Interview with Brandon Small and Huy Do, Fund Managers of PrideCo Capital Management LLC
Eurekahedge
January 2009
PrideCo Capital Management LLC seeks to provide its investors access to the highest quality asset-based lending (ABL) opportunities, industry leading underwriting operations and experienced investment management. Also, the company aim to maintain low volatility and consistent returns.
PrideCo Secured Loan Fund (PSLF) seeks to achieve consistent above-average returns from a pool of high yielding short-term loans to individuals and corporations which in all cases are secured by assets.
PSLF participates in an underserved segment of the lending market (loans that are too big to be funded by individuals but too small for larger institutional lenders).
Asset-based lending notes are a powerful asset allocation instrument, as they demonstrate little to no correlation to the public equity and bond markets.
Loans are originated through the general partner’s network of loan origination firms, brokers, attorneys, accountants and family offices.
PSLF offers its investors access to high quality asset-based notes.
Brandon Small, CPA, CFA, is responsible for underwriting and investor relations at PSLF and is the lead financial advisor and operations manager at PCM. He has experience with some of the most sophisticated investment advisory practices in the US. Small has been recognised in the Wall Street Journal for his work on investment research software, has been a guest commentator on San Francisco’s KRON4’s Rob Black and Your Money television show and has presented at Stanford University on various financial topics.
Huy Do is responsible for underwriting, business development, and client relations at PCM. He has experience in strategy, audit, operational finance, and management over the past 12 years. Prior to PCM, Do held positions at Wells Fargo as a new accounts manager, Arthur Andersen as an auditor, Aramark as a director of finance responsible for over US$250 million in business across 24 states, a boutique specialty finance firm, and Anycom, a high-tech firm pioneering Bluetooth products.
Did the recent credit market meltdown, in which many conventional sources of loans and financing faced a severe liquidity squeeze, work to the benefit of managers managing funds like yours?
Yes. In light of the current economic situation and tightening of the credit market, we have seen an increase of credit worthy borrowers looking for capital. Our portfolio is capitalised by private money funding private asset-based loans in our portfolio. All of our loans are underwritten based upon the asset securing the loan. We have, on average, a 40% loan-to-value (LTV) with the loans in the fund.
What does your fund’s portfolio look like in terms of geographical exposures? Are you biased towards lending across any particular regions? If so, why?
We are currently focused on the east and west coasts of the US. This is a function of our broker and sales network being located in these two regions and the proximity of our offices to the two regions. It is important in ABL that you “know your borrower” and we place an emphasis on being located near our borrowers.
Generally, what are the different types of parties that you extend loans to? And what are the usual loan-sizes like?
We lend to both corporations and individuals. We are primarily loaning to corporations when the assets securing the loans are accounts receivable, inventory or purchase orders. When lending to individuals, we are usually lending against personal residences and/or commercial real estate. Our loans range from US$500 thousand to US$10 million.
How do you decide the term/tenure of the loans you give out? Is there any significant research (whether on the party concerned or on the collateral, for instance) that influences this particular aspect of the deals that you enter into?
We believe that the duration/tenor of the loans we make are the second most important risk mitigating aspect of the deal – with the first being the LTV. We are not in the business of taking time risk on assets that can move up and down in value. We have found that one year is an adequate compromise between protecting our interest of keeping the loan short and our borrower’s needs.
Could you walk us through the qualitative and quantitative research that you perform on prospective debtors (whom you lend to) before actually lending them money?
Qualitatively, we are most concerned with the experience, reputation and personal references of our borrowers. We also require that we understand the reason they are requesting a loan. If the reason does not make business sense to us, we will not do the loan. We also perform background checks on most borrowers. Quantitatively, we are focused primarily on the asset we are lending against – what value can we assign to the asset, how can we take control of the asset and how would we liquidate that asset quickly and efficiently? Quantitatively, as concerns the debtor, we reference measures like FICO scores, tax returns, personal balance sheets and business interests.
What kind of assets do you keep as collateral, in order to securitise the loans that you extend? And do you have any guidelines for a ratio of the current market value of the collateral to the outstanding portion of the loan?
Typical assets that we lend against are: real estate (both personal and commercial), accounts receivable, inventory, purchase orders, insurance premium financing, and jewelry. Our loan-to-value guidelines depend greatly on the type of asset being considered. Assets which are easy to assign a value to, and have a healthy secondary market, are candidates for a higher loan-to-value loan (ie we will loan a greater percentage of the value to the borrower).
Could you shed some light on the risks involved in asset-backed lending? And, also tell us about the systems that you have in place to mitigate such risks.
The major risk is that the value of the asset backing the loan does not sufficiently protect the lender from principal loss. We understand that asset-based lending is not simply an investment, but a business. A great deal of work is done at the outset of a loan to ascertain a conservative and accurate value for the asset. We employ the best appraisal experts in their prospective fields. Next, thorough legal documentation securing the asset to the note is essential. After funding, asset-based loans also require a great deal of servicing and monitoring. We employ a staff of analysts to closely monitor every loan, some daily, to make sure the assets securing our loan are retaining their value.
The average fixed income fund has lost in excess of 10% between April 2008 – when you launched the PrideCo Secured Loan Fund LP – and October 2008. How has your fund fared over the same period?
We have averaged a 0.87% per month return for 2008. This equates to an approximate 10.45% annual return. Our returns are truly independent of the overall bond/fixed income market. Our notes are private and secured by assets. Even when asset prices fall, our low loan-to-values are intended to protect our investments from principal loss.
What classes of investors is your fund best suited for, given its risk/return profile? And ideally what time horizon must an investor have, in order to consider investing in a fund like yours?
Our fund is ideally suited for investors seeking exposure to a long standing asset class that has little to no correlation to the public fixed income and equity markets, provides a steady return and is secured by real assets. Our volatility is expected to remain very low. Asset-based lending is a business, not just an investment. The returns which our investors receive in the fund are determined by how we manage the operations of the loans and our firm. However, it is not recommended that an investor place more than 15% of their net-worth into a strategy like asset-based lending. We advise this because ABL, and as a consequence our fund, is not a very liquid asset class. We are entering into private loans that cannot be bought/sold quickly and easily. Therefore, this strategy is best suited for a small allocation of an investor’s portfolio or for investors that do not require a high amount of liquidity.
And lastly, could you share with us your outlook of the asset-backed lending space (particularly after the dust from the current economic storm settles, and conventional asset classes like equities and commodities are in demand once again)?
Asset-based lending has been around for thousands of years – in fact, it was one of the first ways people lent money to others. However, in this environment, we are seeing deals that a year ago would have been done by traditional banks. ABL has always been something that has successfully operated outside the traditional banking universe, but now we seem to be one of the only games in town. We see this continuing for the next two to three years. But even for the long term we are very excited about ABL and our fund. We believe the ability for investors to participate in this asset class will grow substantially.
