How Private Placements Reduce Investor Risk
ROI performs extensive due diligence before and after an investment is made. Our strict investment process begins with an in-depth checklist to be completed by all potential investee companies. Due to ROI’s strong relationships in the industry and our reputation for only offering conservative investments, only those companies who feel they meet our strict approval process should apply.
Once a company passes the initial screening, further due diligence is performed, including external economic stress tests, plus a risk assessment, which includes Risk of Default and Risk of Loss. This further review helps determine the strength of the company, plus their cash flow and security, when applicable. ROI’s investment thesis is to mitigate risk of default first and then to mitigate risk of loss.
Risk of Default
A company may default under its borrowing obligations (non-payment), but the security (mortgage, General Security Agreement (GSA), corporate guarantees, personal guarantees, etc.), liquidation or sale of assets may be sufficient to repay the lender in full. Under this scenario, the borrower will have defaulted, but there would be no loss because of the security coverage on the investment. A similar example would be an individual who defaults on their home mortgage. There would be no loss for the bank since they would sell the security (the house) for the loan amount (under the assumption that the market value is greater than the loan amount).
ROI mitigates default risk by investing in strong operating companies with proven cash flow, management, markets, products, etc. These qualities demonstrate the company’s ability to make monthly payments to ROI, without a default on payment. ROI would not typically lend to pure start-up venture capital firms, turnaround situations or restructuring companies, as these businesses, by their nature, have a higher risk of default. Instead, ROI focuses primarily on companies with historically strong cash flow and strong tenants in prime locations. Those companies who experience seasonal trends must be able to carry ROI’s terms during their slowest times.
Risk of Loss
Once the risk of default is mitigated by selecting only companies with the strongest cash flow, ROI then analyzes the risk of loss, should a default ever occur. This analysis entails an evaluation of security or collateral for the investment to determine if the security could cover the value of the investment. ROI lends money as a secured creditor and, as such, each investment is governed by covenants (loan rules), as well as security (mortgages, GSAs, guarantees, etc.). The extent to which risk of loss is mitigated typically drives the pricing of the investment, i.e., the more security offered, the lower the yield that can be charged.
For hospitality investments, ROI assesses the type of travel, location and revenue stream during peak and slow seasons. By focusing on prime locations, top-tier hotels and business travel versus leisure travel, ROI has made strong investments that pass our strict risk assessment levels. Only those who pass this review become eligible for funding. These investments are then presented to the Investment Team for a robust analysis and review. Only those investments that pass this final stage are granted approval. In addition, locations are branded with strong head office support, which generates web bookings. This strategy, in combination with conservative loan-to-value ratios and a good risk premium, makes investing in this asset class a better alternative than other asset classes. There is also a lot of value in exchange for these types of properties and supply or capacity is well-managed in "land locked" locations.
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