Henry Ford once said you can’t build a reputation on what you are going to do. But action by itself is not sufficient to acquire a reputation: delivering results with consistency is the critical element in earning and preserving trust over time. In the investments industry, these two inputs drive the success of an emerging manager or differentiated investment strategy.
One year ago, the Build Secured Income Fund I (the “Fund”) opened to fee-paying clients. Over this time the Fund delivered an 11.27% net return on invested capital1, paid distributions monthly2, used zero leverage, and experienced no loan losses. Total assets of the Fund grew 75%. As is the case with most private market investments, the Fund’s holdings typically do not offer secondary market pricing and liquidity; however, the secured loans owned by the Fund are backed by an undivided interest in one of the most globally liquid and continuously marked-to-market assets in today’s financial markets. At the end of June, the average credit holding owned by the Fund carried a loan-to-value (“LTV”) ratio of 28.54%. We believe this conservative underwriting to be a key element of the Fund’s performance.
The Fund’s avoidance of debt places it in the minority among its peers in the private credit category: only 36% of investment managers reported using no financial leverage in their private credit funds per a 2023 report published by the Alternative Credit Council3. This decision has resulted in a lower return on equity (ROE) than would have been achievable if borrowing were utilized, but it helps insulate the Fund from potential problems and financing risk in today’s credit market environment.
As early developers in an emerging niche in credit markets, the Fund’s investment strategy stands out among its peers8: it invests its capital in U.S. dollar-denominated commercial loans secured by a borrower’s bitcoin. The Fund owns loans that we believe are distinctly positioned for this new era: limited duration (average 11 months), secured by a liquid and increasingly desired real asset, and originated at a conservative loan-to-value (LTV) ratio. Like many private credit funds, the Fund invests in secured loans made to small- and medium-sized businesses that typically fall below the threshold for public debt markets or loan syndication. However, in contrast to the typical assets used to secure loans in the private credit industry (such as real estate, working capital, or property, plant, and equipment), the Fund distinctly prefers Bitcoin as a backstop in the asset-based lending model.
While still developing its understanding with institutional investment professionals, we believe Bitcoin’s properties as a collateral stand out favorably against other assets: its holistic profile raises the bar with its degree of liquidity, fungibility, segmentation, transparency, and controllership. It is near continuously marked-to-market, non-depreciable, and can be owned on a balance sheet with a de minimis and fixed cost of carry. In our evaluation, only one other asset competes well across this list of features: the United States Treasury Bill. In a head-to-head comparison over recent years, Bitcoin has demonstrated its ability to preserve real purchasing power9 through time (a potential benefit to the borrower) with the drawback of its comparably extreme price volatility (a significant deterrent for the lender). We expect these core trends to feature prominently as Bitcoin’s adoption in credit markets continues to evolve in the years to come.
While we hold the opinion that this market offers a significant opportunity, it would be an understatement to say that several competitors who have tried their hand in this space have fared poorly. Our Fund differentiates itself from other borrow-and-lend products in the “crypto” or “blockchain” space in its structure, operations, and risk management. First, the Fund limits its investment to loans made to commercial borrowers in the United States who meet know your customer (KYC) and anti-money laundering (AML) standards established by state and federal regulators. This includes registration and sharing of a valid federal tax identification number with the U.S. Treasury, thus the U.S. dollars supporting the transactions involved in the loan operate exclusively within state or federally regulated banks and financial institutions within the domestic U.S. banking and financial system (the “onshore” dollar rails). This stands in stark contrast to a significant share of lending and transaction volume in this space which utilizes U.S. dollar “stablecoins” which tend to operate unregulated and outside the jurisdiction of U.S. financial regulators (“offshore”). Finally, the loans in the Fund legally hold an undivided interest in segmented, on-chain Bitcoin in a manner that credibly demonstrates to the involved parties in the lending arrangement that rehypothecation has not taken place.
Reserving the best for last, it is our pleasure to thank our key partners in this endeavor at Unchained Inc. While the Fund celebrates its one-year anniversary, the team at Unchained has been working at this significantly longer. Founded in 2016 out of Austin, Texas, the team has done a fantastic job building out the Bitcoin custody and operational infrastructure that make the Fund’s achievements detailed in this letter possible. Their collaborative custody model for Bitcoin sets an industry standard for alignment with their clients’ interests as the ultimate owners of their bitcoin, and the rest of their product lineup follows a similar DNA for simplicity, security, and robustness. Already an outstanding product platform in the Bitcoin space, you should expect to hear more positive news out of this team in the years ahead as developments in the Bitcoin ecosystem continue. Our firm, the Fund, and its clients have all benefited tremendously from our relationship with Unchained, and we look forward to continuing the journey ahead with Joe Kelly, Dhruv Bansal, and the talented team they have put together.
In the year ahead, we optimistically look forward to the Fund’s continued benefit from its established leadership on the secular underlying trends we have described in this letter. We see immense and promising potential for Bitcoin’s role in future developments within global credit markets in the years ahead, and proudly stand behind the reputation the Fund has developed alongside our clients and its partners.
Sincerely,
Highlights
%
inception-to-date total net return1,4,5
%
one-year growth in total assets
%
leverage6
%
average loan-to-value7
Matt Dines
Co-Founder & Chief Investment Officer
1 Past performance of the Fund, Build, or its personnel is not indicative of future Fund results.
2 Distributions are subject to manager discretion. There is no guarantee of any distributions, and the composition of the distributions, if any, may consist of non-cash items, such as return of capital or borrowings.
3 Alternative Credit Council. (December 20, 2023). Financing the Economy 2023. https://www.ssctech.com/resources/form/financing-the-economy-2023
4 Since inception of fee-paying LPs (July 2023) through June 2024. Returns greater than one year, since inception, or representing FY values are annualized. Any return information provided in this Website has not been audited and represents the Fund’s performance during the periods noted herein, net of related fees and expenses. A full discussion of related fees and expenses can be found in the Memorandum. The Fund’s future performance may differ materially from its past performance and be subject to various risks noted below and in the Memorandum.
5 Calculated using fee-paying LP capital only.
6 Leverage is calculated using the average daily borrowings during the month divided by average net assets.
7 Average Loan-to-Value represents the net ratio of loan-to-value for each loan, weighted based on the fair value of total applicable private debt investments. Loan-to-value is calculated as the current total net debt through each loan divided by the total value of the loan collateral as of the period noted.
8 Noting with a bit of humor that the investment industry has somewhat uncreatively named this group the “alternatives” category.
9 Per total return performance of the relevant indices for each asset benchmarked against the Consumer Price Index (“CPI”) published by the US Bureau of Labor Statistics, March 31, 2020, through June 30, 2024: XBTUSD (Bloomberg Spot Bitcoin Exchange Rate) +687% real return (+63.5% annualizes) versus Bloomberg US Treasury Total Return Index (LUATTRUU) -27% real return (-7.3% annualized). Indexes are unmanaged, reflect reinvestment of income and dividends, do not incur management fees, costs, and expenses and cannot be invested in directly.
