We’ve all heard the term “investment manager” and many of us deal with them on a regular basis, but just what does an investment manager do and how do they do it?
Essentially, in the area of debt, investment managers facilitate a transaction between a borrower and an investor, or more often, a number of investors.
For example, TierONE Capital manages a portfolio of loans, with any particular loan usually funded by between one and 50 investors. Typically, the number of investors neither simplifies nor complicates the transaction. The complexity usually arises on the borrower side, and it is this part of the transaction that attracts the greatest amount of focus, which ultimately ensures the investors’ best interests are looked after.
Due diligence
Prior to an investment opportunity being offered to prospective investors, the transaction undergoes thorough due diligence, in line with TierONE Capital’s Credit Policy. A loan submission is accompanied by a raft of supporting documentation including reports, statements, explanations, financials and assessments. The TierONE Capital team uses our extensive knowledge and experience to review and assess the transaction on its merits, and structure the loan appropriately. For any one loan that is offered to investors as an opportunity, there might be three or four others that have been deemed unsuitable.
Open lines of communication
Once a transaction has settled, it’s easy to think that the loan (and the related investment) can be “set and forget”, however this is never the case and it’s imperative for the investment manager to closely liaise with a group of key stakeholders throughout the term of the loan. In the case of a construction loan, communication between the broker, borrower, developer, builder and their contractors, along with the valuer, quantity surveyor, project managers and lawyers is key to ensuring the project stays on track and the loan terms are met.
As part of our day-to-day role, TierONE Capital can be involved in a multitude of critical processes including: valuations, quantity surveyor reports, contractor and builder payments, claims and drawdowns, project control group (PCG) meetings, site visits, documentation reviews, security lodgements (and releases), legal matters, production of statements, and interest and payout calculations, just to name a few.
Property Services Team
A key component of our management process that sets us apart from many other mortgage managers, is the engagement of our dedicated Property Services Team. Our skilled team regularly monitor and oversee construction loans to ensure we can assess and respond to risks and concerns as they arise.
Extensions and defaults
Whilst many loans are paid out on or before the maturity date, other loans can run over term. It’s the investment manager’s role to facilitate the extension, negotiate new terms, ensure the base parameters of the loan haven’t changed, order new valuations if required, and to restructure the loan if necessary.
It’s important to note that if a loan extends beyond the original anticipated maturity date, this will generally trigger a loan default, and any default interest is likely to be passed on to TierONE Capital investors, either in part, or in full. Defaults such as these are not necessarily a cause for concern and are to be expected when investing in this field.
A small number of loans can fall into default for other reasons – non-payment, builder illness, cost over-runs or project mismanagement for example. Given TierONE Capital’s robust due diligence and approval process, these are kept to a minimum, but they do occur nonetheless.
TierONE Capital closely monitors the conduct of all loans and will likely be aware of any issues early on. Indications of distress might include late payment, changes in market conditions, delays in construction or lengthy delays between progress claims.
The team will work extensively with the borrower and broker to mitigate or lessen any impact to stakeholders. Management of defaults is extensive and actions might include appointing a solicitor to commence recovery procedures, ordering a new valuation, implementing a lender appointed development manager, enforcement procedures which could include the appointment of a qualified administrator or placing the security property on the market.
Ultimately, the primary role of an investment manager is to ensure the best interests of their investors are maintained at all times, whilst providing commercial loan terms and sufficient funding to a borrower to enable them to finalise their project. It seems complex, and in many instances it is, but for the team at TierONE Capital, this is what we do every day.
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