1. A debt fund being raised to lend money to property development entities / projects controlled by the same people running the fund. At best, this gives rise to a conflict of interest.
2. The debt fund’s investments were going to be subordinated to other lender’s security interests in the projects. In property development finance, being subordinated to other financiers is a risky place to be. The risk being presented was essentially equity risk in property development projects.
3. These funds were concentrated in projects sponsored by the same group. No diversification of industry or borrower.
4. Whilst 10%pa returns sounded good, considering the above points, we felt a more appropriate return for this type of investment would have been 18-25%pa.

We quickly moved on to considering the next potential investment. However, this experience did encourage us to design the Merx fund with a few key principles in mind:

Prioritising quality security

Not all security is created equal. It’s easy for investors to overlook this if they’re not in the business of making loans. In property development lending, the value of a lender’s underlying security can be volatile with small adjustments in cyclical drivers of value. We saw the fallout from this during the Finance Company collapses in New Zealand during the Global Financial Crisis (GFC). We learned lessons on this at that time. This reinforced the importance of strong security positions for the loans we make. At Merx, this principle remains a cornerstone of our investment strategy.

Minimising concentration risk

Diversification, diversification, diversification. If there’s one word to live by in the world of investing, it’s this. One of the inherent risks in some property developer sponsored funds is concentration. Concentration of risk in a few large projects. Concentration of risk in a single borrower.

At Merx, we ensure that our investments are distributed across a wide range of unrelated borrowers. Unrelated to each other and in a spread of industries. By doing so, we limit the potential for concentration risk. This broader diversification helps protect against downturns in specific sectors and provides a more stable and resilient investment.

Structuring for aligned interests

At Merx, we designed our fund to ensure that the interests of fund managers and investor partners are aligned. Our managers are also investors in the fund, which means that every decision regarding security and lending is made from a position of aligned interests. This structure seeks to ensure that our goals are aligned to our investors’ goals.

The bottom line? The Merx debt fund was designed to mitigate the issues we were seeing in alternative investment options available in the market like the property developer sponsored debt  funds. We remain committed to safeguarding our investor partners through careful risk management, diversified investments, and aligned interests.

Like to know more?

If you’d like to know more about the debt fund or have queries as a current investor, don’t hesitate to get in touch by booking a call here.

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Note: This article is intended to provide general information and does not constitute financial advice. We recommend you speak with a financial adviser for advice tailored to your individual circumstances. Potential investors with Merx must qualify as Wholesale Investors as that term is defined in sections 3(2)(a) – (c) or 3(3)(a) of Schedule 1 of the Financial Markets Conduct Act (“FMCA”). The Trust is not suitable for retail investors.