How Well Do You Know Your Fund Manager?
Anyone can lend money but very few can consistently get it all back. The GFC has reminded us all of the soundness of this old saying.
In 20 years of lending I have had my fair share of loans which have required some effort to make a full recovery. While technical aspects such as valuations, quantity surveying reports and security documents are important tools, the core of the issue inevitably comes down to the personalities, skills and mindset, not just of the Borrower but also of the Lender.
In this article I will focus on the personality, skills and mindset which I believe are necessary to be a successful Lender, because you invest your moneys in the security of the property, as well as the competency of the operator.
My real journey in understanding this issue started in the early days of being a Solicitor/Private Lender, when my Father took me aside and asked me the non-question of “Are you a solicitor or a money lender? Because if you try to be both, you will muck it up”.
This one-liner, delivered right between my eyes from someone not associated with either the legal or finance industries (he was in the transport industry), has remained with me because it provided a lasting guidance on several levels.
The most apparent is that you need a lot more than good legal skills to run a mortgage fund. You need a diverse group of complementary skills and to think and act like a mortgage fund operator.
A commonality for solicitor/private lenders who successfully negotiated the solicitors/private lending difficulties of the late 1990s was that they got professional about how they operated their mortgage funds and engaged personnel from outside the legal industry to assist them to run their mortgage funds.
Another level of my Father’s words of wisdom is to “stick to your knitting”. GFC saw the collapse of many mortgage funds that had grown to not really being mortgage funds any more. Operators were leveraging the funds to generate greater returns of profits. They were becoming property developers in their own right. They were driven to ever increase the amount of funds under management. In the period of time before the GFC hit, which is known as “sub prime” there was a loss of focus by quite a large number of mortgage fund operators, and the consequences are now recorded in history.
Operating a mortgage fund is not rocket science. You lend Investors’ hard earned moneys and you get it back with interest. To do this, you put together a competent, skilled and experienced team. You must also have a direction for the business which caters for fluctuations in the economy. In particular, the mortgage fund operator must not only be able to stop lending if there are no prudential loans available, but they must also have the mindset to be able to do so. This brings me to my Golden Rule No. 2, which is to “Get to know the team of the mortgage fund before you invest”. Make sure they have the depth of knowledge and experience to get the moneys back. Be confident about the direction of the business of the operator.