Larissa Herczeg

Larissa Herczeg (0:00 - 0:39)

And so decisions like that, I think around economics are really important in telling as far as, I mean, it constantly baffles me that people will be like, oh, we're going to turn away capital from this investor because the fee's too low. It's like, so you're going to make zero. And, because a 1% fee was from a $200 million investor was too low.

So instead, you're going to make one and a half percent on zero. And somehow that is better than making 1% on $200 million. Like, good luck. Good luck with that math.

Nancy Lashine (0:40 - 3:25)

Hello, and thanks for tuning in to Real Estate Capital. I'm your host, Nancy Lashine of Park Madison Partners. Capital is the lifeblood of the real estate industry, but the decisions on where and how it's allocated are driven by people and personalities.

Who are they? What motivates them? What can we learn from their experiences?

On this show, we introduce you to some of the real estate industry's most influential thought leaders and decision makers. And we talk about what is important to them, how they make critical decisions, who has influenced them and a lot more. Our guest on this episode is Larissa Herczeg, founder and managing partner of One Seed Partners, a firm that provides capital to early stage real estate managers.

Larissa is one of only a handful of women who have started a real estate investment management firm. The origins of One Seed trades back to when Larissa joined Oak Street Real Estate Capital to launch its seeding and strategic capital business. Blue Owl acquired Oak Street in 2021.

And in 2024, Larissa and her partners bought the business back to launch One Seed as an independent firm. Larissa did not plan a career in real estate. She began as a lawyer practicing corporate finance law at Clifford Chance.

It wasn't until 2005 that she crossed into the investment world, joining Credit Suisse's Customized Fund Investment Group, now part of GCM Grosvenor. After Credit Suisse, she had a few short stints at Franklin Templeton Real Estate Advisors and Morgan Creek Capital Management before settling in at Oak Street. Larissa has backed dozens of real estate managers through multiple market cycles, which has given her a sharp sense of what separates a good investor from a good business. They're not always the same.

In our conversation, we discussed her unconventional path from corporate finance law into real estate and why she chose to spend a career seeding new GPs and the benefits of working with small investment firms. Also, advice for recent real estate startups and the red flags she watches for when she meets an emerging manager.

Larissa, I've known you for, it feels like so long. It just seems like it's really fun to talk to you at this stage in your career because it just feels like you went through just a whole series of different early jobs. I mean, I guess you went to law school and then somehow you ended up in the real estate business.

I don't quite know, I met you maybe when you were first in the Credit Suisse days, which is the predecessor to what today is called GCM, like over 20 years ago. So tell us, first of all, how'd you end up in the real estate business? Let's start there.

Larissa Herczeg (3:25 - 4:35)

Yeah, very much by accident. I had been a lawyer, as you mentioned, so worked with Roger Singer and a variety of funds folks at Clipper Chance, really before there was even a funds group. And so then went in-house to Credit Suisse, served as their counsel for their real estate fund and CFIG, the Customized Fund Investment Group, which is now GCM Grosvenor.

And they were mostly private equity focused. And at some point along the lines there in 2006, got some real estate money to invest and started hiring people to focus on real estate and had asked if I wanted to do it. I said, no, because it was definitely very far out of my comfort zone.

And then ultimately they came back to me and said, we think you're going to do it because we hired someone to replace you over here and we should try it. And I said, okay, I guess I'll try it. And it was great.

I mean, sometimes people know better than you do. And it was, obviously, I loved it. I'm very happy I was made to be uncomfortable in that job decision.

Nancy Lashine (4:36 - 4:42)

Was somebody just looking out and really saw something in you that you didn't see in yourself at that point in time?

Larissa Herczeg (4:43 - 5:07)

Obviously, that was part of it. Obviously, if they didn't think I could do it, they wouldn't have asked me to do it. And then, it's also investment banking world, who knows how decisions get made.

So I think it was a lot of those things. But fundamentally, if they thought I was not going to be able to do it, they wouldn't have had me do it. So yes, I do think someone had more confidence in my abilities than I did.

Nancy Lashine (5:09 - 5:23)

Yeah, no, I think it's such a common theme for a lot of people, particularly women whom I know, to say, gee, I don't know how to do that versus saying, sure, I'll do that and then figure it out.

Larissa Herczeg (5:23 - 5:34)

It wasn't like you were throwing me to the wolves. I mean, obviously, like you have a lot of resources here to help you figure this out or not just abandoning you. So, yes, I think you're spot on.

Nancy Lashine (5:36 - 5:38)

So what was the business like when you first started out?

Larissa Herczeg (5:38 - 5:42)

The business at Credit Suisse or the overall market, the business-

Nancy Lashine (5:42 - 5:47)

Well, your particular purview of the business from Credit Suisse, what were you actually doing there?

Larissa Herczeg (5:48 - 7:01)

Yeah, so we were doing a lot. I mean, it was global real estate investing. Definitely this was 2005, 2006.

So as crazy as it sounds, access to information was much more limited. And so particularly if you were trying to find smaller groups, they were off the beaten path, harder to find information, was harder to come by. And so even though it was a traditional fund of funds structure, there was a lot more value to it than there would be today.

And obviously, that's why their business and so many others have evolved. But at the time, there really was value both in accessing the small cap and understanding a very large universe to compare them to. And also the flip side of that business was also creating feeders to access Blackstone and Carlisle and the names that a retail investor wanting to commit one, two, sometimes even five million dollars.

You could not get access to those funds and you could not go direct like you can today. So just a very different world 20 years ago. Email, we were walking uphill, barefoot to school and back.

Nancy Lashine (7:01 - 7:04)

How long were you at Credit Suisse? 

Larissa Herczeg (7:04 - 7:05)

For three years.

Nancy Lashine (7:06 - 7:07)

And then what happened?

Larissa Herczeg (7:07 - 7:30)

And then I joined the Franklin Templeton team. Definitely one of the things I was looking for was more as I got shoved into this real estate role and really enjoyed it. I wanted more real estate experience and real estate mentorship and to really be focused more on real estate.

So Franklin Templeton seemed like a great, great shift from our guards.

Nancy Lashine (7:31 - 7:33)

And then you went from there in North Carolina?

Larissa Herczeg (7:34 - 7:36)

To Morgan Creek. 

Nancy Lashine (7:36 - 7:37)

Morgan Creek. Right.

Larissa Herczeg (7:38 - 7:40)

Yes. Which was very fun.

Nancy Lashine (7:41 - 7:43)

Definitely. You had way too much fun at Morgan Creek, as I recall.

Larissa Herczeg (7:44 - 8:46)

We had a lot of fun. It was such great people. And for me, it was the first time.

It was interesting to see Clifford Chance. And I had been at Rogers and Wells as a summer associate. Credit Suisse, Franklin Templeton, all just huge firms, which I had enjoyed.

I hadn't appreciated in the move from Credit Suisse to Franklin Templeton, how differently big firms could behave and the cultures and just the dynamics that would be different. And so Morgan Creek was really fun because it was much smaller. It was about 12 billion when I joined and just a very entrepreneurial environment.

I could be totally wrong on this, but I think there were about 60 to 70 people versus tens of thousands. And so it was just really fun. Great people and a really fun experience that helped, I think, whet my appetite for being at smaller firms and in a more entrepreneurial setting.

Nancy Lashine (8:47 - 8:51)

Yeah. And there's a great sort of alumni network now for Morgan Creek.

Larissa Herczeg (8:51 - 9:00)

There is. There is. It's really fun.

We've had one alumni gathering and it's always fun to connect with folks from Morgan Creek.

Nancy Lashine (9:01 - 9:03)

And then how did you meet the Oak Street guys? 

Larissa Herczeg (9:03 - 10:20)

So I met Mark and Jim. It was a couple of different reasons. First, they were raising Net Lease Fund 1, which was 20 million dollars. And I thought it was a really, yes, really 20 million.

That was not billion, but million. I thought it was a really interesting strategy. They had a lot of guardrails around it.

And I just thought it was very different, very interesting. Those were the types of things we were looking to do at Morgan Creek. And so that was a really good fit.

And I was also, as much as I love New York and loved being there with you, I was realizing with travel, like I'm in New York five nights a week, five nights a month, rather, at most. Why do I pay to live in New York? And so kind of wanting to move back to Chicago where Oak Street was based.

And so just also naturally started spending more time with Mark and Jim as I was looking to move back to Chicago. So Planets just really aligned in a very unexpected way, which obviously worked out. It was a bit unintentional and just through a mutual investor who had asked me to take a look at Oak Street out of the gate.

And that's how I met them.

Nancy Lashine (10:21 - 10:28)

And you were building, again, a real estate fund to funds business within Oak Street. Is that right?

Larissa Herczeg (10:29 - 12:15)

So when I joined Oak Street, part of the thesis that Mark really pounded the table on was, Morgan Creek was great. Your process was great. You were the only institutional investor who would even answer our phone calls, let alone run a process.

And it was a very good process. It was very respectful of us being small. And so we really, his thesis and having me join was there's a huge gap in the market.

But one thing, and obviously this is post Bernie Madoff, but you are not monetizing the risk for your investors correctly. And so, as we sit on our side of the tables, the GP we're negotiating with, you can be extracting a lot more value in a well-aligned way, not extracting a pound of flesh, but you can be extracting more value from your investors than you are and monetize that risk better. And so we spent about three to four years kind of refining what that should look like.

What is it that a small firm would be willing to give up? What wouldn't they? What was off the table? What for us was a non-starter or would really misalign interests and a bunch of just trial and error at different types of structures until we came up with effectively where we are today, which is, taking a revenue participation GP sake, whatever term of art you want to use that we continue to tweak all the time. But it was, it set that in motion instead of just, oh, we're going to get a discounted management fee and maybe a discounted carry. The thesis was really we need to do better than that.

Nancy Lashine (12:16 - 12:21)

So what is your structure that you've evolved and why do you think it works best?

Larissa Herczeg (12:22 - 14:13)

So, I mean, I would say that three core tenants of our structure are, A, it has to be with really, really good people. It has to be a very well aligned structure. These are designed to be 10 to 20 year marriages.

And so things are absolutely going to go wrong and you need to trust your partner. You also want to have created that alignment such that you're standing in each other's shoes and incentivized to make the same decision when things do go wrong. And, and then third, we feel very strongly, and this was something that we really was very key to us at Oak Street and we turned down a lot of capital early on.

We felt very strongly about having discretion over our deals. And so by the same token, we felt very strongly that giving up discretion is really important and that we're going to attract better partners. Those partners were going to get better deals.

If we are willing to step back and say, you make all the investment decisions, you figure out how to run your business. We want to be helpful. We want to help provide you with as much information as possible so that you can make the best decision.

But we want to give yourself, you enough rope to hang yourself. And, we strongly believe you don't, you don't start a firm so that then someone's breathing down your neck, second-guessing every decision and making them for you. And so that was another, that was kind of the third leg of our stool that we felt was very important.

And then beyond that, much to the dismay of the team, everything looks different depending on the deal. And we really want to create a custom deal that's going to work for that partner. And  they're not all cookie cutters.

So from there, they all look different.

Nancy Lashine (14:14 - 14:36)

So just to be a little more specific, if you can be, do you put capital in the operating business? Do you only put capital in the, for the GP share of a deal or a fund? And then do you share in the revenues at which level?

Asset management fees, property management fees, performance fees. How do you think about all that?

Larissa Herczeg (14:37 - 15:38)

Yeah. So in reverse order, for us, what we're participating in is all math. We need to get the math to work.

And so sometimes it's all of those things. Sometimes it's a more limited set of those things. And it just, it's math to us.

We need, we're trying to back into a specific return, a specific bogey, depending on the investment. And there's a lot of ways to make that work. And so, again, we think that's really important because every firm is different and has different revenues.

And so we can pull on different levers depending on what their hot button issues are. And then we are, I would say it's not impossible that we are actually providing working capital and investing in the opco, but it's exceptionally rare. There's just a lot more risk to that.

And so our preference is always, and the core of our thesis is here's investment capital and an exchange for that. We're going to take revenue participation at the opco level, but we're typically not willing to invest at that level.

Nancy Lashine (15:39 - 15:49)

But you will participate at the opco level rather than just at the GPS at level.

Larissa Herczeg (15:49 - 16:52)

Correct. So this is capital that's helping these groups, that's really launching their institutional businesses. And so we're not doing our investors justice if they're only getting economics from this initial fund, because we expect that's still going to be slow. I mean, as you know raising a first institutional fund, even when you have a 20 or 30 year track record is very hard.

And you're talking about a very small amount of capital that if you're realistic and normal is what you're going to raise. And so, Oak Street is really the template for what we want to accomplish for our investors where fund one was 20 million, fund two was about 130 million, fund three was 500 million, fund four was a billion, two. And so we believe our investors should be able to benefit from that growth because they were there day one and not just benefit from fund one that's 20 million dollars.

Nancy Lashine (16:52 - 16:57)

How many operators have you seeded to become managers today?

Larissa Herczeg (16:58 - 17:03)

Yeah, we have about 17 to date.

Nancy Lashine (17:04 - 17:13)

And would you say, are you looking for something different today in 2026 than you might have five, six years ago?

Larissa Herczeg (17:14 - 19:00)

I would say it is still really the same, good people who are going to be good fiduciaries with an interesting competitive advantage in this space. I'll say, and it may be sad, but one thing we have learned the hard way is that new is not something we want. And so most of the groups we're investing with have at least 10 years of experience as a firm.

Many of them have 20 or 30 years of experience as a firm. And so they have track records. But, the reality and everyone at the firm has heard me say this a million times, but it's, partnerships are loveless, sexless marriages where all you do is talk about money and your children.

And so we like a partnership that's been tested for at least 10 years because it's hard. And if one of two marriages ends in divorce, it's not going to be better, chances for a partnership. And so what we have found was the newer partnerships where it was a year, two years, three years old, where they've done a couple of deals, those are far more likely to go bad.

That's more venture investing and we don't want. And so you're going to get a venture outcome. You could get super lucky and hit a grand slam, but you're going to have a lot of zeros in there. And so we really prefer the more stable, established groups. But that makes me sad because it's so hard to start a firm. I wish that wasn't the case.

And we're constantly trying to brainstorm and iterate and figure out different ways how we could de-risk investing in newer groups because obviously they need the capital and someone should be doing it.

Nancy Lashine (19:00 - 19:13)

Do you typically invest with a group over like multiple funds or how does it work over time? Do they graduate from you? How does going to your firm kind of take them through their process?

Larissa Herczeg (19:14 - 20:08)

Yeah, the goal is both. And again, we get smarter and smarter with every deal we do. So our goal is where we can, we want to continue supporting groups at our option if they've done well.

But we do also want our investors to go directly. And that obviously means different things for a family office. That could mean investing alongside of us today or certainly, in the next fund that's maybe $150 or $200 million.

For a large pension fund, $150 or $200 million is still going to be way too small for a $50 or $100 million check. So for those investors, it might be fund three, fund four, fund five. But we want that, where our investors want to be getting to know our partners and effectively cherry picking the ones they like in writing checks.

We are all in favor of that and want to do everything possible to facilitate it.

Nancy Lashine (20:08 - 20:13)

Are there property types that you've been particularly focused on the last couple years?

Larissa Herczeg (20:14 - 21:21)

They're not, one of the things I think I've learned throughout the course of my career is if we're trying to market time, we're going to get it wrong. And especially because this is a 10 year plus horizon, if you look back 2020 retail was the whipping boy and office was great. And now that's reversed.

And now retail is somehow the golden child. And so we really want to find the best partners. And what, being retrospective of our investments historically in my investment track record historically, whenever I was trying to find like, oh, multifamily is really hot right now, we need to find a multifamily group that never ended well.

And so we learned the hard way, we want to find good partners, be sure that we're creating a diversified portfolio. But if you're scrambling, say, gosh, we have to have a multifamily group, you're probably going to make a bad decision.

Nancy Lashine (21:24 - 21:58)

Interesting. We've had similar experiences in that respect, right? It's very hard to say, we're looking for this.

And then, because you really want to just respond to the best opportunities. And we can afford because we don't have to do that many transactions. We don't, you don't. You can afford to be really selective. I sort of skipped over your iteration from being at Oak Street to starting your own business. So tell us, why did you decide to start your own business?

And give us a little bit of that backstory.

Larissa Herczeg (21:58 - 24:01)

Yeah, so I mean, Oak Street, I was definitely a lawyer by training, extremely risk averse. So even though I got this taste of what being at a smaller entrepreneurial firm was like at Morgan Creek, it was still never something that I woke up and was like, oh, I want to do this myself. And so it really happened by accident, leaving Morgan Creek and joining Oak Street, and being an entrepreneur.

And that was, I mean, I joked all the time that I was never ever going to do that again. And there were definitely really fun days, there were definitely a lot of really hard days. And I feel like no one goes on CNBC, who's failed at being an entrepreneur who talks about how hard it is, how hard it is to be partners, how you have to learn to disagree with your partners, how you have to understand how much it costs to print in color versus black and white versus at Kinko's, because those sense matter.

And so that was really hard. It's that I never wanted to do it again. And then we obviously sold the business to Blue Owl, which was fantastic. But realize, being back at a very large public company that I definitely liked smaller entrepreneurial better. And so we know was very fortunate. Both my partner Mark and the Blue Owl folks were incredibly supportive and really led us by the business back and by the business back with with AUM to start.

So I will say it was, while still challenging and hard, not nearly as hard as starting at 20 million. Like we did at Oak Street when I joined. So it's been a lot more of the fun side and less of the stressing over printing in color versus black and white. But that is definitely still there. I'm never doing it again.

Nancy Lashine (24:01 - 25:05)

Right. Well, it's like that. There was a Greenberg from Bear Stearns, used to send out these emails to his team and needless to say, when it was a email called Save the Paperclips.

And for quite a years, I've had a pile of paperclips in my drawer, just. You're mindful.

Well, how is the seeding business changed since you were at Oak Street? I mean, it's such a popular place to be right now. There's so many huge firms who are looking to invest or buy platforms as well as funds that have been created to invest in platforms.

And so many more investors looking to be, part of that platform or, part of the operator. And so many of the big investors saying I want access to deals as I own these platforms. So how has the business evolved and changed for you since you were at Oak Street?

Larissa Herczeg (25:05 - 26:46)

Yeah, it's been crazy to watch it as a market. I think if you back up to 2016, 10 years ago, investors and ourselves, like I think people didn't necessarily appreciate the nuance to GP staking, seeding, GP economics, sponsor equity. I think there wasn't a lot of appreciation to how those strategies were different.

There were very few of them, to your point. And, over the course of the past decade, obviously, GP stakes have become hugely popular. I think that's because they're in the news every day and they have, for the most part, been very successful because the market has really gone up and to the right.

And so like a good bull run that's made people pay attention and feel like they want to get a piece of the action. But I think there is tremendous nuance to it. And frankly, I think there's tremendous risk that not everyone appreciates because the market has gone up and to the right.

And so it's been very interesting to your point. We spend a lot of time with investors who wound up owning some GP stakes by accident and are trying to figure that out, who wants to have it as more of a strategy and are trying to figure that out, whether they want to do it themselves or through others. And so I think there's a lot of attention on it, on the space, which is great.

But like everything, I think as it grows, you're gonna-  there's lessons to be learned and it doesn't always go up and to the right.

Nancy Lashine (26:48 - 26:55)

Can you, for people who are listening who aren't as familiar with the GP stakes business, can you give us an example of what a deal looks like?

Larissa Herczeg (26:56 - 28:06)

Yeah. So, for a traditional GP stake, and again, there's probably not one standard deal, but it varies from, a passive investor saying, hey, Nancy, we're going to buy 25% of your firm. And they're, they're writing you probably a decent sized check for that ownership interest.

And then they're getting that long term ownership interest that behaves like a true, that is a true ownership interest, but passive. You're obviously seeing increasing numbers of deals where it's more than passive, where maybe it's 50 or 51%. Obviously, Blue Owl, we completely merged. Oak Street and Blue Owl completely merged.

And you're seeing a lot of that as well. And so, there's really a very broad spectrum from very passive through to full ownership. And then there's all sorts of variants where it's not true ownership, it's more of a revenue participation, and varying degrees of involvement, discretion.

Nancy Lashine (28:07 - 28:12)

Can you give us a specific example of one of your deals of how you like to structure something?

Larissa Herczeg (28:13 - 30:04)

So we, and I can't give away all of our secret sauce, but, I would say we generally do not want to be a true owner. And that's really, I think a lot of the most of the GP stakes transactions that you read about are with larger companies. And so the larger the company is, if you're writing a big check to buy into that company, there is probably multi billions of dollars of contractual management fee- of contractual AUM that is going to generate management fees.

And so you can look at that and say, okay, I know, within a pretty narrow band, how much I'm going to be getting back in management fees over the next 10 years. And so you can write that check and be comfortable with some sort of downside. And also understand that, yes, we might have to kick in capital as part of the GP, but that's going to pale in comparison to the billion dollar check I just wrote to you to buy 25% of your business.

So that extra $10 million doesn't really matter. And so that's how a traditional GP state transaction would work. And you want to be the owner, you want to have that in perpetuity.

In the small cap space, it just behaves different. We don't have 10s of billions of dollars of AUM that we can look at. And so we don't have that same comfort level around how much are we going to be getting back in management fee revenues.

And so we don't really want to be a true owner. We don't want to have that ongoing responsibility to kick in capital. We want the right to, but not the obligation because if things go sideways, that's going to be a meaningful check that we're now we're obligated to kick in.

Nancy Lashine (30:04 - 30:16)

So do you generally structure deals where you just have a participation in the GP and provide your share of the GP capital and then maybe have warrants at the operating company level? 

Larissa Herczeg (30:17 - 30:30)

It can be all sorts. And so again, that's where there's really not a standard deal. Like sometimes that's what it looks like. Sometimes it's capital beyond that.

Sometimes there's warrants, sometimes there's not. It just really, it just depends on the transaction.

Nancy Lashine (30:31 - 30:37)

Is it easier or harder today to launch a new real estate firm given the industry consolidation?

Larissa Herczeg (30:39 - 32:29)

Well I mean, harder. I'm always going to say harder, I think, but again, it's like anything. I think if you ask someone in 2010 or 2012, if it was easier or harder than it was in 2000, they're going to be like, oh, wow, it's much harder.

So I think it constantly gets harder. And maybe this is just what I want to hear. So I'm hearing it. But it does feel like the world and the pendulum is starting to swing back a little bit where not every investor wants to do more with fewer partners. And that because there are so many interval funds, so many non-traded REITs, so many ways to get exposure to a lot of the very large real estate firms out there, that they are recognizing that portfolio diversification is such that we should be investing in smaller and mid-cap groups. That's exposure we're not getting through these groups and just realizing how much concentration they have with those fewer partners.

And so I feel like the pendulum is starting to swing back a bit where you're starting to see more attention to being open to a new relationship to smaller groups. But nothing like, I mean, I feel like 2006, 7 and 8 were like the heyday of emerging manager, first time funds where truly like if you had a pulse and a story and a pedigree of a good firm on your resume, it was like, oh, yeah, this is better alignment. Let's do it.

And then obviously, due to the GFC, a lot of that went horribly wrong, which is not necessarily a variety of reasons for that, not just because they were-

Nancy Lashine (32:29 - 33:32)

I'm smiling because, of course, Park Madison Partners started in 2006, 7, 8. We had a phenomenal run because, yes, it was certainly the heyday for emerging managers. But I would say that even, obviously, we've had to view the markets and iterate our strategy, but we've had a barbell approach for a long time, which is on the one hand, working with some really large managers on, say, open-end fund products, but on the other side, introducing smaller operators who have a niche strategy that you can't get at the big firms and creating, it used to be called REIT bait when you buy smaller deals, aggregate them and sell them to the REITs. Now, maybe it's, big asset manager bait.

But you certainly see that in a lot of the niche strategies, right? Like whether it's iOS or student housing or senior house, a lot of those things. What are the red flags that you look for when you meet with a new operator or manager?

Larissa Herczeg (33:33 - 35:48)

Definitely that fiduciary mindset and how they're thinking about the business. And from my perspective, one of the reasons we were successful at Oak Street, we had a very focused strategy. We were also very LP friendly on governance and on economic terms.

And our thesis was we wanted to be, if you were comparing us to any other investment in real estate in our, particularly in our early days, but we, for most of the firm's existence, we wanted to have the best fee structure. And so we never wanted an investor to compare us to one of our competitors and be like, oh, the competitor's economics are better. And that is definitely, it's hard to start a firm.

It costs a lot of money. There is definitely, I'd say you can tell very quickly the people who get that, who get that this is not a get rich quick game. It is, if you are lucky, a get rich very slow game.

And then there are those who are like, no, we have to charge 2% fees. And, I left a seven figure job. I can't be making less than that.

And the reality is you have to be, if you start a firm, like, and you have people who say like, well, so the analyst in my firm is going to be making more than I am. Like they are, I guess, because you own the firm and you're going to get the upside. And so decisions like that, I think around economics are really important and telling as far as, I mean, it constantly baffles me that people will be like, oh, we're going to turn away capital from this investor because the fee's too low.

It's like, so you're going to make zero. And because a 1% fee was from a $200 million investor was too low. So instead you're going to make one and a half percent on zero.

And somehow that is better than making 1% on 200 million. Like, good luck. Good luck with that math.

Nancy Lashine (35:48 - 35:56)

So would you translate with your advice to someone starting a business, a real estate business today? Take the money. 

Larissa Herczeg (35:57 - 36:36)

Take the money. I think, and we all know if you do, if you do a good job, investors are sticky. And the reality is they have a lot of pressure on, everyone is, is assessing their, the fees that they're paying. And it's just the reality of the world.

But if you do a good job, they're going to be very sticky. And that's what you should be hanging your hat on. Not, not this idea that if you're not making one and a half, that's, that's not enough and you can't pay yourself enough.

So it's hard and margins are thin but as you grow, it's going to get easier and easier.

Nancy Lashine (36:37 - 36:44)

Where's the best risk-adjusted return in the small cap universe today by property type and geography?

Larissa Herczeg (36:45 - 36:49)

Oh, so again, we're so bottoms up that I think it's-

Nancy Lashine (36:49 - 36:52)

Just in your portfolio, what's performing best right now?

Larissa Herczeg (36:53 - 38:25)

Yeah. We really like equity right now. I know obviously there's, credit and debt is, is very popular and, and we certainly like that space as well.

But I feel like there are so many forced sales right now, so many broken capital stacks that even, buying something with accretive leverage or no leverage, we're not big fans of negative leverage, but there are a lot of transactions like that are writing on an unlevered basis to a net 10 or 12 with, with negative rent growth, with aggressively growing expenses and exit caps in the seven to 8% range, regardless of asset class.

And you look at that and say, if I can make that math work and get to a net 10, there are so many things that could go right here that could easily get this to a net 15 or 20 with very little risk. And so, we like those deals and a lot of that, a lot of those are small cap deals that are, relationship lenders who are having to force sales or have run a process and gotten very fatigued because they've awarded it to two or three buyers who then flaked, or it couldn't line up equity. And so we like those deals and our partners who are finding them are kind of fixing them and then selling them also pretty quickly, which has been really nice.

Nancy Lashine (38:25 - 38:35)

If you created a bar chart of the deals that your partners have done in the last 18 months by property type, what would you say is the dominant?

Larissa Herczeg (38:37 - 39:36)

It has been very light on multifamily. Although that seems to be coming, like looking down the road, it seems like there's a lot of distress and multifamily that is finally working its way through the system. Hotel and office have certainly been at the forefront.

I'd say retail has been steady Eddie, I think it never had, no one was buying retail at three and four caps. And so retail has kind of just maintained a very even plane, but it's had some really, like some really interesting deals. And then industrial, we've seen some, more than multifamily, but not as many as hotel and office, but a lot of the hotel and office deals, it's an old adage that you're going to go broke saving money. And just because it's on sale doesn't mean you should be buying it.

Nancy Lashine (39:36 - 39:46)

So is there a, if you were to say whether the two hottest markets in the country for your managers in the last 18 months, what are they?

Larissa Herczeg (39:47 - 41:05)

As far as geography? I would say Texas. Texas has just been on fire in ways that I think probably people would argue Florida has, but Florida seemingly has a lot of cracks and Texas just keeps on providing. I mean, Texas office, particularly Dallas has been insane and the really attractive place to play Austin, a bit less so, but the broader Texas market has been really interesting.

We like the Midwest and I would exclude Chicago, but the more core Midwest, the Pittsburgh, the Indianapolis, the Columbus, the Cincinnati, again, very steady Eddie markets that never- it's not a roller coaster, but there has been growth. I mean, Columbus, it kills me as a Notre Dame band having lost to Ohio state twice in the past four years, but Columbus had been a really rapidly growing market and very interesting. So I think a lot of those overlooked Midwest markets that got ignored in the last cycle are pretty interesting.

Nancy Lashine (41:06 - 41:09)

I was wondering how long it would take for us to get to Notre Dame.

Larissa Herczeg (41:09 - 41:10)

I think that's pretty good.

Nancy Lashine (41:11 - 41:12)

I think we did good. Yeah.

Larissa Herczeg (41:13 - 41:14)

Yeah. Very good.

Nancy Lashine (41:14 - 41:18)

How are you feeling about the coming season since we're on it?

Larissa Herczeg (41:19 - 41:56)

I know I'm terrified. It feels like again, right. Whenever there's so much hype and everyone's like, Oh, this you can't lose with this.

And everyone says, interest rates are going to be cut. Like what, what have we seen for years? They have not been cut.

And so the fact that everyone thinks we're going to win and there's so much hype just makes me extremely nervous that we're being set up to fail, but the team seems good. And I know as a fan, I am still fired up about being excluded last year. So fingers crossed. Hopefully it's our year.

Nancy Lashine (41:57 - 41:59)

I'm rooting for you. 

Larissa Herczeg (42:00 - 42:01)

Thank you. 

Nancy Lashine (42:01 - 42:16)

I guess one question that always comes up is our investors better off investing with emerging managers or mega funds.

Is there anything that gives emerging managers a true edge over the mega platforms?

Larissa Herczeg (42:18 - 44:54)

So, I mean, I think if you look at the mega platforms, they're all publicly traded companies and that comes with a lot of advantages, but a current cash comp, I'm guessing, 90% of not a hundred percent of their employees make more than those employees would at a small firm in current cash. And so, and the resources, the information, when a public company is run well, I think it certainly has a lot of very strong competitive advantages as far as information, as far as being able to get deals of scale done. And that's important.

And so I think that exposure is worthwhile and important, but what you lose is the reality that, A, that's balance sheet, firm balance sheet capital that's your GP commitment is not Nancy and Larissa writing a check that they are nervous about every day. It is the firm balance sheet at a public company that is owned by no individual. And so there's just much less of that concern every day.

And the reality is shareholder value and stock price is how everyone at those companies gets paid, 30% or whatever percentage it is of the bonus is in stock price. And so you care a lot more about stock price than you do about the overall asset performance. And that means you care about driving management fees and driving AUM.

And so I think there's a lot to be said for smaller firms where it is a get rich very slowly and only after you have made a lot of money for your investors. So I absolutely think there are pros and cons to both. And I think, I absolutely think, I mean, and obviously we're very familiar with the data center space, regardless of the politics around it and how you think about it, a small firm investing in data centers is going to have very different exposure than a Blue Owl Aries Blackstone investing in data centers.

And you did want both of those exposures. They are not mutually exclusive. And just because they are all called data center does not mean they're going to behave the same way.

So my bias is that I think there's better alignment at small firms, but I think there's absolutely a lot of reasons why you should also be getting that mega fund public company exposure.

Nancy Lashine (44:56 - 45:15)

Wise words, indeed. Hear, hear. Of course we agree.

Let me ask you the question that people ask us all the time, capital formation. It's been really hard the last few years. Everybody- it doesn't matter who you are. It's been tougher than it has been. Are you starting to see that fall?

Larissa Herczeg (45:17 - 47:04)

Well, yes. I mean, again, hopefully a little bit. I feel like the credit crisis, if you will, and all the negative headlines around credit did real estate in a very big favor and, private equity, I think has seen some pain is going to see continued pain.

I mean, it's easy to sit back and say, oh, real estate is so levered. The private equity is all about the levered buyout. So it's not less levered than real estate.

And I think it's taken longer for the days of reckoning to arrive, but they are. And so I think that has been helpful, for those investors who are saying, well, why would I invest in real estate when it's the same illiquidity as, as private equity, and I can get much better returns in private equity. And I think that being disproven credit, not taking as many dollars away from real estate.

I think all of those things have been helpful to real estate. Obviously a lot of dollars have gone into infrastructure, which again, feels like the hype around Notre Dame, like when everyone's jumping into infrastructure, because it can't go wrong. And it's a great use of capital.

It feels like maybe, maybe it can go wrong. But I think fundamentally, real estate needs to do a better job of educating investors into how and why it fits in a portfolio and what the role of real estate should be relative to private equity, relative to credit, relative to infrastructure. And I think as an industry, we haven't done a great job of that.

Nancy Lashine (47:05 - 47:56)

Some questions never go away. We've been ruminating on that one for three decades. Is it an inflation hedge?

Is it diversification? Yes, all of that. But there's no question that because performance has been disappointing for so many investors, the question of what's the role of real estate in the portfolio, which should it be going forward is being revisited across the board.

Whether you're an endowment foundation, public plan consultant, it is definitely something that's broadly been rethought and reconsidered. Fortunately, allocations aren't going to zero. They're still there, but in general, they're down a couple of points.

And oftentimes, infrastructure is replacing them or private equity. Larissa, what's the best investment decision you ever made?

Larissa Herczeg (47:58 - 49:29)

Well, I mean, personally, it was definitely joining Oak Street and taking a risk on starting a new business. But there was more than I went into that investment, and more luck involved than anything else. I mean, so that's probably the best.

It's hard. Otherwise, I mean, otherwise, you're asking me, like, which of my children are my favorite? But what I will say, it's just so satisfying, like working with good partners who care about investors and are good fiduciaries and seeing them succeed and grow is really fun.

And the flip side of that coin is it's heartbreaking. When they don't perform, it's amazing how people turn into just complete jackasses and stop being good fiduciaries and stop sharing information. And that makes it very easy for you to write them off and be unhappy with them, both as people and performance.

It's really hard, when partners you love who are continuing to fight for every penny and just aren't getting the returns and things go wrong like that. That's the sad part about it when you're cheering for them and it's and your capital, your investors, capital's at risk and feel like they're doing everything right. And the end result is just still not working. But.

Nancy Lashine (49:30 - 49:38)

So as you think about this roller coaster of a career ride that you've had, what would you tell your younger self that you know now?

Larissa Herczeg (49:41 - 51:22)

Yeah, I mean, two things. One, I think I was always pretty good at. And that's just finding the best people, like people are so important.

And it's amazing to me, those individuals who get obsessed with like, well, I have to be VP by the time I'm 35 or I'm behind the eight ball. And this is where I want to be, because if I had done that, I would never be where I am. And I think attaching yourself to good people, having a good board of directors, as Michelle Obama describes.

And being open, not feeling like I have to be X, Y, Z, and this has to be the time frame, but really being open to different ideas and different things that apparently are also beyond your comfort zone, as I learned, is so important. So I think that is always my first piece of advice. But I think patience, and I'm still constantly reminding myself every day that patience is allegedly this virtue that people talk about.

And I think especially when you're young, but even when you're not young, the desire, when something negative happens, or you don't like something, the instinctive reaction to like, I have to, I gotta get out of here, I have to fix this, or this is wrong, instead of just being patient and letting things play out and realizing that it's probably not nearly as bad as you thought, or there is a really good reason, and it's probably a positive, like, but I'm still, I'm still working on that one.

Nancy Lashine (51:23 - 51:45)

I feel your pain on that. I feel your pain. I once, one of the things I think about a lot, I was reading an article about the then-CEO of McKinsey, and they asked him a question, like, what have you learned as a consultant?

I'm watching all these consulting assignments, and he said, most problems have a way of working themselves out if you just do nothing.

Larissa Herczeg (51:46 - 51:48)

Ignore it. 

Nancy Lashine (51:49 - 52:02)

Oh, you could pay a lot of money for that advice. Is there anything that you are reading, or listening to, or obsessed with that, outside of work, that our audience should know about?

Larissa Herczeg (52:02 - 52:10)

I know, I've been thinking about this since I saw it on your question list, and I've embarrassingly, like, not come up with anything.

Nancy Lashine (52:10 - 52:13)

Well, we could talk about Notre Dame, because that's definitely global.

Larissa Herczeg (52:14 - 52:50)

Yes, but, no, like, I will say, I just watched a series on the National Parks, on Netflix, that was amazing, and just, it's so incredible how the world functions, and how like the smallest little worm makes such a huge difference in the ecosystem, so that was really cool and was a short six- I think it was a six-episode series, but yeah-

Nancy Lashine (52:50 - 53:38)

I'm looking at your background, and you definitely have this barn farm look, and I just finished this morning a book about tradwives that it's called Yesteryear, that your background could have been the scenery for it, so it's pretty good. t's not an overwhelming recommendation, but it was, it's definitely a provocative read, so, yeah. Larissa, it's a pleasure to have you, and I just, I so admire what you've done, across, although it seems like you've been in a lot of different places, there's a very clear arc pattern to all the things that you've done that makes so much sense, and-

Larissa Herczeg (53:38 - 53:42)

Well, only in hindsight does it make sense. 

Nancy Lashine (52:42 - 53:55)

Well, in hindsight, it makes sense, but, there, it's clear that your decisions had a rationale, and your ability to start your own firm and be so successful heads off to you.

Larissa Herczeg (53:56 - 54:08)

Well, I would say to the industry, I mean, again, right, none of us would be where we are without the help of so many amazing people in our industry, so I could not have gotten here by myself.

Nancy Lashine (54:09 - 54:13)

None of us could. No. Thanks so much for joining us today, I appreciate it.

Larissa Herczeg (53:14 - 54:15)

Thanks, Nancy. 

Nancy Lashine (54:15 - 54:47)

I hope you enjoyed this episode of Real Estate Capital. Before you go, I have a quick favor to ask.

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