Why it matters in an Investment? (By Travis Miller, 2nd August 2019)
What do you mean by 'Structural Protection'?
Well we don't put steel bars on the windows, although it's actually not a bad way to think about it.
If a robber was trying to get in your window and they were made of glass, any hard object could be used to gain entry, whereas if you had the steel bars, stating the obvious it would be harder to gain access.
Think about a single personal loan as a pane of glass, if that personal loan borrower defaults you wont get your money back, similarly if there are no bars on the window the robber will get in.
In investment terms you could invest in a single loan through a traditional peer to peer lender, or an investment into a loan that has structural protections for investors.
I will use an example to explain;
Structural Protections - Bars on the windows
Focus is on the portfolio construction and legal terms of the investment, criteria is added to protect investors to adverse events.
Overview of typical protections iPartners will utilise
- Create a Portfolio; Start with diversification, rather than a single loan invest in a portfolio of loans from different regions, segments, cap loan size etc...
- Secured; Prioritise loans in a portfolio that are full recourse and secured
- Credit Assessment; Scrutinise how the servicer (loan administrator/originator) approves loans, nothing will save you from a bad credit policy
- Alignment; Ensure the servicer is exposed to loss first to keep their wallets focused on protecting your investment
- Margin Capture; Ensure you are holding back some of the servicer's profits, nothing improves alignment better than back ending the reward
- Margin Capture Accelerator; If the servicer is underperforming capture 100% of their margin to build loss buffer
- Revolving Period Stop; Again if the servicer is underperforming, restrict further lending and force amortisation of the underlying loans
Below is an extract from a recent iPartners termsheet.
Adding Loss Protection - Adding the security system
Loss protection simply means someone is exposed to loss before me!
The question then becomes how much loss are they taking before me and is that a good risk / return.
Imagine there are 100 chilli's in a basket, and there are 7 Carolina Reapers (Wikipedia hottest in the world) and 93 perfect mild tasting chillies.
A 7% loss protection would be when one of your mates (everyone has one) says I will eat any of the Carolina Reapers, regardless of the order we take out chillies.
To round that out in terms of an investment, in the OMM Secured Loan below, any losses up to 7% are taken by OMM (your mate) before iPartners series 2 investors are exposed to losses.
Lastly Junior or Senior Secured Loan - Do you want the security guard?
The Junior Secured Loan is the security guard for the Senior Secured Loan as it provides additional loss protection for the Senior Secured Loan
The Junior Secured Loan is happy with bars on the windows and the security system while generating a double digit/high return, whereas;
The Senior Secured Loan wants the additional loss protection provided by the Junior Secured Loan while generating high single digit returns for the level of risk and protection.
iPartners currently has an open investment in iPartners OurMoneyMarket Junior / Senior Secured Loans that reflects the above features, further detail can be found by clicking here.