Wholesale investing case study: Searching for yield

Financial Planning Written by Squirrel, Sep 1 2021
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In this case study we're putting the microscope on a Wholesale Fund who was finding it increasingly tricky to originate and manage the loans it required to meet its investors’ income expectations. This particular Fund is a company who targets a higher running yield and enjoys a flexible mandate to generate returns to fund its quarterly distributions to its unit holders.

They faced the challenge of generating enough income to meet their investment goals whilst satisfying their unit holders’ expectations. When you throw together record-low interest rates, the impact of Covid, disruptions to supply chains and increases in property prices, property related lending becomes increasingly challenging.

This investor had three choices:

  1. Reduce its property lending activities and focus on other investment types.
  2. Allocate more resources to its property lending activity – either by hiring more staff or scaling back its other investment activities.
  3. Partner with a specialist who could help tailor a solution to provide them with the deal flow they required, without having to increase their own resources.

This Investor’s credit appetite and investment policy is broader than what Squirrel provides to retail investors. This allowed them to consider loans that Squirrel wouldn’t be able to settle on behalf of its retail clients. The Investor decided to continue making investment decisions but chose not to invest further into developing their own direct lending and origination program. They also preferred not to recruit a loan management team.

The investor partnered with Squirrel to develop and implement a solution that:
  1. Aligned with the investor’s credit policy
  2. Ensured the investor retained responsibility for investment decisions and
  3. Leveraged Squirrel’s expertise, resources and platform
The strategy that Squirrel developed together with the Investor provided for two specific requirements:
  1. Treasury management – the Investor needed to maximise its returns on strategic cash it was holding to fund its commitments to planned future investments.
  2. Strategic investments – Squirrel would originate potential loans that the Investor would review and fund if the loans met its investment criteria. Squirrel would originate the potential loans, undertake the credit analysis, draft the term sheets and if approved, contract, settle and manage the loan on the Investor’s behalf.

The Investor registered on Squirrel’s platform, completing AML and other requirements before setting up their Squirrel On-Call account which they transferred their funds into.

They managed their day-to-day treasury activities and used Squirrel’s platform to invest and manage cash (liquid reserves) across a range of loan classes including residential construction loans, home loans and personal loans.

Through this, they were able to maximise the return on their cash while controlling their liquidity position. They could also easily forecast cashflow requirements based on Squirrel’s interest payments and loan maturities.

Using Squirrel’s platform they were easily able to select their investment amount and loan class they wanted to invest in. Squirrel matches investment orders with a loan that it has previously settled, in terms of Squirrel’s credit policy, and is holding in its warehouse facility.*

When this investor needed to raise additional cash, they were able to use Squirrel’s secondary market to sell a portion (or all) of an investment to other willing investors, allowing them to quickly get their cash back out.

The investor also benefited from Squirrel’s Reserve Funds which reduce the credit risk for each loan class. The Reserve Funds help cover expected credit losses as well as giving better predictability to investors.

Together with Squirrel, this investor was able to set investment parameters to evaluate potential loans for them to consider funding. These parameters included the loan size, loan to value ratio, interest paying or capitalising, security and the borrower’s rating.

Squirrel, through its origination and credit process, identifies loans that meet the Investor’s requirements and presents these loans to the investor in a 2-stage process – 1) initial screening and 2) full credit assessment and term sheet.

These are “whole” loan investments, and the Investor earns the loan’s interest rate, net of Squirrel’s platform fee, in exchange for assuming loan’s credit risk.  Squirrel is responsible for managing the loan from term sheet, contracting, settlement and repayment.

The results from investing with Squirrel

The investor managed to extend the scope and scale of its investment and lending capability without having to recruit any extra staff or expenses.

Squirrel’s platform allowed them to increase their rate of return on their treasury cash to 4%p.a. and 7.5%p.a. - significantly more than what it may have earned sitting in their bank account or a term deposit.

Squirrel has since been able to offer a number of investment loans to this investor for their portfolio, with interest rates ranging from 6%p.a. through to 14%p.a. and terms ranging from three months to two years.

The investor has been able to increase its strategic allocation to residential property backed loans thanks to Squirrel originating qualifying loans and aligning their risk profile to suit the investor’s criteria.

Squirrel offers Wholesale investors a range of options than can be tailored to meet Investor’s needs. You can contact Doug Thomson to learn more about Squirrel and how Squirrel can assist you enhance your return prospects.

Book a chat with Doug

*Subject to availability – where a loan is not immediately available, the investor’s order will be queued.

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