Some brokers specialize in organizing loan syndicates. This is where multiple investors team up to contribute the capital required to make up the principal of a single loan. This requires a fair amount of work on the part of the broker because instead of dealing with just one investor they need to deal with multiple investors. However this process has become much easier thanks to Omicron’s technology.
There are substantial benefits that accrue to investors from lending through a syndicate. Chief among these is diversification. As a general rule of thumb a solo investor can comfortably manage around 5 to 10 loans simultaneously. The main work involved is in inspecting properties to confirm their value before each loan begins. The standard loan term is 12 months, so on average the investor must inspect around 5 to 10 properties per year.
Diversifying a portfolio across 5 to 10 loans has the advantage that if one goes into default the investor’s income stream is only slightly reduced. By contrast if the portfolio is concentrated in only 1 or 2 loans a default will cause the investor financial hardship by halving or suspending their income until the loan is rectified, refinanced or the security sold.
The problem for small investors is that when they fractionalize their available funds into 5 to 10 parcels the amount is often too small for typical loan sizes. This is where lending through syndicates can solve the problem. The investors can still diversify their investments but do not need to fund individual loans in their entirety.
Another benefit of lending through a syndicate is that investors can inspect the security with their fellow investors and so gain each other’s perspective.
It is a condition of using the Omicron platform that all syndicates created using the platform must be documented using an Omicron-approved loan syndication deed. The hallmarks of such a deed are that:
- all commercial decisions are made by the investors and not by a manager;
- all decisions are made by email voting tallied by the syndicate’s solicitor;
- voting rights are proportionate to the amount of capital contributed.