Brian Dally: So let's back up for a minute. I co-founded Groundfloor in 2013 with Nick Bhargava. Our goal was to open up private markets that were only available to institutional investors so that everyone could participate.

We started with real estate debt, and that's still our core focus. Over the last 13 years, we've built a very resilient platform with over 300,000 registered investors who have invested over $2 billion in a series of offerings that we've put together over the years. Now, importantly, we designed our platform from the very beginning for retail investors.

That's all of you. That's me. It's for everyday people who wanted to diversify their income and could understand the benefits of real estate debt, which for most [00:02:00] people is a pretty new category. So we've done a lot of work over the years to mature the company and mature these offerings the way that they're presented so that everybody could get involved, feel confident about it, and know what they were getting.

Now, recently, you may have heard that we've opened up our products for more institutional investors. So these are people that are investing tens of millions or sometimes hundreds of m- millions of dollars in this category. But we insisted that those investors could only be included in what we do if retail investors were getting access to the same structure and the same quality of deals.

That's always been our North Star. Now, usually what you see is that these larger companies, the Wall Street players, the usual suspects, they're gonna focus on institutional investors first. By the way, a lot of startups did that too. Institutional investors are very highest end of high net worth, uh, individuals.

And then they all [00:03:00] try to go down toward retail and the mass market. We did this completely the other way around, by starting with our focus on retail investors. Now, that's part of the issue in what you're seeing in the market today with the redemptions. It's these large Wall Street-oriented companies that are having these problems.

It's a who's who list of Wall Street and private credit.

​ Brian Dally: So let's get back to these headlines. What we're all seeing is an issue with the structure and opaqueness of many of these private credit markets.

That's my argument. When you see the volatility in private credit today, it's exemplified by the gating of these massive funds from companies like Cliffwater, BlackRock, and Blackstone. A lot of these are big Wall Street names. Some of them are household names. What they're facing is the result of a fundamental liquidity and transparency mismatch.

I think about these fund structures as today's [00:04:00] private market analog to mutual funds in the 1980s. Now, mutual funds were later supplanted by index funds and then by ETFs, and in each case, that evolution was for a good and valid structural reasons. I think the same thing is happening in private markets today.

Now, the large institutions that are out there today facing these problems, they jumped into private credit as aggregators. That means they're providing a funds of funds approach that, on the plus side, offers a massive surface-level diversification across thousands of loans, and that sounds pretty good.

The problem is, the scale is impressive, but it creates a structural distance between the investor on one hand and the actual credit on the other. Now, if you look at that compared to something like Groundfloor or other direct platforms, you've just got funds that are adding a layer of management on top of other managers.

Now, the risk that you're [00:05:00] seeing isn't necessarily in the individual loans. A lot of those are fine, but the opacity of the overall structure makes it very difficult to see what's happening, because when you're that far removed from the borrower, you aren't just taking on credit risk, you're taking on manager of manager risk.

A whole separate issue for investors that I'm sure a lot of people would be thinking about if they weren't just scared about what's happening, is under the hood, when the fund managers deny redemptions, they don't stop charging fees. So they're holding onto capital for reasons that are driven as much by their desire to maximize their fees and their profits, as to hide what's actually happening underneath in the portfolio, 'cause after all You know, if they had to sell in order to meet redemptions, they'd have to take big write-downs.

​ Brian Dally: At Groundfloor, we believe the [00:06:00] best way to mitigate risk is through direct exposure to the asset, not by hiding behind thousands of data points that the investor can't verify. In these models that are getting all this negative attention, you're essentially trusting a manager to grade their own homework using models that rarely show a down month.

We take the opposite approach. We provide asset-level transparency where you can dig into the property, the borrower, and the specific valuation of the collateral, for example. We don't hide behind mark-to-model accounting because our loans are short-term. We don't have to. Real value is proven by cash repayment, not a spreadsheet assumption.

Now, investors today want to know exactly what they're investing in and exert control over it. Technology gives us that ability. People are now smarter than they are, than they've ever been about investing. They do this with publicly traded securities like ETFs and stocks, and why shouldn't they get to do it in private markets?

Now, [00:07:00] these funds that are aggregators rather than operators, they're all at the mercy of their partner platforms when a loan goes sideways, and loans do go sideways. I can tell you that through 13 years of operating in this, uh, in this sector of private credit, loans do go sideways. The difference is they don't have boots on the ground who can manage a workout.

They have to wait for a third party to do it. As a contrast, Groundfloor is a direct vertically integrated lender. I think it's very important that we built the company that way. We originate the loans, we underwrite the collateral, and we manage the recovery process ourselves. You can be the judge of how well we do that, and that's a great relief actually, in a market where JPMorgan is already marking down software-linked loans and cockroaches, so-called cockroaches, are appearing in the sector.

I think in that kind of world, being an aggregator is a [00:08:00] big liability. You want to be the person holding the keys to the collateral, not the person holding an IOU from another manager.

​ Brian Dally: Okay, we've gone through the negative headlines. I've shared my perspective about what's actually happening behind them. And I have to say, having built Groundfloor over the last 13 years and watched people discover what's possible in private market investing, you know, it's great that there is so much attention on the retail investor.

The retail investor has power. Wall Street knows it. They're trying their best to harness it. They're just doing it with the wrong mousetrap. And what you're seeing out there today, unfortunately, it's gonna slow down the growth of the market in some ways. It's gonna scare some people away. People are gonna have to discover, just like they did with individual stock investing when Robinhood gave us fee-free, commission-free trading, and Robinhood and others gave us, [00:09:00] fractional share investing.

So many innovations in the ETF market that we have to thank for the evolutions that that market went through, and I think we're just going through one of those now. We have a lot of excitement, a lot of hype, the big names piling in, bringing retail investors in through their big distribution platforms.

And now we're seeing the ugly truth of what it's like when Wall Street designs products for themselves and not for you. Groundfloor is here to do something better than that, and I think, there's a lot of opportunity in this market for people who are willing to think about it from the investor's perspective first.

If you liked this episode of Beyond the Stock Market and want to hear more about trends and investment opportunities in private markets, please like and subscribe wherever you get your podcasts. We'll be back every two weeks with a new episode featuring guests and talking more about trends in private [00:10:00] credit and other asset classes.

You can check out all of our episodes at groundfloor.com/podcasts. ​ ​