Palladius Capital Management’s Nitin Chexal talks about his asset investment strategy

Venture capital invested $12.2 billion in real estate companies last year, a 34% increase from the number in 2019, according to private company data tracker CB Insights. A real estate investment manager tapped into that venture capital, capitalizing by raising a $15 million Series A round.

Palladius Capital Management is a minority-owned real estate investment manager. Since launching in July, the company has acquired $500 million in assets with a growing pipeline. Commercial Observer spoke with Palladius CEO Nitin Chexal about the company’s vision, strategy and workforce diversity.

Trade Observer: Tell us about Palladius Capital Management.

Nitin Chexal: We launched Palladius in July 2021. When we launched it, we thought a lot about alignment, which is really important with our investment partners and our team. We wanted to imagine a structure that would allow us to grow quickly but also in a controlled and thoughtful way. Our team is from Wall Street, I’m ex-JPMorgan and Marathon, my colleague Manish is ex-Morgan Stanley and Bear Stearns. Many of our other teammates spent the first 10 years of their careers on Wall Street and then moved on to the operational side of the business. Over the past seven or eight years, we have acquired assets on a case-by-case basis. We raised a Series A funding round, and it was $15 million to run the business.

Many emerging managers fund their organization on a case-by-case basis. They charge the initial fee to cover the overhead of the organization. In many cases, they can take unnecessary risks because they have to continually feed the business with fees. The right way to do this is to raise capital upfront in a Series A, so we can build the organization, hire the best-in-class team, fund overhead and upfront deposits if we need it on acquisitions initial until we have downstream investment manager vehicles that are put in place. What this has allowed us to do is that in exchange for ceding part of the capital of the organization to certain financial partners, it has allowed us to hire a first class team. Since July, we’ve hired 11 people, and that’s allowed us to fund overhead and be a lot more thoughtful and strategic about the acquisitions we make because we’re not under pressure to force the money. So we can be a lot more surgical about the initial acquisitions we make. So, since July, we have acquired and have contracts worth approximately half a billion dollars. This Series A allowed us to be thoughtful and smart in building a robust infrastructure.

What sets Palladius apart from its competitors?

There are things that we think are important for an organization to be ready to scale quickly, which we’ve done in terms of deploying capital, but also having a strong infrastructure internally, to be able to grow alongside that growth. The significance of this Series A round was critical. We have also set up an underwriting line alongside Series A, which is structured as equity for the purposes of lenders at the real estate level. So bridge lenders and agency lenders will look at that and say, “You have this line available to you to deploy. This line can be drawn in a fund vehicle or a joint venture or in any vehicle we want. This also says a very significant number. And then we can raise capital for the downstream funds. So, for example, Palladius Real Estate Fund One is multi-family and student housing or a multi-family residential vehicle. We can draw that line into the fund to use it to make acquisitions and it’s treated like equity. So if we buy an asset, an agency lender or a bridge lender will look at it and say, “That’s equity. And then we can raise capital for that fund vehicle either before or simultaneously with the acquisition or after the acquisition. And then that new money that comes into the fund or the SMA goes and pays off that line, so we can keep redeploying it like a gun. So there are really two components in our structure that have allowed us to think about growth: the Series A and the convertible subscription line. [Both] enabled us to make acquisitions in collective and student housing and industry. We plan to add a hospitality area later this year. We had a lot of flexibility in terms of design. And that’s allowed us to evolve smartly in our growth, with the goal of wanting to be a mini-Blackstone over the next 10 years, and investing in all property types and the spectrum of risk across the whole structure of the capital.

We are about to launch our Core Plus vehicle, which will be an evergreen structure. And we are also starting to invest in preferred shares. We will eventually have debt instruments as well. In the short term, we make investments that are in a less risky position in the capital structure, like preferred shares in particular, for developments from scratch in multifamily. We don’t want to be the equity of some of that added value because it might be too risky or the markets too frothy. And we don’t necessarily want to take the risk of development today. But we are more than happy to play in the prime equity or mezzanine position.

What is your strategy?

Our mantra or discipline is to never overleverage, never overpay, and focus on the details. This is truly how we will continue to generate alpha on behalf of our investment partners, regardless of ownership type and where we are on the risk spectrum and capital structure. We understand how to navigate turbulent waters when they arise, whether under your control or not, like what is happening with Russia and Ukraine. If you haven’t over-leveraged or overpaid and you have a very good operating margin on your investment, you can survive. At Palladius, we are very data-driven as operators, so we review information coming from the property on a daily basis, [we look at] both income and expenses, probably around 30 data points coming out of the asset daily. We pull data from properties daily, speak to properties weekly, and are typically onsite at least once a week for the first 18 months of any value-added execution. We have the ability to pivot on execution plans in real time because we’re watching this data coming in. When I talk about data coming in, in our view, it’s a combination of human data and data that really makes the difference. If the human team doesn’t know how to take that data and then adjust what’s happening operationally on the property, the data is useless.

How does it feel to be one of the first to raise the Serie A?

I haven’t seen anyone else relaunch Series A. There may be others. We looked at this from the perspective of how do we develop alignment? What have other industries like technology done in terms of raising capital? And how can we take some of these best practices and apply them to real estate? Surely everyone is embracing things like data and proptech. And we embrace both of those, but how do we take traditional real estate capital structures, along with other industry best practices as a Series A of technology? How do you combine that in terms of developing an investment manager with a capital structure designed for fast but smart scale? It’s not just about “Let’s go buy as much as we can”. It’s about “Let’s buy what we think is the right thing to buy fast”, but also making sure we have the capital to build the infrastructure from the start.

Tell us about one of your successful transactions?

We thought two things were happening in Austin, Texas. I grew up in Silicon Valley and was aware of a quiet but rapidly growing tech footprint in Austin, with a vibrant and thriving startup ecosystem. City officials indicated in the early 2010s that they were interested in population density and familiarizing themselves with building verticality downtown. This resembled a trend seen in Chicago in the late 1990s and early 2000s, when the City of Chicago was trying to increase population density in its own downtown. For me, Austin became the most interesting place in the country to invest at that time. And to institutional capital, I’d say, “Hey, we’re investing in Austin, Texas.” And they’d be like, “Why would you ever want to invest in Austin?” and it was a challenge to get people to want to come here. But we have done extremely well in this market. We purchased over one million square feet of student housing on 100 total acres and then completed the largest rezoning ever by the City of Austin, so we added value to all the products we have purchased. And then we completed a rezoning where we took it from 1 million square feet to 9 million square feet of new development and then sold it to two institutional developers between 2018 and 2020.

Palladius is a minority-owned real estate investment manager. What do you think of diversity at work?

We want to hire the best people we can identify for the roles we have. So, whether it’s a minority or not, a man or a woman, we want to hire the best person for the position available. Certainly, I think what is important with DEI is that we open the opportunity to everyone. In no way do we want to be closed-minded about the people we hire. I grew up in Silicon Valley. My mother was a microchip designer in what I would describe as a predominantly male field. She has worked at companies like Intel, Sun and Advanced Micro Devices. In almost every case, she was the only woman or one of the few women on his teams. I had a lot of admiration for her because she was so successful in a field dominated by men. My wife is now a retinal surgeon, and this field is dominated by men. I also have a huge amount of admiration for her, because she has done very well in what I would describe as a very masculine field. So when we look at our team today, diversity and inclusion matters. This does not mean that we are only going to hire this or that person, but the role must be open to everyone. And we want to make sure our team hires the right person for the right role. And we have a number of women on our team, and real estate has always been a very male-dominated industry, and we want everyone to feel included.