With 326 consecutive months of positive returns, Romspen Investment Corp. might have the most consistent investment fund in the country.
As a provider of high-interest mortgages to property developers who typically don’t qualify for bank loans, the fund may not at first seem designed for an almost absurd level of stability.
After all, the private debt space in Canada is still tainted in the minds of some investors by the Bridging Finance debacle, which is ultimately expected to cost investors over $1 billion.
But no sort of scandal, shock or disaster managed to jeopardize Romspen’s performance – until the pandemic.
Managing Partner Derek Jenkin spoke to The Globe and Mail about that rocky start to March 2020 and how the fund got back on track.
This fund has returned an annual average of 7.6% since the mid-1990s with almost zero volatility. How?
Yes, that generally shouldn’t happen. You are expected to be subject to either stock market fluctuations or changes in interest rates. But there is nothing complicated in that. It’s an old-school loan toughness that hasn’t been wasted. When I joined in 2015, it was surprising that it wasn’t a much larger fund — it was only around $1.4 billion. It’s the best kept secret in investing.
Describe “old fashioned lending”.
They are first mortgages, so we are always in control. We need a lot of guarantees. One of the key parts of the process is that when we have a loan that fails, we repossess the property if we have to.
How it works?
We have in-house teams who can complete the work and seek to maximize the value of the property. In the traditional model, you would just sell it and crystallize a loss. And to compensate for this, you would use leverage to issue additional loans. You could borrow at 3% and lend at 10%. Now you have a burn rate and you still have to pay the 3% on a non-performing asset, so you’re going to be very motivated to get it off your books, even at a loss.
Did many of your borrowers stop paying when the pandemic hit?
We saw a big spike in non-performance – in the 40% range. We certainly could have started capturing a lot of our borrowers, but this was not the market for that. Labor markets are disrupted. Trade routes, supply chains are all disrupted. The bank is confused. The courts are closed, the permit offices are closed. You cannot send engineers to a site to do an inspection. Everything you need to complete construction projects, everything is in chaos. So we decided to work with our developers to help them get back on track. About five months into the pandemic, we began to see the fruits of that labor.
You had to reduce your monthly distributions and freeze withdrawals from the fund. What drove these decisions?
Monthly distributions are like the heart of our fund. And you can see the impact of a pandemic putting us in a little cardiac arrest. What are you doing? You don’t have good data to work with, so you can’t make good decisions. So we suspended the fund – we suspended redemptions and we received no more fresh money. We had to make sure to protect the capital of our investors. By the end of the year, we were back to our normal distribution. And on January 1, we started finalizing redemptions. Since then, we’ve issued over half a billion dollars in buybacks.
Did you lose investors after the Bridging financing the story broke?
It certainly rocked the boat. Many investors thought it best to exit the industry for a while.
Did you learn from the scandal?
For us, it’s a question of transparency. Each of our mortgages is a public record. We publish all of our audited financial statements online, although as a private lender we are under no obligation to do so. Romspen is the gold standard in this space.
This interview has been edited and condensed.
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