Issue No. 39

Some of the most important insights I’ve had about a company have come after I thought I understood it well enough. The answer seemed sufficient, but one more question identified a new risk.

It’s also telling when you reach the point where the counterparty no longer has a good answer. In any deal, there will be unknowns and some amount of imperfect information you have to accept. Good diligence is partly about understanding exactly where those unknowns begin.

James Clear writes about using identity to drive habit change in his book Atomic Habits. One of the identities we hold at Pier is that we are ever curious knowledge seekers. Asking one more question is one way we put that into practice.

Why did that number change? What assumptions are we relying on? Have we tested whether those assumptions are actually true?

When you’ve done enough similar deals, you naturally start to anticipate how things work. That instinct is valuable, but it can also cause you to stop asking questions too soon.

Stay vigilant, friends!

— Jillian

‍

Revolving credit facilities are often viewed as the more flexible option, but that flexibility can carry hidden costs. Here, I compare a revolver to a draw facility, where borrowers can draw down from the line, but re-use that capital while the principal stays outstanding.

First, many revolvers charge a fee each time capital is drawn. If a facility is drawn, repaid, and turned over three times, the borrower may effectively pay three times the origination fee it would have paid on a comparable draw facility.

Second, revolvers commonly charge unused-line fees. These facilities are sized for peak needs. So, borrowers may spend much of the facility’s life paying for capital they are not using. Pier charges no unused-line fees.

Finally, revolvers create recurring operational work: draw requests, repayments, availability calculations, fee tracking, waterfalls, reporting, and reconciliations. In every instance we have seen, a draw facility has been simpler and more efficient for both borrower and lender.

A revolver may be appropriate when liquidity needs fluctuate sharply. But for predictable asset funding, a draw facility can provide the necessary flexibility with lower fees and significantly less administrative burden.

Tooting our own horn here, I know but that's why our flagship product is a draw facility with no draw fee, no unused-line fees, and a simple operational footprint.

- Conor

‍