Return Is Only One Part of the Equation
Why doesn't a return target tell the full story?
Return targets often dominate investment discussions, but they only tell one part of the story. Behind every investment decision are considerations such as risk, liquidity, governance and long-term objectives. CEO Rob Kumer and Chief Capital Officer Aliyah Mohamed discuss why understanding the investor behind the capital is just as important.
Video Transcript
Rob Kumer: They always start with return metrics and return targets. And as long as I've been representing KingSett in the market, one of the very first questions I get typically is, what's the minimum return you need to invest? And I always respond, you know, in a very similar way, which is to say that the return in isolation really isn't an important number. And it's all, it’s all in the context of the risk that we'd be taking on by making the investment.
And we talk at KingSet about premium risk-weighted returns, and by that we're really driving home that point in that when we're making an investment, when we're buying a piece of real estate, when we're making a loan, when we're developing a building, whatever it is, we're investing capital expecting to generate a certain return, but we're doing it because the return we're expecting to make, we feel properly compensates us for the risk we're taking on by making the investment. And so that's really the full side of the equation.
The reason individuals often focus so much on return is because the return is so easy to measure. The return shows up in a spreadsheet. It shows up in a financial model. It's easy to put on a piece of paper. It's what people talk about – cap rates, ROEs, IRRs, all of these digits on a page which, which demonstrate return.
Risk is something that's much more nebulous. It's more difficult to describe. It's more difficult to measure. And so, a lot of people don't spend a lot of time talking about it. But the fact is that here we probably spend more time focused on downside, focused on risk, focused on what could go wrong over the life of an investment. And so, in the end, we have to feel that the return we're getting properly compensates us for the risk we're taking on. And that to me encapsulates really what we do here best. Aliyah Mohamed: I think those are great points. And, you know, I would add on to that, if we zoom out and look at LPs and how they evaluate opportunities kind of across their portfolio, in addition to the returns that they're seeking, understanding the risk that comes with generating those returns, I think there is some other fit criteria that they have at the top of their mind.
What is the timing, the liquidity timing for this investment, and how does that fit with what their capital needs are? What's the governance around it? Is it through a fund structure? Is it through an SMA? Is it direct? You know, how does this asset and this risk and return that they're bringing on fit with the rest of their portfolio? So, I think there's, you know, these– return is a core part of the investment decision that you make day to day with a specific investment. And I think it kind of filters up into all these other factors that LPs have to consider.
And so, you know, going back to that concept of return driving a decision, I think you're right. There's so much more to it than just the return. Rob Kumer: Yeah. And the last part I'd add to that is to say that the way we've built our business here at Kingset, between all of our various debt funds, all of the equity funds, and then the SMA accounts, you know, in the middle, we play in every part of the capital stack, and we play in all of the asset classes in all of the markets across the country.
And so, as we're surveying the market and the opportunities that, you know, come across our desks and trying to evaluate whether or not we find them compelling, if we find something that's compelling, there's somewhere in our world where we can put it because we span the entire risk-return matrix. And that's really what we're talking about. It's a risk in the context of the return.
