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What is underwriting and how can it provide certainty?

syndicates@quarrycapital.co.nz

Underwriting started over 325 years ago in London at Edward Lloyd’s coffee house when it became the place to obtain risk cover for ships and cargo.


From these humble beginnings grew Lloyds of London, the most famous of all insurance markets, but it also started a global underwriting industry.


Nowadays, underwriting is a service provided by a wide range of different types of organisations, such as banks, insurance firms, and investment and finance companies. 


What is underwriting?

With insurance, underwriting refers to “signing and accepting liability under a policy and therefore guaranteeing payment in case of loss or damage.”


For other financial risks it refers to:


"undertaking to finance or otherwise support, or guarantee, something such as a financial transaction or investment."

It’s clear that underwriting is all about providing certainty. 


Being able to, in some way, control what is ahead is important as it enables organisations to plan with the peace of mind that support is available if risks eventuate.


Where the benefit to the underwritten policy holder is certainty, for the Underwriter there’s an opportunity for commercial gain through providing a valued service. In general terms, underwriting means receiving a remuneration for the willingness to pay for, or incur, a potential contingent risk.


Underwriting in the finance and property investment industry

The principal of guaranteeing or underwriting risk is a fundamental principle for investment. 


For instance, when a property investment company identifies a high quality and commercially viable asset, it needs to act swiftly to secure it for its investor base. Timing is everything. The firm most likely to succeed with a purchase is the one that acts quickly and confidently – it’s essential to have your financial ducks in a row.


Facilitating the purchase process is where the Underwriter is used – in return for a fee, the Underwriter provides the initial capital to complete the purchase. This secures the asset so it can be offered to investors. 


The next stage involves investors securing interests in the property and this is when the Underwriter is repaid. The commercial opportunity for the Underwriter is to earn fees from this process, as well as having the opportunity to own a proportion of the investment itself, at a discount. 

This is a very common use of an Underwriter – another one is “pre-sales underwriting” where a property developer needs to demonstrate to a lender there is sufficient demand for a development and that there will be funds available at completion for repayment. 


In this case, the developer needs to show a certain proportion of the development is “pre-sold”. This provides certainty and cash-flow, and confidence about repayment. If a developer is not able to confirm this, an Underwriter can fill the gap by guaranteeing the purchase of any un-sold units.

 

Underwriting is a tool that brings benefits

For organisations in the finance sector, and their clients, underwriting is a way of delivering benefits ranging from peace of mind and confidence, to providing investment products to help secure people’s financial future.


While it usually operates behind the scenes it is important for investors to understand the supporting role it plays. Underwriting is one of the most tried and tested financial processes with a simple heritage that started with a problem needing a solution and now supports people, companies and industries across the world.



Underwriting is just as relevant today as it was in the swashbuckling era of the 17th Century. 

Wholesale Investment with Quarry Capital

by Simon Mullinger • 13 June 2023
Who can invest with Quarry? While some commercial property investment opportunities and funds are available to ‘retail’ investors (the general public), others may only be available to ‘wholesale’ investors. Quarry Capital’s investment opportunities are currently only available to ‘wholesale’ investors within the meaning of clauses 3(2), 3(3)(a) and 3(3)(b) of Schedule 1 of the Financial Markets Conduct Act 2013 (‘FMCA’). What is a wholesale investor? To meet the Financial Markets Authority – Te Mana Tātai Hokohoko (‘FMA’)’s definition of a ‘wholesale investor’, an investor must be at least one of the following: a Government agency, or; an ‘ investment business ’, or; must meet the ‘ investment activity ’ criteria, or; must be considered ‘ large ’, or; must be considered to be an ‘ eligible investor ’, or; invest at least $750,000 in a particular offer. Investment Business A person or entity meets the ‘ investment business ’ criteria if their primary business is investing in financial products, acting as a financial adviser, providing financial advice or trading in financial products on behalf of other persons. Investment Activity A person meets the ‘ investment activity ’ criteria if at least one of the following paragraphs apply: the person owns, or at any time during the 2-year period before the relevant time has owned, a portfolio of specified financial products of a value of at least $1 million (in aggregate): the person has, during the 2-year period before the relevant time, carried out 1 or more transactions to acquire specified financial products where the amount payable under those transactions (in aggregate) is at least $1 million and the other parties to the transactions are not associated persons: the person is an individual who has, within the last 10 years before the relevant time, been employed or engaged in an investment business and has, for at least 2 years during that 10-year period, participated to a material extent in the investment decisions made by the investment business. Large investor A person meets the ‘ large ’ investor criteria if at least one of the following paragraphs applies: as at the last day of each of the 2 most recently completed financial years of the person before the relevant time, the net assets of the person and the entities controlled by the person exceeded $5 million: in each of the 2 most recently completed financial years of the person before the relevant time, the total consolidated turnover of the person and the entities controlled by the person exceeded $5 million. Eligible investor A person meets the ‘ eligible investor ’ criteria if they self-certify that they have previous experience in acquiring or disposing of financial products (as defined under the FMCA) to be able to assess the: merits of the transaction; their information needs and the adequacy of the information provided; and they understand the consequences of certifying themselves to be an eligible investor. The certificate must set out the grounds for the investor certifying they have sufficient investment experience to assess the merits of a particular transaction, including value and risk. Where the stated grounds are not relevant to the certification, the certificate will not meet the FMCA requirements. In addition to the self-certification, the eligible investor must receive independent written confirmation of the above certification from either a financial adviser, a qualified statutory accountant or a lawyer after having them consider the investor’s grounds for their certificate and confirming that they: are satisfied that the investor has been sufficiently advised of the consequences of the certification; and have no reason to believe that the certification is incorrect or that further information or investigation is required. What does this mean in terms of overall risk and protection? It is important to note that wholesale offers are not regulated in the same way as offers to retail investors. The FMA advises that investing in a wholesale offer may mean you: do not receive a product disclosure statement (PDS) for the offer. The PDS sets out the key characteristics, risks and features of the investment, in clear, concise and effective language that is aimed at a prudent but non-expert investor. A PDS is not required for wholesale offers. are not dealing with a firm licensed by the FMA (this is particularly relevant for offers of managed investment products and derivatives). Licensing gives us the ability to monitor the activities of the firm. do not have access to a free independent dispute resolution scheme if things go wrong. do not receive information about the investment’s ongoing performance. won’t have a licensed supervisor (an entity that looks after the interests of investors) in the case of debt securities such as bonds and managed investment schemes. How we operate In 2017, Quarry Capital were granted a market service licence to operate as a manager of Managed Investment Schemes (MIS), excluding managed funds. The licence requires Quarry to adhere to strict FMA licence requirements and has given rise to the appointment of two independent, non-executive directors to the Quarry board. The processes and practices implemented have resulted in a very high standard of offer documentation in the form of a detailed Information Memorandum, as well as regular quarterly and annual financial reporting for each syndicate. In addition, Quarry hosts Annual General Meetings for each syndicate and aims to provide regular and transparent communication between management, the Quarry Board and the investors.  We encourage all of our investors to communicate with us via phone or email or come into the office for a chat to discuss their investment and future opportunities whenever they feel like doing so.

Successful fund-through solution for industrial development in Sawyers Bay

by Simon Mullinger • 12 June 2023
Against a backdrop of Covid-19 enforced lockdowns and supply-chain uncertainty, a 1.33 hectare site in Sawyers Bay, Dunedin, has transformed into a state of the art $16.75m industrial warehouse and office facility over the past 10 months. The Duke Street Limited Partnership, managed by Christchurch-based property syndicator, Quarry Capital Limited (‘Quarry’), is proud to hand the keys over to tenant Hilton Haulage (‘Hilton’) today as Hall Brothers and Thompson Construction and Engineering complete the final touches. The 7,700m2 development is the culmination of a long-term vision to support both Quarry and Hilton’s growth aspirations, continuing a strategic relationship between tenant and landlord. The purchase has been modelled on a flexible fund-through approach which has benefitted both parties. The $10.1m of equity raised by Quarry from its existing wholesale investor base as well as new wholesale investors (within the meaning of clauses 3(2), 3(3)(a) and 3(3)(b) of Schedule 1 of the Financial Markets Conduct Act 2013) has been used to purchase the land, demolish the existing building and contribute toward funding the construction. The tenant has handled the project management responsibilities including full compliance during construction. David Kitson, Managing Director of Quarry, saw the same potential in the site’s location due to the proximity to Port Otago and the two companies began collaborating on the project in 2020. David says:  “the experience and capability of the tenant has ensured the process has exceeded expectations from start to finish. Trust and communication have underpinned the project’s success and we are excited for Hilton to move in, as well as show our investors the impressive facility they have funded and now own”.  Wholesale investors in the Duke Street Limited Partnership invested funds in two equal instalments in March and in June and received a cash distribution for their investment between 1 April and 31 October and now receive a 7.0% pre-tax cash distribution from rental income which commenced 1 November. The property syndicate, the fifth managed by Quarry, attracted 63 investors from around the country. Hilton has taken a 12-year lease with 2 further rights of renewal. The fund-through model allows a developer to complete a project which is funded by the syndicate based on pre-agreed milestones. This model replaces the need for the developer to seek bank funding. The purchase price, which is paid through progress payments, is equivalent to the valuation as if complete. Any development profit (less funding costs) is retained by the developer, who also takes responsibility for the development risk. Quarry has the skills to design and deliver flexible fund-through solutions for experienced developers due to its ability to think outside the box, work collaboratively with various stakeholders and raise capital from qualified investors. Quarry can also work alongside potential tenants seeking a property partner.
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