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We recently sent investors in AlphaFlow Fund 1 their first quarterly update, sharing both information on the Fund and our commentary on the market. We wanted to highlight a number of key points for all of our members:

May 2016

We are pleased to let you know that AlphaFlow Fund 1, LP (“Fund 1”) is now fully invested and earning returns. The Fund 1 portfolio now contains 77 loans with a weighted average return of 10.0% (net of AlphaFlow’s 1% AUM fee) and a weighted average LTV of 68.6%, with all loans secured by first liens on the underlying properties. The Fund 1 portfolio is invested across 5 different platforms, with investments in 20 states across the country. As such, the Fund 1 portfolio is currently more diversified than 98.5% of AlphaFlow portfolios of users invested in the real estate crowdfunding industry.

Commentary
Platforms:
AlphaFlow Fund 1 ultimately invested across five real estate crowdfunding platforms after reviewing potential investments across eight different platforms. AlphaFlow may choose to work with additional platforms in the future, but at this point we found these five platforms to have the combination of underwriting processes, risk-adjusted returns, and procedures / performance in handling delinquencies / defaults that best fits our desired investment profile.

Platforms in AlphaFlow Fund 1:
Fund That Flip
LendingHome
Patch of Land
PeerStreet
Sharestates

Market
During the course of investing Fund 1, we experienced a shift in the riskiness of loans. We had the ability to invest Fund 1 much quicker if we simply looked for 10%+ investments with LTVs at 75% or below. However, we chose to forego many of these investment opportunities, as too often we were presented with inexperienced rehabbers (often doing their first project ever) undertaking significant construction plans in competitive markets.
Given the proliferation of platforms in the space, it’s not surprising that better borrowers who last year may have paid 11% or 12% interest for their loans are now paying 8% or 9%. Ultimately, today’s 12% borrower is rarely as creditworthy in our eyes as what we saw only one year ago, so we expect to see a measured increase in defaults across the industry.
Real estate prices are on an upswing, but there are questions as to its sustainability. One way to evaluate this risk is to measure the median home price in the U.S. vs median family income. As the chart below illustrates, we’re currently above the historical average (by ~1.5 standard deviations). Compared to the last bubble, we appear safe. In financial circles this situation is often referred to as an echo bubble. That is, a belief that we’re still in safe territory because of how much worse it was in 2006, and thus believing we’re still far from a bubble, even if we’re actually in a smaller one today.

How Prices Getting Carried Away

That said, interest rates today are significantly lower than during the last bubble (both in the U.S. and worldwide). As such, higher real estate prices still look more attractive than they did in the past. In addition, with interest rates so low around the world, we expect U.S. real estate prices to be supported by foreign capital looking for relatively safe asset-backed investment opportunities. Given all of these factors, we believe we are still 1.5-2.5 years away from the housing market peaking.
Moving forward into AlphaFlow Diversification Fund 2, LP, we plan to invest more capital in lower-rate loans that we are finding to be relatively attractive on a risk-adjusted basis. The supply of these is very strong, and they generally have borrowers with significantly more experience and allow us to invest more in what we find to be attractive geographies.

Portfolio
Our aggregate portfolio in AlphaFlow Fund 1 consists of 77 loans, all of which are secured by first liens.

Maturity Schedule

 

Delinquency Schedule

 

Below is the list of loans contained in AlphaFlow Fund 1.

Fund 1 Portfolio - 1

 

Fund 1 Portfolio - 2


This AlphaFlow Fund 1 Portfolio Fact Sheet and Market Analysis is a summary highlighting key points in the May 2016 AlphaFlow Fund 1 Quarterly Updated letter from AlphaFlow Fund 1, LLC (“Fund 1”) to its investors.
This document does not constitute an offer to sell or the solicitation of an offer to buy any security, product, service or fund. This document is for informational purposes only and is not intended to be, and must not be, taken as the basis for an investment decision. The information contained herein may not be used, reproduced or distributed to others, in whole or in part for any purpose without the prior written consent of AlphaFlow, Inc. (“AlphaFlow”). Neither AlphaFlow nor any of its affiliates is under any obligation to inform you if any of this information becomes inaccurate. No representations is made as to the accuracy and completeness of information obtained from third parties. This document is qualified in its entirety by the Offering Memorandum of AlphaFlow Diversification Fund 2, LLC (“Fund 2”), which should be carefully read prior to any investment in Fund 2, a successor fund to Fund 1.
This document has been prepared for prospective investors who are legally eligible and are suitable to invest in the type of investment described herein. Generally, prospective investors would include investors who are “accredited investors” under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and verified pursuant to rule 506(c) of Regulation D promulgated under the Securities Act. An investment in Fund 2 is suitable only for sophisticated investors and requires the financial ability and willingness to accept the high risks inherent in such an investment. It is the responsibility of any prospective investor to satisfy itself as to full compliance with applicable laws and regulations of any relevant jurisdiction. For a description of certain risk factors associated with an investment in Fund 2, please refer to the “Risk Factors and Conflicts of Interest” section of the Fund 2 Offering Memorandum.
Interests in Fund 2 have not been and will not be registered under the securities laws of any U.S. State or Non-U.S. Jurisdiction, and have not been recommended or approved by any U.S. federal or state or any non-U.S. securities commission or regulatory authority. Furthermore, the foregoing authorities have not passed upon the accuracy or determined the adequacy of the information contained herein.
Past performance is not indicative of future results. Any AlphaFlow Fund 1 investments listed herein are being provided for informational purposes only. Investments in real estate loans may result in the loss of principal. There can be no assurance that Fund 2 will be able to achieve the same portfolio composition and underlying loan terms as Fund 1.
These materials contain projections and other forward-looking statements. Any statements that are not historical facts are forward-looking statements that involve risks and are inherently uncertain. Sentences or phrases that use such words as “believe,” “anticipate,” “plan,” “may,” “hope,” “can,” “will,” “expect,” “should,” “goal,” “objective,” “projected” and similar expressions also identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Projections and other forward-looking statements, including statements regarding AlphaFlow’s assessment of the market, are by their nature uncertain insofar as actual realized returns or the projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, errors in strategy execution, acts of God and other developments. There can be no assurance that projections and other forward-looking information will not change based on subsequent developments and without further notice, and no assurance can be given as to outcome. You should not place undue reliance on forward-looking statements, including forecasts and projections, and statements regarding the assessment of the market, which speak only as of the date referenced herein.
These materials do not constitute legal, tax, financial or other advice. The legal, tax and other consequences of any proposed transaction may differ for each recipient as a result of, among other things, the particular financial situation of, and the laws and regulations applicable to, each recipient. You should consult your own legal counsel, accountants and other advisors regarding the information contained herein and the transactions described hereby.

photo-1453136390024-6574de0900b5 In early February we launched AlphaFlow Fund I live for investment, and it has been an incredibly exciting couple of weeks. We took just over 5 hours to cross $1 million in investments, and since then we’ve added family offices, hedge funds, and even a founder of one of the real estate crowdfunding platforms as investors in the fund. If you haven’t had a chance to take a look yet, the idea behind the Fund is pretty straightforward. In short, we’ll allocate your funds across 75-100 loans using multiple platforms to give you a level of diversification you can’t find anywhere else in real estate crowdfunding today. We do all of the work, and if we don’t hit the 9% target return rate, we won’t take a dime in fees. In preparing the Fund, we’ve met with platforms all across the country to speak to them about their underwriting process, lending guidelines, performance history, and how AlphaFlow Funds can grow with them in 2016. We were incredibly impressed by the fantastic teams at established platforms such as Patch of Land, LendingHome, and PeerStreet. We were similarly impressed by newer platforms like Fund That Flip, which are less than six months old but have tremendous executive teams with robust experience and thorough underwriting processes. For those of us who have been in real estate crowdfunding since its earliest days, it sometimes feels like we’ve grown up and made it into mainstream finance. When Patch of Land announces a $250 million forward flow agreement and Realty Mogul funds a $49 million real estate loan, you have to be incredibly impressed. These teams are both still hungry though, and know the industry has the potential to grow so much more and the best days are still ahead. While I’ve seen some sharp elbows in the industry, that’s fortunately been the exception. Leaders like AdaPia d’Errico have paved the way for collaborative meet-ups with multiple platforms, bringing investors tremendous value. The greatest competition for any single platform today isn’t any other platform, but rather, lack of awareness from investors who have no idea that real estate crowdfunding exists. We’re proud that AlphaFlow Fund I has over 50% of its investments from people who never actually invested on one of these platforms themselves. That means new investors for our partner platforms, so we all benefit. The winners in this space will be the ones who step back and realize that fighting for a bigger pie will be so much more impactful than simply competing for a bigger slice of what’s there today. We’re excited to work with as many of you as possible to help make that happen.

If you enjoyed this post, sharing it on Facebook, LinkedIn or Twitter with the links below is the highest form of flattery. Thank you!

About the author:

Ray Sturm, CEORay Sturm is a leading entrepreneur in financial technology, and is currently the CEO of AlphaFlow. Prior to launching AlphaFlow, he founded RealtyShares, one of the P2P industry’s top platforms for real estate investing. His early career in finance included investment banking at Bear Stearns, restructuring at Lazard Frères and private equity at CCMP Capital.

Ray has a BBA-Finance from the University of Notre Dame and a JD/MBA from the University of Chicago.

AlphaFlow Fund I

Yesterday we launched our first fund at AlphaFlow. It’s the industry’s first multi-platform real estate fund being offered to accredited investors, with a fairly straightforward mandate: give investors a way to invest in 1st lien residential debt opportunities across the industry with one single investment.

We didn’t follow the typical marketing playbook, in which we might trickle out a slew of “Something great is coming” emails and ads (I’ll take the blame, as I don’t have the marketing chops of some of the industry’s great talents like AdaPia d’Errico of Patch of Land). Awareness is important, of course, but so is making sure we’ve built something truly unique and powerful. Within five hours of launching, we had over $1 million of pledges from our users. That’s incredible! So how did we get here?

A number of users wrote in to say nice things and praise us for being innovative or exceptionally creative, but that’s simply not true. Honestly, the credit is all yours. Within a month of our September launch, three or four users reached out to ask if we could put together a debt fund. A few factors contributed to this:

  1. Debt is structured in a way that makes the goal about minimizing downside, given the upside (interest rate) is fixed. Diversification across platforms, geographies, sponsors and specific properties is tremendously impactful, as it helps to reduce correlation between investments.
  2. Picking deals one-by-one can be time consuming, and good debt deals often fill quickly.
  3. Less positively, the growth of deal flow has brought an increase in defaults on many platforms. Investors who experienced this pain wanted to smooth out the lumps.

The-Great-Divide-in-P2P-Lending-Institutional-Demand-and-the-Little-Guy-Percentage-of-Loans-Issued-to-InsititutionsAs we dug in, a fund made more and more sense. Most people still think of Lending Club and Prosper as a peer-to-peer lending platforms. The truth is that an increasingly small percentage of dollars come from retail investors though. Funds are driving the industry, and if that’s the inevitable path for real estate crowdfunding as well, why couldn’t we give you the power of a Wall Street hedge fund by creating one ourselves? Why couldn’t we give you effectively the same influence as a Park Ave fund? The same access to decision makers when things go wrong? The same great opportunities that are often filled offline?

Most platforms we contacted were extremely receptive. A fund meant another source of capital, and while some worried we’d cannibalize their users, most saw that we’d be bringing a wave of new investors to their platforms. In the struggle of two-sided marketplaces (see #4), assuring volume on one side of the seesaw is a huge advantage. I’m so excited to work with great platforms like Sharestates, LendingHome, and AssetAvenue, and start to build relationships with others like PeerStreet.

And so, we launched AlphaFlow Fund I. From day 1, helping investors has been our central mandate at AlphaFlow. The fund won’t invest in our own deals, so we have no conflict. My co-founder and I will be investing, so our money will be right there alongside yours. Investors will see the exact same dashboard we use to manage the fund, giving you complete transparency.

Our most popular ideas have come almost entirely from you – the investors. In the next two months, you’re going to see a wave of new additions to the site that improve your investing experience. Most of those started with user requests and ideas, and we listened. From reporting, to deal analytics, to actually investing across the industry, we’ll be rolling out huge improvements continuously. In the meantime, please keep sharing your ideas!

As always, you can reach me at Ray@alphaflow.com. If you enjoyed this post, sharing it on Facebook, LinkedIn or Twitter with the links below is the highest form of flattery. Thank you!

About the author:

Ray Sturm, CEORay Sturm is a leading entrepreneur in financial technology, and is currently the CEO of AlphaFlow. Prior to launching AlphaFlow, he founded RealtyShares, one of the P2P industry’s top platforms for real estate investing. His early career in finance included investment banking at Bear Stearns, restructuring at Lazard Frères and private equity at CCMP Capital.

Ray has a BBA-Finance from the University of Notre Dame and a JD/MBA from the University of Chicago.

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