathan Jameson (00:03)

Joe, good to be here. Appreciate the time.

Joe Guidi (00:05)

Yeah, I'm really looking forward to this conversation. Obviously, we've been able to catch up a little bit ahead of time. But before we jump in, would you mind giving a little overview about you and ARX Capital for listeners that might not know anything about you?

Nathan Jameson (00:19)

Sure. I am based outside Philadelphia, in the western suburbs, and have lived in Pennsylvania for a little over 20 years after growing up in North Carolina. I fell in love with real estate at an early age and actually moved to Pennsylvania to be an assistant basketball coach at Lehigh back in 2002. I did my MBA at the time and realized about a year in that I didn't want to coach forever. I landed at a small, privately owned homebuilding company in land acquisition. That was where I really got to continue to develop my passion for real estate in the built environment.

I had the opportunity to go into investment banking right out of college and chose not to do that for a variety of reasons. I think one of the core reasons was I really do enjoy the physical real assets part of the economy that tend to be—if you do it right—lower risk with returns that are outsized for the risk being taken. We talk about that a lot in our business. I was able to move through that homebuilding business, become one of the three partners, and eventually we became one of the largest privately owned homebuilders in the country. In 2015, I think we did 400 and something closings, about $120 million in sales.

I split with my partners in 2016 and started ARX Capital, which is—hard to believe—almost 10 years ago now. I was fortunate that I had capital to invest. Getting started with capital is very different than getting started without capital. That feels like an obvious statement, but I think about it a lot because I look at people in the business who strive because they don't have capital. They find ways to do deals without it, which provides a creativity that sometimes I feel like I don't have because the deal doesn't happen unless they can figure out a way to patch it together.

But the advantage of starting with capital is you don't have to move faster than you should move. What I began to do was pick different businesses I could invest in through ARX Capital that gravitated toward real estate. I did a residential land development deal, a historical rehab of a home, and I invested in a manufactured housing fund. As I started to get feedback from those investments, I began to refine what I wanted to spend my time on. Ultimately, I landed with a focus on manufactured housing specifically—direct investing and managing those investments through ARX Capital.

Joe Guidi (03:16)

So, fairly hands-on in your investments.

Nathan Jameson (03:19)

Yes. That's part of my heritage here and my upbringing in the business. Maybe to a fault, I'm super hands-on. I could be accused of micromanaging. But I have to go back to the Great Recession, which I think is relevant because we have so many people in the syndicator space today who don't know what it was like. They were in college or high school, and yet somehow they've raised hundreds of millions of dollars and they believe it's always up and to the right.

I was running a homebuilding company from 2006 through 2015. The only way to survive was to be on-site every day, looking customers in the eye and proving to them, "Hey, we have the money. We're going to build your home. We're going to stand behind the warranty." We were there to make sure the community wasn't left with spotlights where you don't know who's taking care of the empty lot and the weeds growing up. We carry that through our entire business.

Joe Guidi (04:24)

Yeah, you can see how that would dramatically impact the way you approach investments. Also, just to pick up on one other thing you said: you started with your own capital. I assume that impacts your approach as well.

Nathan Jameson (04:38)

It does. I mentioned patience there. You could be impatient; you could say, "I'm getting 0.2% of my savings account, I've got to deploy this." But I didn't need to earn fees to keep the lights on. I was able to really look at the universe of investing and think about how I wanted to develop long-term returns for our family.

The process was very clear: I'm going to invest with others and refine what I want to do with my own time. Then I'm going to invest my own capital and we'll prove that I can earn a good return on that. And then maybe we'll invite some other people to invest with us. We followed that path that I set out back in 2016. Today we've got multiple manufactured housing funds, some land development opportunities, and we do some one-offs.

The differentiator is my family and I are making the first and largest investment. Today we own about 50% of the total equity across all the funds through our cash investments. I'm not accounting for promote return—just pure cash. We're putting in significant seven-figure checks to all of our investments.

Joe Guidi (06:01)

Wow. So it sounds like "skin in the game," for lack of a better term, is a big piece of your investment philosophy—not just in your cash, but in the more important resource, which is time. It’s interesting, though, because you’re heavily invested in these deals. I think there would be a tendency for some to be less responsive; the LPs are making up a smaller share of the deal. But one of the things I saw in your reviews is how responsive you are. Talk to me about your commitment to your LPs and how you view them in your ecosystem.

Nathan Jameson (06:37)

Well, they're absolutely critical for us. We've made the conscious decision that we're not looking to blow that list up. Frankly, it's been a lot of referrals. The greatest compliment we can get is your referral. Our network has expanded more slowly, but it's rarely two or three degrees removed from somebody we already know who is investing with us.

I saw a headline this morning that the president is going to sign an executive order to create more opportunity for private retirement accounts to invest in private equity. On one hand, I'm a big fan of that; it's a great opportunity for investors who have been left out. However, I do think one of the biggest drivers of success for LPs is having a personal connection. While accountability should be the same regardless of whether you know someone, I feel a significant weight in my gut when I know I'm going to run into someone at the golf club, at church, or at the coffee shop. It's not someone who's faceless in some other part of the country.

The challenge for a sponsor like us is we're not going to grow very quickly with that modus operandi. It's slower growth. We're not going from a thousand lots to 10,000 lots overnight because we're going to limit our capital—we're just not willing to go out and do calls with people that are four degrees removed from our network.

Joe Guidi (09:04)

Do you think that's in part because you guys are heavily invested and are growing your own capital? You don't really need to make money on fees; your orientation for yourself and your LP is more on long-term equity growth.

Nathan Jameson (09:22)

Yeah, it is. I probably like you, Joe, follow the LinkedIn chatter: is it IRR or total equity multiple? I will say one of the evolutions I've gone through is that when I was investing as an LP, I'd read the subscription documents and the PPM. I'm a fairly sophisticated person and I could understand those terms conceptually.

But not until I had to write my own documents did I really understand how so many LP documents are really set up so that, in a pinch, the sponsor can take your money as an LP legally. It was actually frightening. At the end of the day, you are ultimately trusting: how is the general partner going to handle your money when things get hard? There are actually a lot of good reasons why the documents should ensure that they can pay themselves and keep the lights on to work through problems, but integrity when rubber meets the road is uncertain.

I've seen people lose money in a real estate market where, frankly, no one should have lost money from 2016 to 2020. I saw sponsors bleed companies dry because they were sucking fees out of the business. I know someone—a general partner—who had a bad investment, lost a bunch of money for the LPs, and they gave all their fees back. So, it’s back to that personal connection and integrity. You cannot know how someone is going to handle your money just from the documents.

Joe Guidi (11:35)

That makes sense. Personal connections are harder to come by these days, and information is key. Many LPs are looking for deals and want access to the asset class, but they don't actually know anybody, so they're starting from a point of low information.

Let's talk about when things get harder or go sideways. This podcast is about trust and transparency, and we've talked about your alignment, but how do you think about communicating with LPs when timelines change or the pro-forma needs adjustment? Walk me through that process, perhaps with a specific example.

Nathan Jameson (12:38)

We've been fortunate to not have a lot of that happen. That goes back to our acquisition philosophy. One of our core values is "Good news fast, bad news faster." We follow that internally. I don't want to be finding out that something went sideways slowly. If we had a water line break, I want to know immediately. Don't go try to figure it out and then tell me, "Oh, we got it solved." No, we're a team; let's figure out how to solve it together.

That communication is critical, and we have the same philosophy with our partners. I share transparently through regular quarterly reporting. Fortunately, we've been conservative in our underwriting and have been able to outperform it. One of the lessons from the homebuilding business is "Basis wins." Don't over-leverage or spend too much on a property because when things do go south—as they inevitably will—a lower basis will protect you from the downside.

To click into a specific example: we had a property in our first fund where it proved to be a heavier lift than our initial underwriting evidenced. We are constantly looking at the equity in that single-purpose entity and how much we can earn through continued improvement. When we think that starts to flip against us—for instance, we're not keeping pace with the preferred return—then we evaluate an exit strategy.

The honest assessment on this particular asset is that we probably bought it with too much of an eye toward the tax benefits. While manufactured housing is phenomenal from a tax perspective, taxes should not drive the decision. They can be an important factor, but they should not lead. I think a lot of people bought bad deals because they could take a big loss, not realizing they’d get recapture on that depreciation when they sold at a loss. We chose to exit the property effectively at our basis and move on. We sent the capital back to the investors and moved on to focus on assets where we could earn the expected return.

Joe Guidi (15:46)

And that was just one deal in a fund.

Nathan Jameson (15:47)

That was in a fund, yeah. It's worth clicking on that because a lot of investors say, "Just give me that single deal; I don't want a fund." But as an investor, I like the diversification. In this case, we're still outperforming our targets. We had one sideways deal, and everything else is outperforming. If somebody was just in that one deal, that would not have been good. I think what you guys are doing with Invest Clearly may give sponsors a greater opportunity to raise funds because the big question is: do I trust the person?

Joe Guidi (16:26)

Yeah. If you look at the broader market over the last three years, a lot of syndicators switched to funds—at least in my assessment—because the deals weren't that good. They wanted to raise money, but there weren't many deals. But there's also the practicality: raising money in syndications means you have to do it really fast. You either have an existing base of investors or you have to acquire them quickly, and sometimes the costs aren't advantageous.

Funds are harder to raise for because they are more sophisticated. It's easier for an LP to look at a specific multifamily or hotel deal. Hopefully, you're right. Insofar as we can help bring confidence to the LP about the actual sponsor, it will make it easier to raise dollars into a fund because diversification is helpful.

Nathan Jameson (17:40)

Yeah, it's the "blank check" hesitancy for investors. "I see you've got a deal or two that might go into this fund, but what about the rest of them?"

Joe Guidi (17:48)

Yeah, without a doubt. So, you invested as an LP, owned a business, and then started your own firm. Were there examples of where you were communicated with as an LP in a way that informed the way you communicate now as a GP?

Nathan Jameson (18:14)

Yeah, I can think of a couple of examples. One specifically: I was an LP in a fund that was a partnership, and suddenly there became a conflict between the partners. One was pitting themselves against the other. The individual partners started to communicate their sides of the story to the investors separately. You're going, "My gosh, this is not good." To the credit of the partnership, I asked for my money back and they sent it, which they didn't technically have to do.

I learned that partnerships are a big deal. Making sure those relationships are aligned is critical. Alignment is about incentives, but first and foremost, it's about values. Integrity and character. We have traditional quarterly reporting, but one of the challenges is making sure it's useful. It drives me crazy when I watch CNBC and someone is reading data dumps. Stop giving me data; tell me what it means. In our reporting, we try to tell you what the data means. Sometimes I think sponsors think more information is better, or they're actually hiding the story by dumping information.

Joe Guidi (20:22)

It's so interesting. You're the third or fourth person to say that, and I totally agree. The analysis of the data is what they're paying you for—the story behind the numbers. A big data dump isn't that helpful. Even reading a PPM for an LP isn't always helpful because of how they're constructed.

Nathan Jameson (21:01)

To your point, Joe, I saw somebody bragging on LinkedIn that they give their investors their full underwriting model. Maybe that's transparent, but they know inherently that very few people are going to look at it or understand it, and they get a checkmark for being transparent. I really want to know as an investor why you're telling me what you're telling me. Tell me what it really means.

Joe Guidi (21:33)

Yeah. What am I supposed to take out of this information? Data storytelling is everything. We're in a moment in the cycle right now where LPs are a little shaken up. More capital is sitting on the sidelines. A lot of GPs are getting questions about asset performance relative to the markets. Are you getting those questions?

Nathan Jameson (22:11)

Frankly, we're not. I think it's because we tend to be pretty contrarian. We were investing going into COVID, but by early '21, we pulled back in the manufactured housing space because we couldn't make the numbers work, yet deals were still trading. We didn't understand it. Now that the people who were buying then have been bitten or have overspent, we're seeing more opportunities.

Because of how we handled ourselves, our LPs are asking, "What's out there?" They know we're never going to throw a deal at them just for an acquisition fee. In our first fund, we raised about $21 million. We've returned all that capital, started paying down the pref, and we still own 10 properties in that fund. Our second fund is going to be even better performing. We feel really good about the opportunities today. Our LPs appreciate that we're aligned—I’m both the general partner and the largest LP. We’re going to do what’s best for them, even if it means the firm has to be lean to make it through the next cycle.

Joe Guidi (24:03)

That makes sense. It’s confidence-building when money comes back. As you expand, will it mostly be manufactured housing, or are you open to opportunistic stuff? What's the most important thing about your relationship with investors going forward?

Nathan Jameson (24:12)

I think the most important thing is staying up to date on the story. I never intended the firm to be just manufactured housing. What we really are about is finding unappreciated opportunities in real estate assets. We like the information asymmetry in real estate. The playing field is fair and more level in the public markets than in private real estate.

I’ve got a long background in zoning and land development approvals where the value created in the process of entitling property is outsized compared to what happens once you start developing it. We’ve been able to bring those land development opportunities to our investors. We think manufactured housing is great, although unfortunately, most of the country doesn't want more of it. We see opportunity in the long-term RV space. We are opportunistic.

Joe Guidi (26:13)

Got it. All right, we'll wrap up here, but before we do, there's one question we ask everybody: What part of passive investing needs to die?

Nathan Jameson (26:40)

My first reaction is all the sponsors touting silly things on their Instagram videos. But on a structural level, I would fall into the camp that the accredited investor criteria needs to shift significantly. We're keeping too many people out of really good opportunities to grow wealth.

Joe Guidi (27:03)

Shift down?

Nathan Jameson (27:22)

Yes. Is wealth a sign of intelligence? I'm not sure that correlates. Many of our manufactured housing customers are from a part of the economy that is underappreciated and undervalued. At the same level, we've decided that unless you have a certain amount of investible net worth, you don't have access to these opportunities which are frankly better than the public markets. I'd be in favor of opening that up by virtue of some kind of quantitative assessment or test.

Joe Guidi (28:15)

Interesting. Okay, that's a new one for us. Before we finally wrap, where can our listeners go to learn more about ARX Capital?

Nathan Jameson (28:34)

You can go to discoverarxcapital.com and please reach out that way. You can reach me at nathan@arxventures.com.

Joe Guidi (28:47)

And that's A-R-X.

Nathan Jameson (28:49)

That's right. And go to Invest Clearly; you can find us there.

Joe Guidi (28:53)

Right, 100%. Thank you so much for your time. This has been great.

Nathan Jameson (29:03)

Joe, thank you. I appreciate all you're doing.