Insights from GPS Investment Fund Limited (GPS) Executive Director, Ben O’Hara
The private debt mortgage fund industry has grown rapidly as a result of the Global Financial Crisis of 2007/8. The market has grown from $1bn to $40bn, and this sector will continue to grow as banks retreat further from construction financing.
At GPS Investment Fund Limited (GPS) we are often compared to other funds, but we are often not being compared on a like for like basis. It is important to note that one key difference between private debt mortgage fund categories, is whether the investment fund is involved in the debt or equity part of the transaction.
GPS provides loans to borrowers who develop property in exchange for us having a first mortgage over the site – we are on the debt side of the equation. Just like a bank owning a home until the mortgage is paid, this means we get repaid first.
There are other private debt investment funds that raise the equity portion of the transactions from their investors. They do not hold a mortgage to secure their funds, so the equity investors get repaid after GPS’s investors. In the financing world, we call this the waterfall of how the money flows when loans get repaid.
So, are the two investment types comparable when looking at risk? I think not.
Given that we feel that our investors are in a less riskier position than those investing in the equity class, should the two classes get the same investment return? I would suggest that the greater the risk position, the greater the return should be. This is the balancing act we perform when looking at what rate of interest we provide to our investors.
The counter to raising funds from our provide loans to our borrowers. It is these borrowers that are priced for risk as well. The good borrowers are more sought after and can get their funds from the market at the cheaper end of the spectrum. It’s the lesser quality borrowers, that present a higher perceived risk, that end up borrowing money at a more expensive cost. Funds that offer higher returns are able to because they charge their borrowers more. Is this an indicator of the risk of the borrower?
At GPS we are proud of our borrower quality, and while relationship allows for a certain premium, we cannot expect our borrowers to pay over this premium. To write quality loans, and protect our investors, we need to offer a competitively priced loan product.
Taking all of this into account is how we price our investor and borrower interest rates. The rate we offer our investors is balanced to provide an appropriate rate to our quality borrowers.
So when your looking at investing funds, remember to keep in mind where your investment sits in the repayment waterfall and what is the inverse consequence of the rate your receiving where are your funds being deployed. We call this the goldilocks zone – where all the parameters are in equilibrium to allow everything to be just right.
It is also a key time to highlight that due to this balance with the borrower’s rates, the interest rates we offer to investors is not linked to the RBA. GPS has always prided itself on being a business built on relationships, so we do not vary our borrower rate as frequently as the RBA in order to provide some project stability, and therefore completion.
So while the RBA rates might signify a reduction in your distribution rates, we will try to hold all distribution rates as long as we can until the rates become uncompetitive to our borrowers. Historically, our borrowers work with us on this as we hold it in their favour as long as we can when the rates increase.
Want to join us in the goldilocks zone? Get in touch today and we’ll send through a Welcome Pack for your consideration:
