Read time: 7 minutes
- Cadre’s proprietary capital ledger makes fund administration more efficient, while saving our investors time and money
- “The Capital” was designed to model investments, record transactions, compute valuations, issue distributions and transfer ownership through scalable automation
- Investors benefit from efficiencies that support lower fees, enhanced data transparency and the revolutionary Cadre Secondary Market, powered by our capital ledger
The Cadre Tech series details different aspects of Cadre’s technology stack that can help empower our investors and enable our mission: to help make private real estate more accessible, transparent and affordable to a greater number of investors.
The Capital Ledger is the first installment in the Cadre Tech series.
At Cadre, our mission is to help make private real estate more accessible, transparent and affordable to a greater number of investors. Cadre’s ability to manage real estate investments more efficiently than the typical private equity firm is critical to our mission. Our proprietary technology simultaneously helps us reduce investment minimums and charge low fees.
Traditionally fund administration is a major obstacle to efficiency. Tracking and updating investor positions can be an intensive, yet manual and error-prone process, involving multitudes of people and spreadsheets. This means that the per-investor administration cost is very high; that cost grows linearly with the number of investors.
One of Cadre’s objectives is to support an unlimited number of investors without increasing overall administration costs. To that end, we developed our own proprietary software—aptly named “The Capital”—to manage all investor positions and transactions in a scalable, fully automated way. This system currently models all 43 assets that Cadre has acquired, representing over 100 funds and over $1bn in assets under management. The Capital consists of two key components: a ledger system to track investment activity, and a management app for fund administration workflows.
Building the Ledger
At its core, the Capital is a comprehensive accounting ledger for every investment on Cadre’s platform. We designed it to fulfill the following requirements:
- Accurately model every Cadre deal and each associated investor (Limited Partner, or LP) position
- Initiate and record all transactions, such as capital calls and distributions, while keeping track of full transaction history
- Compute valuations (Net Asset Value, or NAV) for every investor position
- Support transfers of ownership between investors that take place on The Cadre Secondary Market
Cadre’s flexible ledger can handle almost any permutation of the requirements above. Here’s how we developed a proprietary system to model investments, record transactions, compute valuations and transfer ownership, while saving our investors time and money.
1. Modeling Investments
To invest on the Cadre platform, all an investor needs to do is subscribe to a Deal-by-Deal opportunity or the Direct Access Fund. Our ledger must ensure that this investment is represented in a manner consistent with the dynamics of capitalizing a private equity fund.
There are many components to the Capital’s data model, but its foundation is a deal structure where:
- Each deal comprises one or more fund groups
- A fund group includes two or more funds invested in a given deal (There can be multiple funds invested in a deal to accommodate investors with different tax classifications)
- Each fund is a pool of capital representing the aggregate of its LP investments
- Investments are data related to the investor subscription to a fund, most critically the investing entity and subscription amount
- Investment transactions are subsets of investments that record LP contributions, distributions, and fees over time
With this schema in place, we can now manage every LP’s investment accurately and efficiently by automating our processes to record transactions, compute valuations and transfer ownership.
2. Recording Transactions
Once we’ve modeled our deal structure, we can use the relationships between deals, fund groups, funds, and investors to initiate and record all investor transactions in an automated fashion.
Let’s take the Direct Access Fund (CDAF). Per our model, CDAF is simply represented as a deal. Suppose the Direct Access Fund is ready to acquire a new asset for $20mm. In order to fund the acquisition, it will need to call $20mm of new capital from its investors. The Capital will divide that capital call among the CDAF investors. It looks across the Fund Group according to each LP’s partnership interest, then issues an automated capital call to each LP within the underlying funds for the appropriate amount.
Now suppose the Direct Access Fund has collected significant rental income from the assets it owns and is ready to distribute $3mm of that income to investors. Here, the Capital will compute the share of the $3mm distribution applicable to each member of the Fund Group and automatically pay out the correct proceeds to each LP. In the process, it will also consider any fees or true-ups and factor those into the net proceeds each LP receives.
3. Computing Valuations
Perhaps the most inefficient aspect of traditional fund administration is computing valuations on investor positions. In order for traditional managers to prepare a given investor’s Net Asset Value (NAV), the fund administrator needs to compile a combination of LP position data and asset management information, and then manually run the following calculation for each investor in each period:
- Starting capital balance +
- Contributions -
- Net distributions (net of fees) +
- Net increase in capital resulting from operations, i.e.
- Net operating income -
- Management fees +
- Net income tax benefit +
- Net change in unrealized gain/loss on the investment
The fund administrator then needs to double-check these calculations before manually producing a statement for each investor based on the results.
It’s easy to see how this process is costly and error-prone. Moreover, the difficulty of computing NAVs also means that once valuations are produced, they are stale (often by 45 days or more) and may omit the level of detail that helps investors understand how they were calculated.
At any point in time, Cadre’s ledger contains all information needed to automatically calculate the latest valuation for each investor. The first three components: starting capital balance, contributions, and net distributions are baked in, since the Capital is designed to track full transaction history.
Cadre also manages the assets in which our LPs are invested, so integrating the net increase in capital from operations into the ledger is a trivial matter. As a result, the ledger can compute NAVs on demand, and the computed valuation is as current as the latest data available from the properties in which the Fund is invested.
4. Transferring Ownership
Finally, but no less crucially, the comprehensiveness of our ledger makes transfers of ownership extremely straightforward. This is critical to enabling one of Cadre’s most important features: the Cadre Secondary Market, which offers investors an unprecedented avenue for potential liquidity. In order for a secondary market trade to occur, the Capital must be able to compute each seller’s current NAV, match the position (or a subset of it) to one or more buy orders, transfer it to the buyer, and close out the seller’s interest. Since ledger records investors’ full transaction history, it can compute NAVs at any point in time, which makes secondary transactions flow seamlessly.
Designing the Management App
While automation is the key value proposition of Cadre’s ledger, it is equally important that our Fund Operations team has the workflow tools to carry out fund administration activities. The Capital allows us to easily call capital, report on investor balances, and review transaction history. Our management app sits on top of the ledger, making it easy for our team to interact with data and manage the lifecycle of each deal and its constituent funds.
To design the app, Cadre employed the same process we used to build our platform experience for investors. We sat down with our fund operations team, listened to their requirements, mapped out their desired workflows, and created an intuitive interface that fulfills their needs.
Using these tools, our small but nimble Fund Operations team can support the administration of thousands of LP investments on Cadre’s platform.
What The Capital Means for Cadre’s Investors
The Capital unlocks Cadre’s ability to manage fund administration at scale. It allows us to support any number of investors, which in turn enables us to offer top-quality real estate investments at low minimum subscription amounts. It also produces efficiencies that translate into low fees.
The Capital also powers the Cadre Secondary Market, where investors can benefit from the possibility of selling deals mid-cycle and/or buying deals at a discount. And, importantly, by preserving the full history of transactions and valuations for every investor, the Capital gives investors full visibility into real-time balances and performance on their portfolio page, available 24-7 on our platform.
Learn More About Cadre’s Technology
The Capital is one of the many features that help create a better experience for our investors. Look for the next installment in the Cadre Tech series to learn how other aspects of our technology stack help make our mission possible.
The views expressed above are presented only for educational and informational purposes and are subject to change in the future. No specific securities or services are being promoted or offered herein.
This communication is not to be construed as investment, tax, or legal advice in relation to the relevant subject matter; investors must seek their own legal or other professional advice.
Performance Not Guaranteed
Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are not guaranteed and may not reflect actual future performance.
Risk of Loss
All securities involve a high degree of risk and may result in partial or total loss of your investment.
Liquidity Not Guaranteed
Investments offered by Cadre are illiquid and there is never any guarantee that you will be able to exit your investments on the Secondary Market or at what price an exit (if any) will be achieved.
Not a Public Exchange
The Cadre Secondary Market is NOT a stock exchange or public securities exchange, there is no guarantee of liquidity and no guarantee that the Cadre Secondary Market will continue to operate or remain available to investors.
Opportunity Zones Disclosure
Any discussion regarding “Opportunity Zones” — including the viability of recycling proceeds from a sale or buyout — is based on advice received regarding the interpretation of provisions of the Tax Cut and Jobs Act of 2017 (the “Jobs Act”) and relevant guidances, including, among other things, two sets of proposed regulations and the final regulations issued by the IRS and Treasury Department in December of 2019. A number of unanswered questions still exist and various uncertainties remain as to the interpretation of the Jobs Act and the rules related to Opportunity Zones investments. We cannot predict what impact, if any, additional guidance, including future legislation, administrative rulings, or court decisions will have and there is risk that any investment marketed as an Opportunity Zone investment will not qualify for, and investors will not realize the benefits they expect from, an Opportunity Zone investment. We also cannot guarantee any specific benefit or outcome of any investment made in reliance upon the above.
Cadre makes no representations, express or implied, regarding the accuracy or completeness of this information, and the reader accepts all risks in relying on the above information for any purpose whatsoever. Any actual transactions described herein are for illustrative purposes only and, unless otherwise stated in the presentation, are presented as of underwriting and may not be indicative of actual performance. Transactions presented may have been selected based on a number of factors such as asset type, geography, or transaction date, among others. Certain information presented or relied upon in this presentation may have been obtained from third-party sources believed to be reliable, however, we do not guarantee the accuracy, completeness or fairness of the information presented.