Editor’s note: HighGainBlog recently learned of an interesting financial services startup based in Louisville, Kentucky.
IKM Capital Management, LLC is an independent investment advisory firm, and was established to manage various fund offerings. IKM specializes in nontraditional and alternative assets.
IKM focuses on sectors in which its managers have demonstrated expertise. Specifically, investments that have defined cash-flow components, which require sophisticated quantitative analysis.
The core idea is to leverage distressed real estate and generate an above-average return. HighGainBlog spoke with the company’s founder, Michael Shackelford on March 19, 2013. The full text of our interview with him appears below.
Michael, thanks for taking the time to talk with HighGainBlog?
Delighted to do it.
Would you give me a snapshot of the new business you have started?
Sure, I have a background in managing portfolios of mortgage securities and in mortgage trading. I spent most of my career working at large institutional investment firms managing mortgage securities. I founded IKM Capital Management in 2008 to take advantage of the dislocation in the mortgage market by investing in a unique part of the real estate market that is lower risk versus mortgage liens, and yet yields a higher returns.
You mentioned a new approach to low risk real estate related investments. What’s your approach?
We purchase tax lien certificates. Which are liens that represent a senior secured interest in real property related to delinquent property taxes. We created a fund that holds a portfolio of tax lien certificates from several states around the country.
Why does your type of investment provide a good upside and low risk?
Since the tax liens are senior to all other liens, including first mortgages, the credit risk is very low. Further, we receive a high interest rate (our portfolio weighted average interest rate is over 9.0%). The interest rate is high, because the rate is a penalty mandated by state law to induce the property owner to pay their delinquent property bill. Also, since we are the senior lien on the property we tend to get paid fairly quickly; most tax liens are paid-off by the property owner between 6 and 18 months from purchase. However, if we do foreclose, either the property owner or mortgage company will pay us or risk losing the property to our senior lien.
What is the size of the pool of liens which you tap?
In any given year anywhere from $500 million to $1 billion in tax liens sold throughout the country. There are many investors in tax liens, from small individual investors buying for themselves to large regional and national banks and insurance companies buying for their own accounts. There are only a few funds created by advisers like IKM Capital Management that buy on behalf of investors.
What is the minimum investment required?
We accept a minimum of $50,000. We only accept accredited investors and institutional investors for regulatory reasons. Our average investor is a professional (doctors, attorneys, CPAs and business owners). They have a net worth that qualifies them as an accredited investor by SEC rule. We are also working with family offices and trust companies on the institutional side.
Are you national? Regional? Local?
We buy liens in eight states, and we are looking to move into another three states in the next couple of years. Our current states are Arizona, Colorado, Florida, Illinois, Indiana, Kentucky, Maryland and Nebraska. These states have made it the easiest to invest and are largely the most investor friendly.
What are the considerations a potential investor will want to weigh?
One downside is that these liens are not very liquid assets. Therefore an investor cannot trade out of the fund everyday like they could with a mutual fund. Instead, we offer sixty day liquidity, which is fairly liberal given the illiquidity of the investment. The other downside would occur if we owned a lien on a worthless piece of property, which is why we spend a significant amount of time reviewing properties to ensure the value well exceeds the value of the liens we are buying. Our due diligence is designed specifically to reduce the probability of credit loss. Though no process is perfect, we have great confidence in ours.
What are the historical returns you have delivered?
We have delivered net returns in excess of 8.0% to investors each of the four years the fund have been open. In fact, for three of the four years we have delivered a net return greater than 9.0%. This compares very favorably against the yield a person could earn from a bond or the net return on a bond fund over the same period. In other words, this is a great replacement for some of the fixed income in any portfolio.
What Federal and state oversight of liens is in place?
The tax lien certificates and their sale are governed by state law. The liens are sold by municipal governments, typically the county, under the rules and regulations set by state law. Most states have allowed their counties to sell tax liens for decades, so the statutes and case law surrounding the sale of tax liens is well established.
How long does it take for an investor to withdraw some or all of his investment or gains?
We are currently offering investors sixty day liquidity from the beginning. So there is no initial lock-up. However, we discourage investors who feel they may need their money sooner than six months.
Is a quarterly pay out plan available?
We offer investors the option to reinvest gains or to receive quarterly withdrawals of gains. It is solely the option of the investor. We also have a few investors who have expressed interest in having a once yearly payout of estimated tax payment in February, which we can also do.
What is the outlook for this type of investment opportunity?
Though there is no guarantee, I am targeting an 8.0% net to investors this year. As I mentioned earlier our portfolio interest rate is around 9.0%, less our management fee and fund expenses that would leave about 8.0% to investors. We have seen our net returns fall from close to 11% the first year to around 9% last year. So there has been some yield compression as new investors enter the space, however I think there is still plenty of yield for investors. This asset class should continue to outpace most fixed income; investment grade bonds, Ginnie Mae mortgages, high yield debt and emerging market bonds.
How does a reader get more information about your company?
Our website is located at: www.ikmcapital.com
This new financial opportunity seems to warrant a closer look by investors eager to diversify their portfolio.
Stephen E Arnold, March 19, 2013