One side holds duration it cannot use. The other needs duration it cannot obtain. In this region, they have never been properly introduced.

The Endurance Capital Series, Part Three  ·  The Dawgen Endurance Capital Framework™

 

A pension fund paying benefits in 2050 has an obligation twenty-five years long. To meet it without taking a view on interest rates every few years, it needs assets that mature in 2050 — or at least assets long enough that the gap is manageable.

In this region, it largely cannot find them. The local-currency options run heavily to government paper and listed equity. Equity has no maturity at all. Government paper has a maturity, but the fund does not control the supply of it, the tenors on offer are shorter than the liabilities they are meant to match, and every roll carries reinvestment risk at whatever rate the market happens to be offering that quarter.

So the fund holds shorter assets than its liabilities and manages the difference. That is a real cost, borne quietly, and it is not the fund’s fault. There is very little else to buy.

Now look at the other side of the room

 

A growing enterprise has just built a warehouse that will produce economic value for thirty years. It financed that warehouse over seven, because seven years is what a deposit-funded commercial bank can prudently write, and because the only security it could offer was titled property the bank already understood.

The company is over-supplied with short money and starved of long money. It carries refinancing risk that arrives before the growth it funded has matured, and a repayment schedule calibrated to somebody else’s balance sheet.

These are the same problem viewed from opposite ends. One party has duration it cannot use. The other needs duration it cannot obtain. Neither shortage is caused by a lack of capital, and neither is solved by more of it.

What is missing is an instrument, and a discipline rigorous enough that a trustee board can hold it.

What is actually being proposed

 

Before going further it is worth being concrete about the instrument, because “long-dated private credit” covers a great many things a trustee would rightly decline.

Endurance Capital™ is long-dated capital, secured on a qualifying appreciating asset, serviced by interest alone through a defined growth phase, sized so that interest remains covered after a fifty per cent decline in earnings, and conditioned on a binding compact governing what leaves the business for the life of the instrument.

Five features distinguish it from what the regional market currently produces. It is duration-matched, with the tenor set against the economic life of the securing asset rather than the funding book of the provider. It is service-light by design, with principal amortisation deferred to the final third. It is sized against the downside rather than the base case. Its capacity is dual-constrained — the lesser of what earnings can service and what the asset can secure, never the higher and never an average. And it is governed, with a covenant architecture aimed at cash discipline rather than at balance sheet ratios that tighten precisely when a company can least afford it.

The sizing deserves particular attention, because it is what converts a proposition into an underwritable position. The signature test is simple: reduce sustainable earnings by fifty per cent and ask whether interest is still covered. The instrument is sized so the answer is yes, with a margin that varies by the maturity of the business.

Every coverage requirement in the framework follows arithmetically from that one test. If a company must still cover interest 1.5 times after a halving, it must cover it 3.0 times today. If a younger company must cover 2.0 times after a halving — and it must, because its earnings are more volatile and its management thinner — it must cover 4.0 times today. The base ratio is the stressed floor restated, not a convention borrowed from bank practice, which means every number in the term sheet can be explained to a board in a single sentence.

Notice what this does to the gradient across the five tenor bands. The younger and more fragile the company, the longer the interest-only runway, the lower the loan-to-value ratio, and the higher the coverage requirement. The structure compensates for fragility with headroom rather than with price — the opposite of what the market currently does to early-stage borrowers, which is to shorten their tenor and raise their rate, compounding fragility at exactly the moment it should be cushioned.

Two further stresses sit alongside the earnings test. A rate stress is added to the coupon at the point of sizing — 300 basis points where the coupon floats or refixes, 100 where it is fixed for the full term — so the structure is built to absorb a rate cycle rather than to hope one does not occur. And a value stress reduces the assessed asset value by 25 per cent, with the resulting loan-to-value ratio required to stay within the band cap. That last stress is why advance rates under this framework sit well below market convention: 60 per cent for titled income-capable commercial property, 50 for owner-occupied industrial premises, 35 for agricultural and development land.

Why the introduction has never been made

It is worth being precise about the obstacle, because it is not the one usually cited.

The obstacle is not appetite. Long-dated, secured, income-producing local-currency paper at a real yield is exactly what a fund with decade-length liabilities wants to own. Nor is it capital — the region’s institutional pools are substantial and growing.

The obstacle is that a trustee board cannot responsibly underwrite a twenty-year exposure to an owner-managed private company on the information and the covenants ordinarily available. And it is right not to. Ask what the trustee is actually being offered in a typical regional private placement: a coupon, a charge over property valued at some point in the past, a covenant package borrowed from bank practice, and an issuer whose distribution policy is entirely at the discretion of the family that owns it.

Faced with that, a prudent trustee either declines or prices the uncertainty into a coupon so high that the issuer walks away. Both outcomes are rational. Both leave the mismatch in place.

What would have to be true

 

Turn the question around and ask what a trustee board would need before it could say yes, and defend the decision in five years to a member, a regulator or a successor board. Six things.

None of these is exotic, and none of them requires new law, a new institution or a subsidy. They are structuring choices. What has been missing is not the possibility but the discipline — a specified method that produces the same six things every time, so that a trustee is assessing a company rather than assessing a bespoke document.

The security position that improves

 

One of the six deserves separate treatment, because it is the feature most likely to strike a trustee as too good to be true, and it is the easiest to verify.

Where principal stays flat through an interest-only phase and the securing asset appreciates in nominal terms, the loan-to-value ratio falls every year without the company doing anything except surviving. At a modest four per cent nominal appreciation rate, an exposure opening at 47.5 per cent loan-to-value is at 42 per cent by year three, 37 per cent by year six, 33 per cent by year nine, and under 30 per cent by year twelve.

The company has repaid nothing. The trustee’s security position has improved by eighteen percentage points anyway. The risk falls in exactly the years the borrower’s capacity rises, and the refinancing that eventually retires the instrument happens at a loan-to-value ratio that is among the most routine in any credit market.

The assumption that carries this, and how it is tested Everything above rests on the asset appreciating in nominal terms over the period. That assumption is not accepted on faith. Under the framework the asset must first pass a five-part qualifying test — including evidence of value retention in real terms across at least one full economic cycle — and it is then stressed by a 25 per cent reduction in assessed value, with the resulting loan-to-value ratio required to stay within the band cap. A trustee is therefore not buying a forecast. He is buying a position that has been sized to survive the forecast being wrong.

How the paper gets built, and who watches it

 

A specification is only worth as much as the discipline that produces it repeatedly. Under the framework, an instrument reaches a trustee through seven defined phases rather than through a bespoke negotiation.

An eligibility screen produces a hundred-point readiness score across the six pillars, and a go, remediate or decline recommendation. A diagnostic establishes the qualifying asset score and tier, and normalises earnings for related-party charges, non-recurring items, revenue concentration and currency composition. Capacity determination assigns the tenor band and produces the dual-constrained principal, with the binding constraint recorded and disclosed. Structure and instrument design produces the term sheet and tests the covenant architecture against the known failure modes. The Governance Compact is drafted and adopted by board resolution, with the extraction baseline established before closing rather than after.

The seventh phase is the one that matters most to an investor, and it is recurring rather than transactional. Quarterly compliance certificates signed by two directors. Annual certification of the extraction ratio. A valuation refresh every twenty-four months. An annual re-score against the same hundred-point diagnostic used at entry, so deterioration is visible as a movement rather than as a surprise.

One boundary a trustee should ask about The framework spans assurance and corporate finance, and the boundary is stated in advance rather than negotiated during a mandate. Placement support is not provided to a statutory audit client. Where the firm is the auditor, covenant certification is delivered by a separate team with an engagement quality reviewer, or referred out entirely. Valuations supporting the security pool are obtained from independent registered valuers. The firm does not value the asset it is helping to finance.

How an issuer is assessed before anything is structured

 

A trustee’s first question about any private-company exposure is not what the coupon is. It is how the issuer was chosen, and what would have caused it to be turned away.

Under the framework, every company is scored before a term sheet exists. A hundred points across the six pillars: twenty each for the eligible asset base, normalised earnings capacity and underwriting the downside; fifteen each for the redemption runway and the governance compact; ten for duration architecture. Thirty questions, each with a scoring anchor and an evidence column, because a capability that cannot be evidenced within five working days scores as partial — which is how a counterparty will treat it in any event.

The threshold for placement is a score of sixty or above, with no individual pillar below half of its maximum. The pillar minimum is the part a trustee should care about most. A company scoring seventy-eight overall but six out of twenty on its asset base does not proceed to structuring; it is referred for security remediation first. Aggregate scores conceal exactly the failure a lender cares about, and a single strong pillar can carry a weak one a long way in a total.

The same instrument is re-run annually for the life of the exposure. That gives an investor something a coupon and an audited balance sheet do not: a comparable score, on a fixed method, moving in a direction. A company drifting from Resilient to Structured over two years has told the holder something well before any covenant is threatened.

The honest limitations

 

Three, stated plainly, because a trustee will find them anyway and it is better that they are in the offering than in the diligence.

Liquidity. This is held-to-maturity paper. There is no secondary market for it in this region and there will not be one soon. It suits the matching portion of a fund’s book, not the portion that must be realisable at short notice, and it should be sized accordingly.

Concentration. A small number of large exposures to owner-managed companies in a single jurisdiction is a genuine concentration risk, and it is not answered by the quality of any individual structure. It is answered by portfolio construction and by the discipline being applied consistently enough to build a portfolio at all.

Valuation infrastructure. Independent valuation capacity in this region is real but thin, and valuations are not always current or prepared on more than one basis. The framework builds this in through an explicit haircut — nothing older than twenty-four months is admissible, and single-method or aged valuations are discounted before they are relied on — but a discount is a mitigation, not a cure.

None of the three is a reason not to proceed. All three are reasons to proceed on a specified method rather than deal by deal.

What this would change

 

It is worth being clear about the scale of the prize, and equally clear that it is not transformational overnight.

For the issuer, the difference is between a capital structure that survives a halving of earnings and one that does not. That has been set out elsewhere in this series, and it is the difference between a business trading through a difficult eighteen months and a founder losing the company and the family home together.

For the investor, the difference is a class of asset that matches the liability it is held against, secured on something that appreciates, at a yield that reflects illiquidity rather than governance uncertainty — because the governance uncertainty has been contracted away rather than priced in.

A fifteen-to-twenty-year, asset-secured, covenanted instrument at a real yield is not a favour extended to Caribbean business. It is an asset class the region’s institutional investors currently lack, and the reason they lack it is that nobody has been building it to a standard they can hold.

For the region, the difference is that growth capital stops depending on whether a founder is willing to pledge the house. That is not a small thing. It is most of what separates an economy where enterprises compound across generations from one where they are rebuilt from scratch every time a cycle turns.

Where to begin

 

For a trustee board or an investment committee, the first step is not a transaction. It is a specification.

• Decide what proportion of the book is genuinely matching capital — held to maturity against long liabilities — and therefore available for illiquid long-dated paper at all.
• Write down what a private-company exposure would have to carry before it could be held for twenty years. The six requirements above are a starting point; the board’s own will differ in emphasis.
• Say so publicly. The supply of instruments in this market is shaped by what issuers believe can be placed. An investment committee that publishes what it would buy changes what gets structured.

This is the third article in the Endurance Capital Series. The first, A Seven-Year Loan Against a Thirty-Year Asset, sets out the framework in full; the second examines the extraction covenant on which the whole governance bargain rests.

The Dawgen Endurance Capital Framework™ exists to make that specification answerable — a defined method for sizing, securing and governing long-dated capital, applied consistently enough that a trustee is assessing a company rather than a document. The framework and its hundred-point readiness diagnostic are available in full.

 

Client acceptance and conflict of interest Every request for Dawgen Global services is subject to the firm’s standard client acceptance and continuance procedures before any engagement is accepted. Those procedures include an independence assessment and a conflict-of-interest check across the firm and its member practices. Where a conflict is identified that cannot be managed by safeguards, the engagement is declined.

 

Dawgen Global Big Firm Capabilities. Caribbean Understanding. 47 Trinidad Terrace, New Kingston, Jamaica  |  [email protected]  |  dawgen.global 876-929-3670  |  876-665-5926  |  US 855-354-2447

 

The Dawgen Endurance Capital Framework™ is proprietary to Dawgen Global. All figures in this article are illustrative and constructed to demonstrate the methodology. They are not drawn from any client engagement and do not represent market pricing. This article addresses patterns observed across private company advisory engagements. It does not comment on any listed issuer or any specific client, and does not constitute investment advice or an invitation to invest.