Welcome to the D3T Capital assessment. This exercise evaluates your understanding of asset-based finance, institutional LP correspondence, and credit market fundamentals. Please review the rules below and enter your credentials. The 45-minute countdown clock starts automatically once you click "Begin Assessment", at which point the questions will be displayed.
Instructions: Read the article below. Then write an executive note of no more than 120 words to a family office investor who has not read it.
For most of the last fifty years, if a business needed to borrow against something it owned, it went to a bank. A car dealer borrowed against the cars on its forecourt. A leasing company borrowed against the equipment it rented out. A consumer lender borrowed against the loans it had already made. The bank looked at the assets, lent a share of their value, and took security over them.
That model is changing. Since the financial crisis, rules on how much capital banks must hold have made this kind of lending more expensive for them. Many banks have kept their largest clients and stepped back from smaller or more specialised ones. Into that gap have come non-bank lenders: specialist funds that do the same work, often for the same borrowers, but are financed by investors rather than by deposits.
This is what the industry calls asset-based finance. The lender is not betting mainly on the borrower's profits. It is lending against a pool of assets that produce cash on their own: monthly lease payments, invoice settlements, loan repayments. If the borrower runs into trouble, the lender can look to those assets and the cash they generate.
For investors, the appeal has three parts. First, the income: these loans typically pay a higher rate of interest than listed bonds of a similar risk, because they are private and less easy to sell. Second, the structure: the assets are often held in a separate legal company, so they are protected if the borrower fails, and the lender is paid before anyone else. Third, the timing: many of these loans are short, repaying over one to three years as the underlying assets pay down, so the investor gets its money back sooner than from a long corporate loan.
None of this makes the lending safe. The quality of the assets matters more than anything. A pool of leases to strong businesses behaves very differently from a pool of loans to stretched consumers. The documents matter too: how the security is taken, who controls the cash, and what happens if the borrower breaks a promise. And because these loans are private, there is no market price to tell an investor what they are worth each day.
That is why the managers in this market spend most of their time on two things: checking the assets before they lend, and watching the cash after they have. Done well, the result is a steady income that does not depend on stock markets. Done badly, it is a loan against assets that were never worth what the paperwork said.
For a family office used to holding listed bonds and equities, asset-based finance is worth understanding. It is not a replacement for either. It is a different way of earning income, with its own risks, that banks used to keep for themselves.
Instructions: You work in our investor relations team. This email has just arrived. Draft the reply that you would send to the partner, Peter, for approval before it goes out. Aim for about 150 words.
Hello,
I read your piece on lending against equipment leases last week and shared it with our investment committee. We have been looking for income that is less tied to the bond market.
Could you send me your presentation and your track record? I would also like to know the minimum investment, and whether returns are guaranteed, as our committee meets on the 28th.
I am free next Tuesday afternoon or Thursday morning, Zurich time.
Best regards,
Daniel
In a private fund, who is a limited partner?
Interest rates rise sharply. What usually happens to the market price of an existing fixed-rate bond?
A company fails. Which lender is normally repaid first from the value of its assets?
A fund charges a performance fee only on returns above an 8% "hurdle". The fund returns 6% this year. What performance fee is paid?
What does a three-year lock-up mean for an investor in a fund?
Explain the difference between a family office and a fund of funds as investors.
What is asset-based finance? Give one example of an asset a lender might lend against.
Why does an investment firm carry out KYC and anti-money-laundering checks before accepting an investor?
Why might an investor prefer short-dated loans that repay as the underlying assets pay down? Give one benefit and one risk.
Some funds can only be marketed to "professional" investors. Why do you think regulators restrict who can be offered these funds, and how would that change the way you approach a new contact?
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