We at Surgent Capital take our time exploring the relationship between risk and return before deploying capital. In general, the higher the risk an investor is exposed to, the higher the return is expected to be, but the greater the potential losses or probability of loss.
We take pride in keeping our investors’ capital in the safest capital assets through large multi-family real estate investments in specific MSAs. We prefer to follow the market not fight the market. In the end, look at the simple equation for Simple Hold Returns (HPR) known as r = y + g. In other words, we add Income Return (y) and Capital Return (g) to better identify which capital assets to focus on and invest in. We also apply mathematical equations like Standard Deviation to identify risk as measured by volatility. Surgent Capital will always favor less volatility.
In today’s market with all the analytical tools we have available to us, we believe it is possible to quantify and measure the amount of risk investment is exposed to, making use of empirical data to estimate the probability of certain outcomes. Although it is not an exact science, the numbers calculated in this manner help us provide real estate investors like you with more confidence about the investments you plan on making through Surgent Capital.
Indeed, today empirical information about property markets makes investment more transparent, replacing uncertainty with risk. This makes the markets more efficient and effective at appropriately pricing assets and allocating investment capital. While we believe in taking risks, we do not believe in investing in uncertainty, ever.
We look carefully at the Security Market Line with each capital asset. Using an ex-ante and ex-post approach, we asses between many investments opportunities, where our capital and yours will achieve the highest returns with the lowest risk. If Risk is defined as unknown knowns, then we can avoid the unknown unknowns that is Uncertainty. We always accept Risk but never Uncertainty.
Further, we look back at each investment to see if our expectations met our actuals. We prove our proprietary “Exit Summary” to each investor at the end of a term. Unlike most firms, Surgent Capital will parse the internal rate of return on an ex-post basis to determine if we met our investors’ expectations and why. The only way to do this is through IRR Performance Attribution.
We dissect the initial yield, cash flow change, and yield change. While we understand that IRR measures average rate of return over time, and is defined and computed at the discount rate that causes all cash flows, including initial investment, to have a net present value (NPV). Equivalently, it causes all the subsequent cash flows to discount to a present value equal to the upfront investment.
However, that is not enough, in our judgment, to properly evaluate the 4 pillars of our acquisition process:
By parsing the IRR, we can more accurately identify where we succeeded and where we failed on each transaction because of the relationship between Initial Yield (IY) and Yield Change (YC) to PROPERTY SELECTION and ACQUISITION TRANSACTION EXECUTION, and Cash Flow Change (CFC) and Yield Change (YC) to OPERATIONAL MANAGEMENT and Yield Change (YC) to DISPOSITION (or resale)