Commentary: Bridging Finance

By now you’ve probably seen the stunning news about the receivership of Bridging Finance and the investment funds it manages, arising out of allegations put forward by the Ontario Securities Commission. With close to $2 billion of investor money at stake, this is a big story for Canadian investors and the Canadian private lending sector. As manager of KiWi Private Credit Fund and a participant in this space, we at Kilgour Williams Capital are obviously concerned by these developments and can appreciate the feelings and worries that many investors must have experienced when the news emerged this weekend.

We will not go into the specific allegations here, as the news media and court filings lay those out in great detail. We do however wish to highlight some aspects of the Kilgour Williams Capital and KiWi Private Credit Fund business models and operating practices that have always been in place and which serve to protect investors from the alleged circumstances that came to light this weekend.

We are not ‘direct lenders’. We invest in loans.

Neither the KiWi Private Credit Fund nor Kilgour Williams Capital are in the business of seeking borrowers, marketing loans, initiating lending relationships or even being the primary underwriter of loans. The Fund finances loans that already exist. Fintech lenders such as LendingClub and Biz2Credit offer us opportunities to fund loans that have already been underwritten, due diligenced, and structured by them. There is no opportunity for fraud or collusion between Kilgour Williams Capital and the borrowers in the Fund because the borrowers are unknown to us in advance. Nor is there any option to lend to related parties, which is prohibited.

We do not place big bets.

The KiWi Private Credit Fund is diversified across thousands of small balance loans. The average loan in the portfolio is $15,000; the largest loan in the portfolio is less than $300,000. The portfolio is diversified across prime consumer loans, small business credit, and secured loans to property developers. The vast majority of the borrowers are US domiciled. Diversification is done to provide a material reduction in risk so that no single loan default can materially affect Fund performance.

We do not handle our investors’ cash.

All cash in the Fund is custodied by Millennium Trust Company, a qualified custodian based in Chicago which has prescribed minimum capital requirements. All transactions into or out of the Fund are executed by this custodian. Transactions can only be executed to pre-authorized counterparties and based on instructions from Kilgour Williams Capital with two-signature authorization. Millennium Trust also custodies all loan documents and thereby is able to reconcile cash movements and cash balances against loans balances every month. Cash is a closed system; any ‘leakage’ will be detected by this key third-party service provider.

We do not service loans.

Each loan that the KiWi Private Credit Fund holds is serviced by the on-line lender that originated it. This means that not only does Kilgour Williams Capital not handle cash collections from borrowers but also that we cannot unilaterally waive delinquency or defaults to conceal losses.

We do not mark our own book.

Each individual loan in the portfolio is valued every month by an independent third-party. We believe that fair valuation is essential to fairness as investors enter and/or leave the Fund. The ‘fair market value’ of each and every loan in the portfolio is calculated each month. Values are determined by whether a loan is current in its payments. If not, the value of the loan is increasingly market down from its very first day of delinquency, essentially taking a loan loss provision against the probability that it will default. There is no room for “hold and hope” in our portfolio. These valuations are provided by a third-party valuation agent using an IFRS-9 compliant quantitative model that is audited annually by KPMG. Kilgour Williams Capital is audited annually by RSM Canada.

In the interest of full transparency, we welcome any investor in the Fund who wishes to review the valuation methodology and/or the mark-to-market of the loan portfolio.

We do not take ‘work fees” from the Fund or from the borrowers in the Fund and we don’t take equity positions in our borrower companies.

For the obvious reason of avoiding conflicts of interest, Kilgour Williams Capital’s sole source of revenues from the Fund is the fully disclosed management fee. All interest and fees or other revenue from borrowers are captured by the Fund.

We drive pick-up trucks, not Bentleys.

Seriously.