Risks to consider
Like any investment, there are risks associated with investing in the Fund. There are a number of risk factors that could affect the performance of the Fund and the repayment of Investor’s capital. Many risk factors fall outside of the Trustee and the Investment Manager’s control and cannot be completely mitigated.
All investments involve varying degrees of risk. While there are many factors that may impact on the performance of any investment, the section below summarises some of the major risks that Investors should be aware of when investing in the Fund.
The following is a non-exhaustive list of the main risks associated with investment in the Fund. Investors should consider and weigh them up carefully and make their own assessment as to whether they are comfortable with them.
Capitalised terms in this section have the meaning given to them in the IM – click here to see a glossary of terms.
The Fund is structured so that:
- Investors can receive distributions up to the Target Income Return, but will not receive distributions in excess of the Target Income Return; and
- The Withdrawal Price may be less than $1.00 but will never be more than $1.00, given the structure of the performance fee payable to the Investment Manager.
The value of an investment may rise or fall, distributions may or may not be paid and an Investor’s capital may or may not be returned. A downturn in general economic conditions either inside or outside of Australia may adversely affect investments.
In the event of insolvency, the GSA may be subordinated to the rights of a higher ranking creditor. A Borrower may default and the security provided may not be sufficient to recover the amount originally loaned. The ability of the Fund to recover any of its debt investments may also be impacted by the solvency of a counterparty and subject to the rights of any senior secured lender.
This means that where a senior debt lender has priority in respect of funds generated by investments made by the Fund, there may not be sufficient funds to repay the Fund’s investment after repayment of the senior debt facility. Further, there will be no rights to recover the debt by seeking to take control or sell any real property of the Investment Manager.
Any deficiency in documentation provided by a Borrower could, in certain circumstances, adversely affect the performance of the Fund. For example, if there was a deficiency in the GSA it may impact on the Fund’s ability successfully enforce its rights of security over a Borrower.
Further, as at the 1st March 2019, there is only one Borrower. This means there is little diversification of counter party risk.
Changes in official interest rates can directly impact on investment returns of the Fund. An increase in interest rates generally has a contractionary effect on the state of the economy. Rising interest rates increases the cost of borrowings which may positively impact the Fund’s returns. Conversely, rising interest rates may negatively impact the Fund’s returns if there are fewer Borrowers or Borrowers are prepared to borrow less money.
Operational risks of the Trustee, the Investment Manager and the Administration Manager include the possibility of systems failure, regulatory requirements, documentation risk, fraud, legal risk and other.
None of the Trustee, the Investment Manager nor any other person or entity guarantees any income or capital return from the Fund.
The Trustee and Investment Manager may elect to retire or may be replaced as the Trustee or Investment Manager of the Fund or the services of key personnel of the Trustee and Investment Manager may become unavailable for any reason.
There is always a risk that the Trustee and Investment Manager may fail to identify and adequately manage the investment risks of the Fund and thus affect the ability to pay distributions or reduce the value of the Units. The Investment Manager may make poor investment decisions resulting in sub-standard returns (for example where the Fund makes a loan in respect of which there is a default or the value of the security in respect of that loan is insufficient protection). This risk is mitigated to some extent by the knowledge and experience of the Investment Manager.
The Fund is relying on the ability of the Investment Manager to achieve its investment objectives. If the Investment Manager were not to continue in its role, the Fund may not be able to achieve these objectives.
The Investment Manager is not a related party of the Trustee. The contractual arrangements between the Trustee and the Investment Manager are negotiated at arm’s length between the parties. The Trustee may from time-to-time enter into transactions with related entities. For example, the Administration Manager is a related party of the Trustee.
By making an investment in the Fund, Investors acknowledge that the Fund will lend money to related parties of the Investment Manager (Borrowers). As at the 1st March 2019, the Fund had made one loan totalling $59,230,000 to Mayfair 101 Holdings, a related party of the Investment Manager. It is not the responsibility of the Trustee to assess the merits of each investment recommended by the Investment Manager. Accordingly the Trustee does not warrant or guarantee that the Fund’s investments are or will be entered into on arms length terms.
Furthermore, the Trustee does not have any oversight regarding the subsequent investments made by the Borrowers using the monies lent by the Fund. The Trustee will rely solely on the confirmation of the Investment Manager that these Borrowers are using the monies appropriately in order to ensure the Borrower does not default on the terms of any Loan Agreement and the Trustee will not undertake any independent review that this is in fact the case.
By investing in the Fund, Investors acknowledge that the Investment Manager is responsible for making investment decisions for the Fund and that any investments made by the Fund may not be on arm’s length terms and that they have made their own independent investigations to satisfy themselves of the benefit of becoming an Investor in the Fund.
Enforcement action procedures, if required, in the event of default by a Borrower will be managed by the Trustee and is set out in the IM, page 10, section 2.3.
Changes in government legislation, regulation and policies generally could materially adversely affect the operating results of the Fund. Although unable to predict future policy changes, the Investment Manager intends to manage this risk by monitoring and reacting to any potential regulatory and policy changes.
The operation of a funds management business in Australia is subject to significant regulation by Australian government authorities including without limitation the Australian Securities and Investments Commission, the Australian Transactions Reporting and Analysis Centre, the Foreign Investment Review Board and the Australian Consumer and Competition Commission. There is a risk that the Fund may not comply at all times with its various obligations under government regulations and this may result in the loss of authorisations of the Australian Financial Services Licence held by the Trustee thereby preventing the continued operation of the Fund.
The Fund is an illiquid investment.
This is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimise a loss or make a profit.
An investor cannot withdraw from the Fund during the Minimum Term. There are no rights for an investor to require the Trustee to repurchase an investor’s investment. However, investors may be able to transfer their investment to another person, although there is no guarantee that any third party can be found to acquire the investor’s investments or to acquire such investments at a fair price.
An investment in the Fund should be viewed as illiquid. There is currently no secondary market for Units in the Fund and it is unlikely that any active secondary market will develop.
You should only consider an investment in this Fund if you are not likely to require access to your investment during the Investment Term.
The Trustee is not in a position to confirm the completeness, genuineness or accuracy of any information or data included in this IM. A significant amount of the material provided in this IM was supplied by third parties including the Investment Manager. This information has not been audited or independently reviewed.
Tax regulations can change and changes can be adverse. Investors should consider their own circumstances before investing.
There may be external influences from time-to-time, including unforeseen items of expenditure which have not been budgeted for and loss of revenue, which adversely affect the income of the Fund. These may result in a reduction of distributions and returns.
As at the date of the IM, the Fund has less than 2 years operating history upon which Investors may base a meaningful evaluation of its likely performance. The success of the Fund’s investment activities will depend almost entirely on the Investment Manager’s ability to carry out the proposed investment strategy successfully. While the principals of the Investment Manager have previous experience making and managing investments of the type contemplated by the Fund, there can be no assurance that the Fund’s investments will achieve the Target Income Return.
There can be no assurance that profits will be realised from the Fund’s investments and losses may be realised before gains are realised. Investors should also note that Fund operating expenses, including annual management fees, may exceed income or realised profits therefore requiring the difference to be paid from the Fund’s capital.
This is the risk that the valuation of the investments contemplated by the Fund are inaccurate at the time of deciding to invest so that the amount realised on exit is less than would have been expected had the valuation been correct. There is also the risk that a valuer who provides an inaccurate valuation does not have or no longer has adequate professional indemnity insurance to cover the valuation on which the lender relies.
The Fund will incur fees and expenses regardless of whether it is successful. The Fund will pay investment management fees, Trustee fee’s and administration fee’s whether or not it receives its returns. In addition, the Fund will also be required to pay investment management fees, Trustee fee’s and administration fee’s whether the funds raised are fully utilised or not. The Fund must therefore ensure that sufficient liquidity is maintained in order to meet these and other expenses. The Trustee and the Investment Manager expect to incur significant costs and expenses in seeking to source, evaluate, structure, negotiate, close, monitor and exit the investment including, but not limited to, financial, legal, technical, regulatory, commercial advisers, engaged to assist the Trustee and the Manager in seeking to source, evaluate, structure, negotiate, close, monitor and exit the investment. There can be no assurance that the Fund will be successful in being able to recover these fees and expenses from a successfully closed investment. These amounts may be significant and could have an adverse impact on the capital and any return that Investors might otherwise expect to realise.
The Fund’s investments will be domiciled in Australian dollars and therefore the weakening of a country’s currency relative to the Australian dollar will negatively affect the value of the Fund’s from the perspective of an international investor.
The Investment Manager does not have any material independent financial resources. If an action or claim is brought against the Investment Manager and such claim is not covered by the professional indemnity or directors’ and officers’ insurance policies arranged by or on behalf of the Investment Manager, the Fund cannot assure that the Investment Manager will have sufficient financial resources to cover any amounts payable under any such claim. The Fund is reserved to certain sophisticated investors who are required to be aware of the risks involved in an investment such as the Fund and who accept that they will have recourse only to the Fund’s assets in existence at any given time.
Investors should be aware that while the Trustee has implemented technologies, processes, and practices designed to protect its networks, devices, programs, and data (or Information Technology Systems) such Information Technology Systems may still be subjected to malicious attack, damage, or unauthorised access.
Such Information Technology Systems may include the storage of information concerning an Investor’s identity, financial interests or other personal details provided to the Trustee in connection with their investment in the Fund.
In the event serious harm is a likely outcome of a breach of the Trustee’s Information Technology Systems, the Trustee or Investment Manager (as may by required) will notify the affected individuals and recommend steps that ought to be taken in response to the breach. The Trustee may also be required to notify any regulatory authority as required by law.
The Fund issues multiple Units Classes. Each Unit Class is referable to the pool of assets and liabilities held within the Fund as a whole.
It is important to note that not all risks can be foreseen. It is therefore not possible for the Investment Manager to protect the value of the Fund’s investment from all risks. Investors should ensure they obtain appropriate professional advice regarding the suitability of an investment in the Fund having regard to their individual circumstances, including investment objectives, their level of borrowings, their financial situation and individual needs.
Neither the Trustee nor Investment Manager guarantees the repayment of investments or the performance of the Fund.
We strongly recommend that Investors obtain independent financial advice before investing in the Fund.