August 8, 2024

Chicago Atlantic’s Four Cornerstones of Risk Mitigation

All alternative investment managers seek unique market opportunities poised to deliver strong returns. But what separates the average esoteric investment from the excellent? What enables a firm to maximize investor returns on hard-found opportunities?

The answer isn’t flashy: It’s risk mitigation.

The ability to analyze and plan for risk at a granular level, both while vetting businesses and managing active loans, can have a substantial influence on potential upside.

Chicago Atlantic’s four cornerstones of risk mitigation have contributed to the firm’s ability to produce consistent returns with zero loss of principal since inception. It’s an effective, holistic process summarized as follows:

1. Favorable Markets

We carefully choose the areas to deploy investor capital.

• The non-sponsored loan market offers less competition for lenders, and therefore better terms.
• We cater to successful businesses in esoteric industries. The unique nature of our chosen borrowers makes conventional banks’ “cookie cutter” underwriting difficult.
• Given the above two factors, our borrowers’ demand for capital far exceeds traditional supply.
• This supply imbalance means we can be selective with our choice of borrowers, leading to favorable credit quality.

2. Thorough Underwriting

Our intensive underwriting process is well adapted across a variety of industries.

• Business analysis includes:
  • Understanding each individual business’ operations, market, competitors, goals and place within its industry.
  • Applying scenario analysis to identify downside risks.
• Financial analysis helps gain a comprehensive data-driven perspective on the business including its rate of growth, historical trends and growth potential.
• Collateral analysis ensures:
  • High quality assets are present to back the loan.
  • Assessment of appropriate haircuts to market value.

3. Ample Collateral

Robust collateral packages help further mitigate risk. We seek to attach all available forms of collateral to our loans to enhance security.

• High tangible asset coverage increases the probability of recovery of capital in a downside scenario.
• Low advance to enterprise value helps to minimize capital at risk relative to enterprise value.
• Required cash reserves ensure borrowers maintain a minimum percentage of the loan value in cash at all times.

4. Meaningful Covenants

Through strong covenants, we maintain close relationships with our borrowing businesses throughout the life of the loan and are able to offer support or actions if further risk mitigation is warranted.

• Deposit account control agreements aid better cooperation in a downside scenario.
• Monthly reporting of financials ensures a higher frequency of reporting that helps identify and address any challenges as they arise.
• Enhanced KPIs and outlined consequences for violating covenants keep teams engaged and on track.

These cornerstones lay a strong foundation of mutual business knowledge and frequent, open communication, which ultimately helps avoid surprises and allows for many potential risks to be controlled before they escalate.

Our carefully chosen and researched market segments, our robust, repeatable and ongoing underwriting process, the collateral we use to secure each loan and our strong covenants help us monitor risk and protect assets on an ongoing basis.