Every investor should have the same access to private market investments — on the same terms, at the same level of quality, and via the same structures enjoyed by institutional investors and the wealthy. We started and built Groundfloor upon the important idea that the opportunity to build wealth in alternatives cannot and will not be closed off to the 95%. We’ve come a long way toward making that idealistic vision into a market reality for hundreds of millions of individual investors.
Today, we’re announcing a significant step toward achieving our mission at the next level of scale: The successful issuance of a $75 million bond offering to securitize our residential transition loans (RTLs).
Read on to learn more about securitization, what it means for you, and why it’s an important development for Groundfloor.
About Securitizations
Investopedia defines a securitization as “when an issuer designs a marketable financial instrument by merging financial assets, normally mortgage loans and consumer or commercial debt.” It’s a packaging up of assets into a bond that fixed income investors can purchase and trade.
Typical fixed income investors would include banks, credit unions, pension funds, and insurance companies among others. Securitizations offer these investors an efficient way to deploy very large amounts of capital on behalf of their depositors, pensioners, and insureds. Qualifying as an issuer of a securitization requires a verifiable track record, meeting high standards of disclosure, extensive verification of collateral, and intensive ongoing monitoring.
Securitizations allow flexible structuring to help purchasers achieve varying target return requirements and risk tolerance. For example, an insurance company may trade off yield and invest in lower risk tranches of a bond offering in order to ensure repayment of its interest and full principal in a timely manner. Meanwhile, a pension fund may choose a different tranche of the same offering to earn a higher yield and trade off its willingness to accept a greater risk of loss or delay in repayment.
Why This Is Good For Groundfloor Investors
This isn’t the first foray Groundfloor has made into serving institutional investors alongside our individual retail clients, but it is our best yet. In 2016, we secured our first institutional credit line to facilitate origination activity, and we started experimenting with “forward flow” of whole loans at low scale. Then in 2019, we became one of the first originators to execute an RTL trade with the world’s largest real estate private equity firm, Blackstone, before they paused during the pandemic and ultimately acquired their own originator. In 2022, we also expanded on a program for institutional investors to purchase fractional shares alongside our retail investors.
These initial experiments with institutional capital never amounted to more than 5–10% of Groundfloor’s volume. Each one ultimately revealed itself as either incompatible with our mission, or compatible but just not scalable. By contrast, securitization uniquely opens broader pools of flexible, long-term capital to fund sustained growth in our origination volume for many years to come. We continued to iterate and have now leveled up to an approach that checks all our boxes.
We’ve continued pursuing different means of bringing institutional capital on board because, if done with care, it can be of substantial benefit to individual retail investors. This first securitization and those that will follow bring three benefits to Groundfloor investors in particular:
- Quality, breadth, and value: We’ve always aimed to prove that we’re bringing institutional quality investments to retail investors. The loans we’re securitizing were underwritten to the same standard, using the same criteria as the loans we offer as LROs and via the Flywheel Portfolio. They will be serviced in the same manner. Investors can take confidence in that, while also enjoying the greater breadth and depth of loans we’ll be able to originate for investment on our platform. Comparing current retail investor returns on loans of the same vintage (i.e. not compared to older vintages originated in a lower rate environment) to the 7.6% on the institutional piece of the bond quantifies the value of cutting out the middlemen and investing direct.
- New, higher yielding investments: This securitization and those to follow will introduce new opportunities to earn even higher returns on our platform. We’re exploring a variety of ways for investors to participate in the equity tranche of our first bond. This unique opportunity could eventually enhance the yields available via the Flywheel Portfolio as well as in other offerings we’re planning for 2025.
- Liquidity: As investors know from our communications over the past week, for the first time in our history Groundfloor is currently offering liquidity on the pool of LROs that remain outstanding beyond three years. Our bond offerings provide new working capital that can be deployed to provide investors with the option of exiting from such investments as we continue managing them to the best possible outcome.
Why This Is Important For Groundfloor
Loan originators who qualify for securitization get access to large amounts of capital at the lowest rates. The structure is more or less “permanent” and eliminates the risk of buyers backing away or changing their criteria.
For Groundfloor, securitization is a new vector for profitable company growth. It opens up an enormous new segment of investors who haven’t been able to invest with us before. With significantly more lending capital to deploy at lower cost, we’ll be better able to compete for borrowers and to serve them better. We’ll be able to expand loan sizes, recalibrate concentration limits, and go deeper in target local markets. Our role as servicer continues, so nothing changes in how the borrower relationship works day-to-day. We’re also preparing to enter new markets, directly and in partnership with local originators who want to carry our credit products.
The Decade Ahead
A cohort of “marketplace lending” and “real estate crowdfunding” platforms emerged and ultimately faded over the years since we started Groundfloor in 2013. Those particular business models and the manner in which they were financed suffered from a number of defects that ultimately proved to be their undoing. Meanwhile, our unique approach prevailed, persisted, and performed through a range of economic headwinds, most recently a steep climb in interest rates.
Groundfloor has earned its stripes and is intent on using them. We’re readying ourselves for another decade of growth, development, and pushing boundaries. The company has built a highly profitable, steady lending business that continues to fund the development and growth of our investor platform. Becoming a repeat issuer of institutional bonds ensures our ability to continue and expand that for many years to come.
As we’ve said frequently since our founding, capital markets function more efficiently when retail and institutional investors both participate. Imagine a public stock market that lacked the influence and impact of one versus the other, or one that functioned in fundamentally different ways that disadvantaged an entire class of investors. We’re here to help ensure that the value created in public markets for individual investors starting with Charles Schwab and Vanguard in the 1970s happens in private markets too.
That said, a range of exciting and challenging work within private market alternatives still remains to bring these forces to bear for the benefit of individual investors and the users of their capital. As we celebrate the achievement of our first securitization, we appreciate all of our customers whose trust has led us to this next leg of the company’s development, and the thousands of shareholders who’ve helped to finance it.