Investor confidence is now key

Every lender will now be defending their risk framework to investors: what makes yours different?

While addressing the Bathla fallout is the obvious priority for impacted funds, the tough questions will be coming even for those that weren’t – investors will want to know: are you any better equipped to identify and manage the consequences of a distressed borrower/builder?

Repeating the standard assurances around LVRs, security, diversification and risk management will do little to appease investors – these are all established components of every lender’s framework. And despite these ‘best practice’ protections, they’re currently reading about significant investor losses and funds gating redemptions.

There are lots of funds competing for the same capital, and if your response on risk is identical to everyone else’s, why should investors choose your fund over your competition? We’re working with a growing group of lenders that have stopped viewing stronger financial governance purely through a deal execution lens, recognising that enhanced risk controls are a direct path to securing & retaining capital allocation.

Construction lending governance stops at progress certification

Investor capital is being advanced against certified progress on the assumption that it represents recoverable value.

But progress only equals recoverable value IF that progress has been paid for.

Construction lenders go to great lengths to ensure that they aren’t paying for work that hasn’t yet been performed; monthly drawdowns are contingent on independent verification by the QS that progress onsite supports what has been claimed. Logical.

What’s less logical is that many lenders stop there; they verify that value has been created, but not that the funds advanced against that value have actually been used to pay for it. This leaves investor capital exposed.

Where certified progress remains unpaid, the expected link between drawdown and remaining Cost to Complete – on which lender risk buffers rely – is broken The loan increases and reported Cost to Complete reduces accordingly, but the project’s actual remaining cash obligations remain unchanged.

The project still appears on budget but now carries a hidden funding gap. Risk forecasts are therefore incomplete (and, by extension, misleading), leaving lenders to make critical funding decisions without a clear view of their true exposure.

The monthly payment control that is setting funds apart

A borrower or builder becoming distressed is difficult for a lender to predict or prevent. Allowing that distress to compound into significant leakage of investor capital is very clearly a failure of the lender’s controls.

Assuming that deployed capital has translated into recoverable asset value is a gamble – and as recent events have shown, an expensive one when you’re wrong. An increasing number of lenders now independently verify that funds advanced against certified progress have reached the subcontractors and suppliers responsible for delivering it before advancing any more.

This simple monthly control allows the lender to identify early signs of capital ‘leakage’ into the builder’s working-capital position. If the payment position falls outside tolerance at any point, the lender can stop or condition further funding, containing the problem before it compounds into a larger capital exposure. Investor risk can be capped.

This mechanism is missing from most construction lending governance processes and can be the difference between one bad drawdown and several. It could also be the difference between securing future allocation – or not.

Adapt before the market demands it

The payment blind spot is a known, systemic weakness in construction lending governance.

A solution is available – one that enables certified progress to be reconciled against live payment data at each drawdown without materially changing existing processes or adding operational burden to the lender.

Every lender says it has robust risk controls; but only some have chosen to independently track investor capital down to those that have done the work, ensuring ‘value’ created is both real & recoverable. For these lenders, it’s not simply a risk control – it’s part of the investment proposition: a tangible demonstration that investor capital is being managed with a level of protection and oversight that exceeds what others can offer.

When investors start asking their various fund managers the hard questions, some will have a much better answer than others.

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