Go Big Once: The Mindset Behind Building Generational Wealth with John Pennington

0:00Stockbrokers make 1.5%, a mortgage broker makes 1%, a general partner makes 20 % of the profits? I want to be one of those guys. When I was 17, I looked into the mirror, and I don't know why I said this, but I said, John, you're not afraid of being poor. John, you're not afraid of being old. John, you're just afraid of being old and poor at the same time. I was like, dude, I want to run a huge, huge company. I would look at him and laugh. I'd say, you know you and I aren't smart enough to run a big company. We've got to find better talent, smarter guys than us. So, John, let's talk about big success, big scale, latest business, number 14, boomed.

0:44How? What? Hundreds of millions is not a thing that most people get to. Yeah, true. So I started 14 business in my lifetime. Three I lost money on, three I made money on. Obviously, this one I made a lot of money on. And then one's in the middle, you kind of make some money on them, right? But the other 13, you get them to a certain size and they just won't scale. I mean, well, they will. It's hard. It's difficult, right? But the 14th was a fund structure. And I learned about funds in 1999. And I was watching this newscaster vilify fund managers. These are villains. They pay low, low taxes. They make a lot of money.

1:25And I'm like, I want to be one of those guys. So in 2000, it took me five years to get the gumption and the confidence and all the knowledge to launch my first fund. It's a general partnership, limited partnership structure. And I learned that, you know, Steve Jobs went public in New York Stock Exchange as an Inc. And every year, an Inc, the shareholders vote on who runs the company. But in a general partnership, limited partnership, the shareholders, the people who have the money, never vote on who runs the company unless the general partner commits fraud. And I thought, you know what? I don't want to build a nice big company and then have someone say, you know what, John, we really appreciate that.

2:08But now I want my son to run it. I never want that. John, we're fired from your own company. So Steve Jobs got fired from his own company. And Steve Schwartzman of Blackstone went public in a general partnership, limited partnership structure. Same thing. the shareholders do not vote on who runs the company. So, but a fund structure was a, the 14th business, you know, that I ever started. And I did it with some great partners. I had brilliant business partners, but it just, I couldn't stop it from scaling. It was so just snowballed. When you started the first one, oh, I got the first fund down.

2:45Now let's go to the second one and the third one and the fourth one. And really you just tweak the asset class. So the first fund I ever started, we lent money on real estate. And then the third fund we started was we bought large apartment complexes. And then the fourth, fifth fund was it was senior assisted living for that fund. And the next fund was office buildings. And the next fund was industrial. You know, it just it just was just separate funds. And they it just scaled like I couldn't stop it from scaling. It was once you got once you got the formula down. And so the structure really, really, if I look at the 14 businesses, the structure was really kind of the key.

3:27But you still had to attract great talent. And so, like, for instance, when we started purchasing apartments in 2008, 2008 was a bad time. Oh, yeah. And I knew how to underwrite a 20-unit apartment complex. I can do it. But I needed someone who could underwrite a 1 ,200-unit apartment complex. I don't know how to do that. So I have to find people with much, much greater talent in certain areas that I have. And so, you know, I would lay in bed imagining at night, there's some dude or some lady, she's been working at Wells Fargo for 15, 16 years, and they've been doing loans on 1 ,200 apartment complexes, and they know how to underwrite it.

4:11And I imagine this person driving to work every day going, one day I'm going to quit my job and start my own fund. And I'm going, I got to find that person. I know they exist. Right. And so when I found those, that person, I was like, you know, I don't want you to be an employee. I want you to be an owner of the general partnership. I want you to come in and own it. Now, listen, you're going to, we have some money for cashflow. You're going to, your salary is going to go down, but if this works, you're going to make way more money than you ever imagined running a fund, right? And, you know, we found, you know, my original partner, we found two gentlemen who had been doing real estate for, I don't know how many years.

4:50It was like a gazillion years. And they were just experts in large real estate. And we were experts in funds, right? So the two of us, boom, we knew how to run funds. They knew how to run real estate. And it was, and then we just jumped, jumped and brought in more partners that even had more experience and it just snowballed. And, you know, 16, 17 years later, we go public on the New York Stock Exchange. We're managing$28 billion of asset management. And we have employees, we have 1000 employees in 33 states, right? I had many, many jobs at that point when we retired. I was the president of over 100 corporations in Delaware.

5:31I was a signer. I was a signer on 1 ,200 bank accounts at 19 different banks. I was, yeah, yeah, not 120, 1 ,200. Just scale. Yes, yes. I was the anti-money laundering officer for eight of our Cayman Island feeder funds. That was a job, man. I did compliance, SEC compliance and all SEC issues for all of our employees in the 33 states, you know, um, I had many, many more jobs than that. Right. But, and we wonder why you were tied. Yeah, yeah, exactly. Exactly. Yeah. Yeah. We went public and I was like, you know what? I'm good. And so my partners took off and they've done even credible job. I'm still a large shareholder, but they've done a credible job going forward and they've been raised more money and got bigger and bigger.

6:17And they, they, they run the company way better than I did, you know, and we ran it together. I had pieces, but like I said, you had to find talent in specific areas to go large. And what we used was ownership and the general partner. We believed, and I believed from the first, I was looking for people who didn't want to be employees. I was looking for the mindset. They wanted to be an entrepreneur. They wanted equity. And some people had never had equity. They had huge jobs over here, never equity and and i wanted i wanted someone that wanted and in 2008 2009 people were willing to take a chance and i was able to gobble i shouldn't say gobble i was able to acquire partners that would have never been my partner if it wasn't 2008 2009 if it was like 2004 yeah when everything was booming everybody's never been my partner yeah there's a nah john sinnington no i don't want to be a spartan no no no but i know nine oh nine right there we got some and then they came in and they were equity owners and the company just went so two things out of that then firstly you got the strategy correct and secondly you got the talent let's go strategy what was the difference in strategy of this one versus the previous ones how did they almost i guess teach you because i define scalability as the next sale costs less and is easier you know so it got easier as you got bigger in this one the strategy was on point what did the first 13 teach you that led you to that thinking so i just i'll answer that in a kind of a just a holistic right people say if you can go back in time when you're changing thing no because i love the three the three companies i lost money on if i wouldn't have lost money on those companies i would not know i would have lost on this company right so i learned these things way back when lose so i would not go back and tell myself don't do this don't do that yeah Because those learning losers, you wake up on some Monday mornings and you're like, how can I make payroll by Friday?

8:22And you're like scrambling and you're learning how to solve problems. And I used that skill set when I started that first fund in 2004. So it's just, I don't know if I can go into any details there in time we have, but it's just a process through life where people want to go back and change their past. But that means you'd be different today. Yeah. Right. So, yeah. So the people thing did, is that something you had to learn over time or were you always find the best people type guy? No, it wasn't always. I, I, earlier businesses, I was just wanting to hire employees. I wanted to hire good employees, but this is what happened.

9:00I'll give you the strategy here. So I'm a 40 years old when I start my first fund. Okay. And I played my life came out and I always said to myself, I want, I want, once in my life, I want to go huge. I want to go for the stars, right? And if you go for the stars and fail, well, you know, so usually what I do, you know, it takes a year or two to see if a business will work. And then if it fails, you've lost a lot of money. And then you take another year to find another business. So now you're four years into a smaller business, but a really, really big business. It's going to take you five to six years to see if it really works or not.

9:36And if it fails, you've lost six years and a lot of money. And you're going to have to, so if I'm 40, I was, like, well, John, if you wait till you're 50 and you go big, you'll be 56 and you'll be best square one. You don't have enough time to recover and retire. So John, if you don't go try to go big at 40, you're never going to do it because you're a conservative dude. You know, you're not going to risk your family. That's just the way you think. You look in the mirror and you think this, right? And when I was 17, I looked into the mirror and I don't know why I said this, but I said, John you're not afraid of being poor John you're not afraid of being old John you're just afraid of being old and poor at the same time how did your 17 year old get that wisdom I don't know I don't know how I did that but I was I was you know when you're 17 you're thinking what am I going to do in life how am I going to make money right and I just kept narrowing it down to what is it really what's really in there right and I I was afraid right I was seriously afraid of not being able to figure out in life which whatever so that that mirror I said to myself for years and that drove me through the companies I failed at and the ones that did okay and the ones that great it was just John John and so by the time 2015 rolled around we're managing eight billion and I knew at that point i'm never going to be poor again right yeah yeah yeah yeah so i'm conservative i'm conservative right so when we were managing 100 million i i went how much we met 100 million and then someone says we're managing 500 i went what and then when someone said we're managing the first billion i was like no no it can't be a billion so i got my calculator out i'm like how how much is a billion seconds yeah it's 31.7 years right i said wait a billion seconds is there And we were managing a billion.

11:34And then like a year and a half later, we were like three billion. I was like, what? And then when he was six, I was like, okay, I'm never going to be poor again in my life if I choose to be, right? And Warren Buffett always says this, you'll have to get rich in the United States once. You see people get rich and they're broke, rich and broke. They're idiots, right? I think they risk too much. You get rich once and you kind of have to change the game, right? It's like if you're ahead in a game by a lot of points, you play differently, right? And you'll protect it. Yes, yes. And I'm like, you know what?

12:01I'm going to protect it. You know, the crazy thing, and coming from Vegas, people don't take their money off the table in business either. They keep running that thing. And I wonder why they do that. You know what? I think that very few people, John, learn how to sell their business. Very few people. I literally say to every business owner, you will have an exit in your business. You get to choose. Pine box, shut it down, or actual sell. Now, if you want to sell it for value, it's going to take us two to three years of planning to sell that thing for value. And most, like you look at the baby boomers right now, holy heck, you got like across the US right now, we got just under 40 % of businesses are owned by baby boomers who got five to most 10 before they got to be out.

12:47There's a massive transfer of wealth coming. And I don't think that, that they understand it, but I sit with most people and I ask them, you know, like a simple dumb question is, have you trained your managers? And they look at me like, no. And then a super dumb question is, well, what's your business worth and what do you want to sell it for? And they look me and I go, well, I'm going to pass it on to my kids. No, you're not. Your kids don't want your business. So it's interesting that, you know, in your business, you almost from day one built the sell strategy into the business. Talk more about that building the sell strategy in?

13:25Yeah. So it's, it's, it's, it's the mentality of, um, some, I've seen, I have friends that have this mentality. They run their own businesses and they go to work and they want to handle everything. And I was the opposite. I wanted people to, I wanted to be able to leave my business. And that's a true business. If I have to go in and I have to run everything every day, but it doesn't run, it's not a business really. It's a, it's, it's, it's, it's a job. and you work for an 80. That's right. You work for yourself, you work for yourself, but it's a job. So if you can leave your business for weeks at a time and it runs, maybe it doesn't run exactly as, right, but it still runs, you have a real business and that's the underlying goal of an entrepreneur is I want to create a real business where I'm not running it every day.

14:11I'm the present CEO. I'm visualizing where this business is going to be in two or three years and I'm creating contacts or relationships with customers or wholesalers that is going to expand or acquisitions that's going to expand this business, right? So that's the kind of the vision that I had when I said, I want to go big at 40. Yeah. Your buddies that are the bottleneck of their own business, you know, it's, it's great to be the rock star on your way to a million dollar a year business. Yes, you should be, but you can't be the rock star at a hundred million. And this is why I think your company coaching your product is because a lot of entrepreneurs get to a certain size and they can't figure out how to make that transition from I'm intricate in the business, but that's not really my role anymore.

15:06It was when you started it. Yeah. How do you build the managers and the management team to get the 10 million? Then how do you build the leadership team to get 100 million and beyond? And I think that goes back to your point of hiring great people. At some point, you've got to professionalize management of the organization or professionalize leadership of the organization to get it. And we used equity rather than a high salary and bonuses. We used equity to find that type of person. I just explained. To attract the talent. That's right. You've got to have some. That's right. Because my goal was, look, in the beginning, me and my first partner, I was like, dude, I want to run a huge, huge company.

15:43and I would look at him in lab and I'd say, you know you and I aren't smart enough to run a big company. We got to find really better talent, smarter guys than us. And we did. We did. We found partners that were way smarter than us and just took it to heights that I never could have imagined. Yeah, I think that's the thing. But let's go flip it over for a second. Scale requires capital. You want to scale, exponentially grow a business, you require capital. One of your key skills has been raising capital. Tell me more about how that works, why it works, and why were you damn good at it? Yeah, I'm a good capital raiser.

16:21I'm not a great capital raiser. And so I had to find, again, people who were great capital raisers. And what I found over the years was there are three really different personalities in raising capital. We found that there's a personality that can raise capital from high net worth individuals. There's a middle personality that can raise capital from family offices and banks and stuff like that. And there's a third personality that can raise capital from institutions. And so usually up the scale, your first couple of years, it's high net worth, high net worth, high net worth. Then you try to go to the family offices.

16:55And it takes you a few years to get into institutions because institutions, they don't even come out to see you unless they can write you a$30 million check. And they won't even fly out to see you. And they don't want to be 30 % of your fund. They want to be like less than 15 % of your fund, but they want to write you a$30 million check. And they ask you questions that you do do diligence that you have no idea how inclusive it is. So it takes you years of being like one of my partners, early partners, we had an auditor. We had all of our funds were always audited. But in our town, there was an auditing firm.

17:32They were 50 man-ish. They were local. They were good. I'd used them for two decades. And when we started our third fund in 2008, he goes, we can't use them anymore. Why? And he goes, we need the big accounting firms. I said, why? And he goes, because when an institution three years from now flies from Boston to come see us, they're going to want to know who your auditors are. And you need to have the big four. And when you tell them one of the big four names, Deloitte and Touche, right? They're going to go, okay, the checkbox. Check the box. If you tell them ABC, if you say ABC company, they're going to go, what?

18:04you know so he and and i said but their triple expense he goes exactly john we have to become a company worthy of an institution before the institution comes we can't wait till them come out and say oh we'll change no no that doesn't work that way they're coming up to see you you already have to be so we had to become things that we didn't want to be yet we had to become a registered investment advisor we had to become um uh we had to use the big four right we had to have SOC 2 type 1 audits before we were asked to do them, right? So our vision was always, we're going bigger and better. And so, and once you get to that level, for instance, let's see, my first fund was 2004.

18:47We got our first institution in 2010. Six years to attract that institution to actually write us a check. But after you got that first one, Yeah. It was like a snowball. It is. It's a long-term plan. People want to go after institutions. Now, listen, I've seen people, their first fund, get an institution. I don't know how they did it. Probably relationships. Maybe, but it takes years and years of prepping your team, training your team, getting your team to act and talk like an institutional-worthy investment. That's an interesting thing because I don't think most people understand how much you have to grow into your goals.

19:27and businesses have to do that the same way humans do. So how did that strategy just be something natural to you or did you have to learn that? Where did that come up for you? No, and that was one of my partners. He was, we hired him as an employee, as an operation officer. We said, you know, you used to work at the big financial firms. Can you make us more institutionalized, okay? And within a year, he was a partner, right? Because we couldn't let him go. We had to have him. And he convinced us we have to spend the money now, triple the audit cost to become. And that got us into that mode of spending the money now.

20:09We have to we have to keep our salaries low, spend the money now, invest in our company, because this is could be huge. And I want to be huge. Right. Let's go back to the raising capital and average business owner. Where where can they start learning the raise capital thing? Because they're going to have to do it. And they're probably not getting debt money. You know, probably not getting bank money. If they can get debt money, you go get it because it's cheap. It's cheapest, right? It's cheapest. Investor money is more expensive, but there's no payment every month, right? Debt money you get, it's cheap, but you have a payment you got to make, right?

20:44So we, you know, most of our funds were, hey, we're going to get investor money. We're going to pool 99 investors into one pool called a limited partnership. And we would file under a 506B, a 3C1. And that allows you 100 investors, 99 investors of accredited investors, 35 non-accredited investors. Then above that, there's a 3C7. And a 3C7 allows you 2 ,000 investors, but they have to be qualified purchasers, all of them. A qualified purchaser is someone who has a$5 million net worth. A qualified client is someone who has$2.1 million net worth. And an accredited investor has a million dollar net worth.

21:28Or now, if you're a lawyer, if you have financial licenses, you can be an accredited investor. And there's a couple of exceptions there. In a 506B, a 3C1, you can have 99 investors. 35 can be non-accredited. Now, this is a fun structure. A lot of people, they're not large enough to become funds because funds are kind of expensive to get into the game if you're going to raise and do big things. A lot of people, they want to raise$3 million,$6 million. They're not really big enough yet to be a fund. So they're kind of a limited liability company. But I would say when you write your limited liability company documents, you need to write them kind of like a fund where the passive investors don't vote every year to take the president out.

22:11right so you have to kind of mirror fund documents because most funds out of new york and boston are called two and 20s yeah they're two percent manager fee 20 of the profits and i gotta tell you when i learned in 1999 i was like wait a minute real estate agents make three percent okay uh stockbrokers make one and a half percent uh a mortgage broker makes one percent a general partner makes 20 % of the profits. I want to be one of those guys, right? I was like, you know, over, there's always a minimum. You have to make a minimum, like a pref for your, for investors, but over the minimum, if you hit the minimum, you get 20%.

22:52I was like, I'm in. That's what, that's what I want to do. I want to stretch our listeners thinking just for a second, because you're right. Most people go the private placement memorandum, they only want to raise a small amount to run this one business. What if we stretch their thing and say, well, what would you have to do to need a fund? How many companies would you have to be buying? Because I don't think people realize that it's cheaper to buy a company than start one. It's cheaper to buy a company than buy customers, even like marketing is more expensive than buying a company and the time to do it.

23:26And like, and And buying a company is equity deployment, not expense deployment. And so when we look at that, it is like, what would you have to do to go, OK, how many do I need to buy in order for it to be worth doing a fund? I mean, I know when me and Doug came to you guys and started learning this stuff, we're like, holy shit, we need to start our own fund to go and buy a bunch of, you know. Okay. So my first fund, the fund documents, the legal documents cost me about$35 ,000,$30 ,000. Okay. So, and we were lending on real estate. Okay. So my third fund cost, the same documents cost a quarter million dollars.

24:07Okay. Now, so you ask me, well, how big would you have to be to have a quarter? So the third fund, we were raising money from Australia, from Hong Kong, from France. And so what you're doing is in one document, you're combining the IRS of Australia and New Zealand and the U.S. and France and Hong Kong all in one document. And you're combining the SEC regulations and the SEC of Australia. That's an expensive document. If you want to raise money for a real estate fund overseas, a U.S. real estate fund. But the first fund, we weren't raising money internationally. We were raising money in five states and we were doing loans in five states.

24:47So it really comes down to, I think, the upfront costs. How big would the capital raise have to be to justify a quarter million dollar piece of paper with a bunch of papers with ink on it, right? Yeah. And so that's kind of how you have to, you know, think about it. But my first fund with$30 ,000 of the upfront cost and then putting it into place, I personally, my partner, we had to go like 14 months without a paycheck. Now, we had two other guys, two friends of ours that wanted to be, they couldn't do it. They had lived their lives where, you know, they had car payments and house payments and second mortgages and stuff.

25:28But they were great guys. They just couldn't go 14 months, 15 months without a paycheck. And then the two of me and another guy could. So we did and then at about that year year and a half we brought in two more partners And those those those guys were the big boys in the real estate industry And we were already cash flowing by that time, right? And so I guess in a roundabout way that's kind of what i'm saying. It's kind of like how Big is your room right now? Why could I go 14 months without a paycheck? The reason is I looked in the mirror when I was young and said I don't want to be old and poor at the same time So all of my businesses, I was like, I have to, when the years are good, I can't go buy a new car.

26:07I have to put that in the war chest because I might get a bad year. And that's why I said when we finally hit in 2015, the$8 billion, I was like, I don't need a war chest anymore. I'm good. We're making so much money. I'm never going to, you know. But all my 14 businesses, every time it was going good, the years, I just lived the same life. And a lot of people, and I think you'd coach this way, a lot of people, when they start making a lot of money, they start spending a lot of money. There's three different levels of wealth. Rich people, they view money, you give them money, you know what they think?

26:39How can this money make me more money? Now, the middle class person, they get more money and they go, okay, this money can help me get a bigger house with a bigger payment. This money can help me, this salary can help me get a bigger car with a nicer car. That's how they think. And poor people think this money can help me eat today. So I can eat. That's one mentality. Middle mentality is this money can get me more in debt, but I can live a better life. And rich people are like, I just want this money to figure out how to make more money. That's the three different. So if you're in the middle and you're thinking, how can this money make me more money?

27:12That's how I thought. I got this extra money. I'm making good money. Oh, I got to put this away. I got to save this. I got to invest this. I can't go buy another car. My boys tell me, uh, it's a great story too. Um, they, my, my, my son, they'll tell us on stage. My sons are on stage a lot and they do presentations and they'll say, yeah, my dad, he was driving a car with 200 ,000 miles on a dent in the door. Right. And he, uh, and he has my, um, one of his business partners agreed to be a mentor to one of my sons. So he goes up there, you know, to this guy's house and he goes, I go, go through these private gates.

27:48I drive through this beautiful rolling hills. I come to this cul-de-sac. There's a house, the white house. I knock on the door. I think there's going to be a butler. Go away. He walks and he goes, there's beautiful white couches. There's an indoor basketball court. There's an outdoor pool. There's a view off the deck of the whole valley. It's gorgeous, right? He's got sports cars in the garage. And he says, I want you to be my son. He says, I want you to be my mentor. And he goes, let me tell you a secret. You know, rich families send their kids to Ivy League schools, then to Wall Street, and they come home and run their family fund, right?

28:22The family office. And he goes, I know. That's why I'm here. I want you to teach me how to do funds. He goes, your dad knows more about funds than I do. We're partners, but he knows more about funds than I do. And he goes, but you're vastly more successful than my dad. I want you to teach me. And he goes, let me tell you a secret. Me and your dad make the exact same amount of money and my son he goes i looked in the ceiling i looked down and i said i gotta go and he drove home i never i was sitting in the living room watching football it was a saturday afternoon and i heard the door slam bam dad what is going on and the next two months i mean i mean so my wife got a new range rover yeah i bought a tesla i bought my test my dad a tesla for his birthday my dad uh my kids got new cars my father-in-law mother-in-law got a new car i spent like a half million dollars the next month two months in cars right so the bag was out the out of the bag i wish i could have stayed under the radar for about five more five more years but he goes my dad was we're living in normal home and he was right at 200 000 miles and a dent in the door and my partner had sports cars and all this stuff and it was but anyway that was years ago so yeah You know, it's really interesting is, you know, I remember the first time I filled my own bucket and, you know, I had all the things that were on my bucket list sort of thing and the dream chart.