Matching motivation spells success for Cannect investors and borrowers
“We think about those personal connections every time we approve a loan and, to date, we have not lost a dollar of investor capital.”
Over the past eight years, Toronto-based mortgage fund Cannect has managed to deliver a rate of return of more than eight per cent annually without ever incurring a loss on one of its loans.
How? Founder and CEO Marcus Tzaferis attributes the firm’s success to what he calls motivational alignment between all stakeholders. Finding the right borrowers has set Cannect apart from its peers, and resulted in its investors seeing incredible risk-weighted returns since it began lending in 2013.
Tzaferis points to several factors that have built trust among borrowers and investors: salaried employees who are all stakeholders in the business, the elimination of third-party intermediaries such as brokers, and the constant focus on a positive exit for the borrower.
“The goal is for borrowers to leave us better than when they arrived,” explains Tzaferis.
While most origination systems pay commissions tied to the profitability of the loans they are generating, Cannect employees are salaried and all invest in the fund. Though the old model of third-party originators is quick, Tzaferis points out it’s unsustainable in the long-term.
“We have stripped away individual incentives so employees can instead focus on finding the best borrowers. When we have the right borrowers our business strengthens alongside the balance sheets of those we are helping,” he says. “We focus on quality borrowers with a defined exit strategy. This helps ensure a stable portfolio for our investors and results in more focused and tailored solutions for our borrowers.”
Communicating directly with both investors and borrowers eliminates all third-party fees and means Cannect’s returns go from its borrowers directly to the investors. But Tzaferis adds it also results in a stronger sense of obligation. “We think about those personal connections every time we approve a loan and, to date, we have not lost a dollar of investor capital.”
The litmus test for lending at Cannect is whether the borrower can ultimately be returned to lower cost capital. And Tzaferis reports they’re successful at doing so, with 70 per cent of borrowers refinancing to lower cost capital within 12 months. Once back on a sound footing, many former borrowers have returned to become investors in Cannect’s fund.
“We want to fix a problem, whether it is bad credit, lack of funds due to job loss or illness, or financial upheaval from changing personal circumstances,” Tzaferis says.
The company’s technology advantage allows Cannect to screen, price, and approve loan applications in seconds. For those that are not accepted into its own portfolio, the company acts as an origination platform for other mortgage suppliers.
Through its differentiated business model, Tzaferis believes Cannect has brought a new elegance to the business of lending.
“Motivations are so often based solely on returns. We look out for the borrower and make them stronger, which in turn helps our investors, and that makes us all stronger.”