In the current investment environment, where fixed income has become a source of principal risk with negligible returns, wealth managers are ever on the lookout for a solution for their affluent clientele.
Savile Finance Group offers an investment product that addresses the lack of return on fixed income with a direct lending asset-backed strategy designed to generate low volatility, noncorrelated, absolute returns over fluctuating market cycles.
Savile's domestic Opportunity Fund, which launched in October 2006, makes senior secured loans to small and midsize companies in the U.S. and select Latin American and Caribbean markets, mainly in the business services, consumer products, food and beverage, health care, manufacturing and telecommunications sectors.
Savile deployed the same strategy in the Bermuda-domiciled Savile Opportunity Fund International, rolled out in 2007.
The loans to companies are short term — typically less than a year — and asset based, backed primarily by account receivables and inventory that can be liquidated within one year. These companies tend to be off most banks' radar screens.
More than 90% of the loans are backed by account receivables with maturity of less than 120 days.
Investors in the domestic fund and its offshore counterpart are high-net-worth individuals and foundations based in the U.S. and Europe, according to Pablo Mariño, Savile's chief executive and chief investment officer.
Profitable, Low-Risk Investment
Private investment funds have been making asset-based loans to companies for some time, according to Inez Markovich, shareholder and chair of Anderson Kill's banking and lending practice.
"At present, there is a strong, growing demand for asset-based lending which is not being met by banks, presenting a real opportunity for investment funds," Markovich wrote in an email message.
Asset-based lending is attractive to investors and fund managers, she said, because it is "an area of investment where funds can and do charge higher returns than banks, realizing significant returns on their investments.
"If properly structured and monitored, asset-based loans can be profitable, fully collateralized and, in fact, low-risk investments."
But risks do exist, Markovich said. "A typical ABL borrower is not as financially strong as most commercial borrowers eligible for traditional bank financing."
Absent proper credit analysis and collateral monitoring, she said, the lender could be susceptible to borrower fraud.
"Investment in infrastructure and hiring experienced ABL professionals skilled in collateral monitoring, rigorous underwriting and due diligence, and portfolio management are critical to assuring the success of this strategy."
Credit Oriented
"The most important thing about our strategy is that it's heavily credit oriented," Mariño said in a recent interview.
Savile, which is headquartered in New York, is a relatively small organization, with 11 members. Of these, five or six are directly involved in credit and three are involved in operations, Mariño said.
"Those tend to be the most important areas of ongoing credit work and ongoing credit analysis and making sure we're able to get our work done."
Savile has developed a proprietary credit model that generates a rating for each facility, similar to models used by banks and rating agencies, but adapted for application to small-business lending. Mariño said that with Savile's assets under management at about $50 million, the typical loan size is between $1 million and $1.5 million, and can rise to $3 million.
Savile has even managed to make larger loans—in the $5 million to $7 million range—by working either with other firms similar to Savile or individuals who want to invest alongside it.
Savile Opportunity Fund has been profitable every year since its inception, with an average net annual return of 10% — including 2008, when it finished up 7%. Year to date through May, it is up 2.8%.
