In early 2021, after spending more than 15 years developing and executing real estate investment strategies for several organizations, Nitin Chexal decided to launch his own endeavor, investment management firm Palladius Capital Management.
Palladius gets its name from ancient Rome—the Latin words palladium, a symbol of safety in ancient Rome, and ius, the rights that citizens had. The combination of those two words—palladius—means investors have the right to keep their capital safe and the firm is obligated to serve as a good steward.
When Chexal left his managing director position with a prominent family office that invested in multifamily and student housing, several people on his team took the opportunity to join his new venture. Today, Palladius is a vertically-integrated real estate investment manager with a team of nine people who handle asset management and construction management internally and plans to eventually add property management capabilities to the firm’s menu of services.
The Austin-based firm launched its first fund, Palladius Real Estate Fund I, in July 2021. Dedicated to multifamily and student housing and focused on the value-add space, the fund has a target raise of $100 million. As of mid-January, it was 85 percent deployed and will likely be fully deployed toward the end of March.
Under Chexal’s leadership, the firm has acquired three properties with a total of about 1,400 units in Illinois and Texas. The properties include: a 624-unit garden-style multifamily asset; a 672-bed student housing property built in 2005; and a 15-story mixed-use tower with 234 apartment units in addition to townhomes and retail.
WMRE recently spoke to Chexal about the firm’s fund-raising and deployment strategies and its plans for the future.
This Q&A has been edited for length, style and clarity.
WMRE: What was Palladius’s original vision and mission?
Nitin Chexal: The vision was to create a vertically-integrated real estate platform, built by a team that was diverse, operationally-focused and transparent with our investment partners. Being honest, transparent, and collaborative with our partners is of the highest importance for us. The mission is to deliver high risk-adjusted returns for our investment partners.
WMRE: What is Palladius’s investment strategy?
Nitin Chexal: We invest in multifamily and student housing. We appreciate that the operational models are different, and because we understand those differences, we’ve historically been successful with both property types.
We bifurcate our investment strategy into value-add, which we call wealth creation, and core-plus, which we call wealth preservation. And, from time to time, we find thematic investment opportunities that we have high conviction around. For example, we own about 1 million sq. ft. of multi-tenant shallow-bay industrial in a private account outside of our fund vehicle.
We typically focus on markets exhibiting signs of accelerating urbanization. We’re looking at population growth, employment growth, and specifically, employment growth around high tech, biotech and green energy. We’re looking at the level of wage growth too, and then targeting markets where those metrics are rising faster than national averages.
We’re also looking at in-place infrastructure or infrastructure that’s planned in order to support the growth that’s taking place. Those are typically the markets that historically have shown some cycle-resistant economic growth or they’re home to tier-one universities or have strong state government presences.
WMRE: Palladius is less than a year old, yet you’ve managed to scale up very quickly. How did you accomplish that?
Nitin Chexal: We did things differently than most emerging managers. Early on, we recognized that we wear two different hats: real estate investment manager and real estate operator. We raised a Series A round to capitalize the investment manager organization. That’s an atypical structure for a new manager, but we viewed it as important for us to be able to scale rapidly—to hire best-in-class people and to be able to fund overhead expenses.
A lot of newer firms don’t have the ability to move as fast as we do [on deals] because they have to raise money in advance or simultaneously with an acquisition. We don’t have that constraint because we established an equity line instead.
Typically, you’ll hear that somebody has a subscription line, which is offered by a lending institution and treated as debt. Our line is structured like equity. It can be used to take down assets rapidly and then we can warehouse them in our fund. It’s subordinate to property-level debt.
Our equity line is structured like a revolver, which allows us to acquire deals rapidly, raise capital for them, repay the line with that capital and then that line is again fully available.
WMRE: How did Palladius come up with the Series A and equity line strategies?
Nitin Chexal: We are fortunate to be surrounded by lots of very smart people who can advise and guide us as we continue to grow this organization. Many of our investment partners (in the Series A round and equity line) are real estate professionals in their own right. Having these really strong partners around us to look at problems from different perspectives and provide insights has been really important.
WMRE: What differentiates Palladius from other investment firms?
Nitin Chexal: In addition to raising our Series A and our equity line, another differentiator is our commitment to DEI (diversity, equality and inclusion). Our team today is 78 percent minority and 30 percent women.
I grew up in a household where my mother designed microchips in Silicon Valley. At the time, she was one of very few women in that field. She was shattering the glass ceiling, and I was very proud of her. My wife is an eye surgeon, which is a male-dominated field, and I’m very proud of her too. So, from gender diversity standpoint, I have two very strong role models.
When we launched Palladius, we wanted to be a progressive platform that welcomes everybody and reflects what the world looks like today. Our tenants are diverse, and we want our platform to reflect a similar level of diversity.
We care deeply about DEI and take it very seriously. We’re proud of our diverse team, and we’ll continue to lean into diversity, both from an ethnicity and gender standpoint.
WMRE: What type of investors does Palladius target? Do you anticipate your investor base will change in the near future?
Nitin Chexal: We have a broad array of investment partners in our fund including high-net worth individuals, family offices and retail capital from RIAs (Registered Investment Advisors). A lot of our investment partners have been the beneficiaries of our team’s performance previously.
Looking forward, we believe our investor base will broaden to endowments and pension funds. We’re already in conversation with several of them.
And over time, because of the democratization of investing, I expect more of our capital will come from RIAs. Many of them are increasingly sophisticated and garnering a lot of success by investing directly with operators. We are actively engaging with those folks.
That retail capital is interesting for operators like us because there are hundreds of billions of dollars of pent-up demand sitting on the sidelines that wants either fund exposure directly without going through an intermediary or single-asset exposure. It’s also interesting because it has different return thresholds and typically requires limited governance.
While the pace of retail capital displacing institutional capital isn’t readily apparent today, we believe over time that growth in that space will begin to mirror software growth models, as barriers to retail entry fall and the playing field is equalized.
WMRE: How does Palladius raise equity and attract new investors? What kind of investor outreach do you conduct?
Nitin Chexal: Just like acquiring and managing assets, our lifeblood is our ability to raise capital, so our entire team is constantly talking with investors. We’re constantly reaching out to institutions, family offices and high-net-worth individuals through our networks.
We’re starting to hit that “word of mouth” phase. We have a lot of demand from our existing investor base—they want more exposure to our platform—and they’re having conversations with friends, peers and colleagues, whether it’s other high-net-worth individuals, family offices or RIAs.
WMRE: What is the range of returns that you expect on your investments?
Nitin Chexal: We’re targeting 16 to 25 percent IRR for our value-add fund.
WMRE: What is your average hold period?
Nitin Chexal: Our value-add investment hold is three to five years.
WMRE: What markets is Palladius investing in?
Nitin Chexal: We describe ourselves as tactically contrarian, which means that we’re looking at markets where capital flows have been historically robust, but institutional capital is currently misjudging some headline risk. Agile investors that can understand that miscalculation and acquire assets quickly when there’s a short-term gap of capital can then sell into the rush of capital when it returns back to that market.
An example is Chicago, where there’s a lot of headline risk around property taxes and crime. But there are pockets in Chicago that are continuing to grow, pockets that don’t have the crime issues that people are concerned about. We believe the calculus around property taxes and that risk is being somewhat misjudged. Because we understand the math and having observed what happened during the last tax reassessment, we have a high degree of confidence around our ability to navigate through it.
WMRE: What role does technology play at Palladius?
Nitin Chexal: From an investment standpoint, we are very data-driven. We’re pulling macro and micro data and utilize it in our investment analysis to rank the markets in which we want to invest.
When we acquire a deal, we pull data off the property on a daily basis—probably 30 points of data—which allows us to make decisions in real time versus waiting for a month-end report. That’s one of the reasons we’ve been able to generate alpha successfully in the past—because we’re paying attention to what the data is telling us about the property.
Technology also pays a big role at Palladius as far as fundraising. We have two sets of investors—direct investors and those who come from RIAs. We’ve built out our investment portal so it has the look and feel of a modern platform that makes data accessible in real time. Another unique way we’re approaching technology is that we know how to interface with the custodial platforms of the wirehouses such as Schwab and Fidelity. We’re making sure our tech lines up so investors can see the performance of a Palladius investment alongside their other investments.
WMRE: The multifamily sector is one of the hottest and most competitive asset sectors today. How is Palladius facing its competition and coming out on top?
Nitin Chexal: We rely heavily on a network that our team has been building for almost 20 years. Because we have such a strong network, we’re able to source deal flow, both on and off market.
We’ve built a reputation in the market for being good buyers. I think we do a good job navigating all our relationships, but there are groups that do a similarly good job, so I don’t want to say that’s unique to us—that would be disingenuous. But I think that of all the groups that navigate the deal sourcing minefield, we do a particularly good job at sourcing investment opportunities that produce strong risk-adjusted returns.
In today’s market, patience is a virtue and experience is extremely beneficial. The Palladius team has been through a number of up and down cycles. Many of the people that we compete against have never seen a downturn, and a lot of the young ones in the acquisition world are running hard and paying really high prices for assets. Those are assets that we typically don’t win because we have been through multiple down cycles.
We’re very focused on being patient and finding the right opportunities that provide strong risk-adjusted returns while also protecting capital in very Draconian downside scenarios that we have to underwrite. So, we miss a lot more deals than we buy because we bid a price that we think is appropriate, and in today’s world, there are many people willing to underwrite super aggressively to win deals. That’s not us.
We are thoughtful buyers, and once we know we like a deal, we will pursue it aggressively. It’s not always the highest price that wins the deal; sometimes it’s the best terms, like a faster close or more money upfront.
WMRE: What plans do you have for Palladius in 2022?
Nitin Chexal: Subsequent funds will include a core-plus fund and additional value-add funds so investors will have an opportunity to invest in both. Our investment vehicles do not/will not have style drift because we recognize that investors don’t like it.
Our future goal, not just for 2022, is to build a diversified investment management firm. Eventually, we’d like to be investing in a diverse mix of property types across the risk spectrum, from core to opportunistic, and we would like to be able to invest at different points in the capital structure—a debt vehicle, for example.