Steve Wiltshire, chairman of HoldenCAPITAL Partners discusses developers seeking help with projects that are out of their financial or professional experience and capabilities.
At HoldenCAPITAL Partners (HCP) it is a common occurrence that a developer comes seeking help with a project that is a step too far in terms of either their financial or professional experience and capabilities and HCP is then faced with having to provide them with an appropriate sense of reality without completely disillusioning them.
This can be a challenging task.
"But, there is also something to be said for biting off more than you can chew and then “chewing like buggery” as my father often advised," Steve Wiltshire, chairman of HoldenCAPITAL told WILLIAMS MEDIA.
"His argument was that it was a good way to challenge yourself and forces you to learn to make decisions under pressure, provided the consequences are manageable.
"That said, in many of the real-life cases we are presented with at HCP, no amount of structuring or funding can overcome some of the basic shortcomings the client is facing."
Probably the most common example seen at HCP is the first time or the one-off developer who has stumbled across what looks like a viable opportunity, but they lack a number of key skills or the financial strength to support the required funding.
The issue for them is that it’s more about what they don’t know than what they do, but they don’t always recognise this.
"As we have elaborated on previously, the art of development can be both simple and complex.
"While for the most part it is procedurally quite simple i.e. if there is demand for the end product, it meets the appropriate approval requirements and it can be delivered for a cost that ensures an appropriate return on the cost, then it should be fundable.
"But the complexity is in ensuring each of those steps can be delivered within the required parameters/budgets.
"With a multitude of stakeholders in each of the steps involved, a developer needs to either have a clear understanding and ability to control them or engage suitably experienced and incentivised professionals to assist them," Mr Wiltshire continued.
"I say “incentivised” because if they are delivering a component or outcome critical to the project, they need to be accountable for that result and a lack of appropriate incentive can be costly for the developer.
"Our team, drawing on their own experience and continuous exposure to current projects, are constantly required to review, challenge and in some cases encourage the developer to revisit their strategy as a result of them identifying shortcomings in the underlying assumptions and or process."
Mr Wiltshire said some developers will appreciate the feedback and act accordingly while others, usually through a lack of appreciation of the risks involved, will look to find someone else to give them what they think they are entitled to.
"On the other hand, the developers who can recognise and understand their own short comings, surround themselves with skilled consultants, and are then prepared to listen and adapt their strategy by utilising the collective skill sets of their team, are more likely to succeed and potentially grow their business.
"In the past we have talked about the problems associated with developers who use ‘fools, friends and family’ to supplement their capital shortcomings in an attempt to make a project happen, only to put everyone’s investment at risk because the fundamental risk profile of the transaction is inappropriate.
"When is comes down to it, using someone else’s capital to leverage a deal makes sense provided all those concerned have a clear understanding of the risks involved and their role in the process.
"HCP applies these principals when assessing whether or not to present an investment opportunity to our investor base."
Mr Wiltshire said a key requirement is for HCP's risk team to be able to satisfy themselves that the developer has the capacity either directly or through appropriate third parties to manage and/or control all those elements of the transaction that are required to ensure that the investment by both the investors and themselves is sound, based on all available material.
"Our investor base has a very high proportion of developers and industry consultants who have an appreciation of what is required to ensure a successful project.
"In fact many of them take the view that it is a sound risk strategy to invest in other developers projects which have been well “de-risked” as a result of income pre-commitments, pre-sales or similar enhancements.
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"Similarly, many lenders see the involvement of HCP as a credit enhancement based on both its capital contribution but also the preparedness of experienced investors to back the transition.
"So while it can be daunting to bite off more than you can chew, if you work smart and ensure that you recruit the right player to invest in the journey, it can ultimately be a rewarding investment both financially and in terms of the knowledge and experience gained," Mr Wiltshire finished.