This document contains additional information related to risks associated with strategies or products offered by EJF Capital LLC and its affiliates (collectively, “EJF”). The following risks do not purport to be a complete list or explanation of all risks involved with an investment in a EJF-managed fund or account (collectively “Clients”) and prospective investors should consult the relevant governing documents, including the private placement memorandum together with any supplements before investing.
Material Risks Across Investment Strategies:
Highly Competitive Market for Investment Opportunities
The activity of identifying, acquiring, and realizing attractive investments is highly competitive and involves a high degree of uncertainty. There can be no assurance that EJF will be able to locate and complete investments which satisfy the Clients’ investment objectives, realize the value of these investments, or fully invest the investors capital, nor can there be any assurance that EJF will be able to make investments on favorable terms and conditions. Competition for such investment opportunities could come from other consortia, financial investors, and other asset managers and owners. These competitors may have financial, geographic, or strategic advantages that may reduce EJF’s competitiveness and potentially materially and adversely affect its ability to successfully conclude transactions. Further, failures in identifying or consummating investments on satisfactory or favorable terms could reduce the number of investments that are completed, reduce returns, and slow growth.
EJF will make investments on behalf of Clients based upon analyses of then current returns and estimates and projections of internal rates of return developed by EJF that may be available with respect to potential investments. Because projections are inherently subject to uncertainty and factors beyond the control of EJF, investors have no assurance that the investments will yield the returns expected by management. It is possible that EJF will not be able to acquire assets at favorable prices or on favorable terms and conditions, thereby reducing expected returns. Acquisitions and debt investments entail risks that investments may not perform in accordance with expectations and that anticipated costs as well as general investment risks associated with any new investment may experience unanticipated outcomes. EJF may not be successful in identifying suitable assets that meet its investment criteria or in consummating acquisitions or other investments on satisfactory terms or timeframes. Failures in identifying or consummating investments on satisfactory terms could reduce the number of and returns on such investments. In addition, subsequent to a Client’s acquisition of a particular investment, EJF may adjust targeted returns to reflect changes in market conditions. There can be no assurance that a Client will make a profit on its investments or recover any part of its invested capital during any anticipated period of time.
General Economic Conditions
Changes in general global, regional and U.S. economic and geopolitical conditions may affect Clients’ activities. Interest rates, general levels of economic activity, the price of securities and participation by other investors in the financial markets may affect the market for debt and credit-related instruments in which Clients make investments or the value and number of investments made by Clients or considered for prospective investment. Material changes and fluctuations in the economic environment, particularly of the type experienced in the years following 2008 that caused significant dislocations, illiquidity and volatility in the wider global economy, and the market changes that have resulted and may continue to result from the spread of novel coronavirus (“COVID-19”) also may affect the market for such debt and credit-related instruments (including the ability of issuers of such instruments to repay principal and pay interest thereon, increasing the incidence of default for such instruments) or Clients’ ability to make investments and the value of investments held by Clients or their ability to dispose of investments. The short-term and the longer-term impact of these events are uncertain, but they could continue to have a material effect on general economic conditions, consumer and business confidence and market liquidity. Any economic downturn resulting from a recurrence of such marketplace events and/or continued volatility in the financial markets could adversely affect the financial resources of the entities (i.e., borrowers or asset holding companies) in which a Client will make investments. Moreover, a serious pandemic, natural disaster, armed conflict, threats of terrorism, terrorist attacks and the impact of military or other action could severely disrupt global, national and/or regional economies. A resulting negative impact on economic fundamentals and consumer and business confidence may negatively impact market value, increase market volatility and reduce liquidity, all of which could have an adverse effect on the performance of investments, Clients’ returns and their ability to make and/or dispose of investments. No assurance can be given as to the effect of these events on investments or investment objectives.
Illiquid and Long‐Term Investments
In some circumstances the markets can be illiquid, making it difficult to acquire or dispose of investments at the prices quoted on the various exchanges or at normal bid/offer spreads quoted off exchange. During periods of limited liquidity, the strategies’ ability to acquire or dispose of investments at a price and time that the strategies deem advantageous may be impaired. As a result, in periods of rising market prices, the strategies may be unable to participate in price increases fully to the extent that they are unable to acquire desired positions quickly; conversely, the strategies’ inability to dispose fully and promptly of positions in declining markets will cause their Net Asset Value (“NAV”) to decline as the value of unsold positions is marked to lower prices. In addition, given the sizeable positions held by various Clients, EJF may be limited in its ability to efficiently and/or profitably exit particular positions or strategies or reduce the strategies’ exposure to particular positions or strategies.
Although some long-term investments may generate current income, the return of capital and the realization of gains, if any, from an investment will most likely occur only upon the partial or complete disposition of such investment. While an investment may be sold at any time, certain strategies and EJF managed Fund’s anticipate holding a substantial portion of their investments for a number of years after such investments are made. In such instances, EJF will not be able to sell its securities publicly unless their sale is registered under applicable securities laws or will be able to sell the securities only under Rule 144 or other rules under the Securities Act which permit only limited sales under specified conditions. In addition, in some cases, EJF on behalf of the Client may be prohibited or limited by contract from selling certain securities for a period of time and, as a result, may not be permitted to sell an investment at a time it might otherwise desire to do so. Furthermore, investments may be subject to industry cyclicality, downturns in demand, market disruptions and the lack of available capital for potential purchasers and are therefore often difficult or time consuming to liquidate.
Certain clients are permitted to obtain leverage using any form or combination of financial leverage instruments, including through funds borrowed from banks or other financial institutions (i.e., a credit facility), margin facilities, the issuance of preferred shares or notes and leverage attributable to reverse repurchase agreements, dollar rolls or similar transactions. EJF will, from time to time, use leverage for its Clients opportunistically and will choose to increase or decrease its leverage, or use different types or combinations of leveraging instruments, at any time based on EJF’s assessment of market conditions and the investment environment. Use of leverage creates an opportunity for increased income and return for Clients, which can increase fees payable to EJF but, at the same time, creates risks, including the likelihood of greater volatility in the NAV and market price of, and distributions on, shares of LP interests. Increases and decreases in the value of a Client’s portfolio will be magnified if the Client uses leverage. In particular, leverage can magnify interest rate risk, which is the risk that the prices of portfolio securities will fall (or rise) if market interest rates for those types of securities rise (or fall). As a result, leverage can cause greater changes in the NAV, which will be borne entirely by the Client. There can be no assurance that EJF will use leverage for its Clients or that its leveraging strategy will be successful during any period in which it is employed.
The long-term profitability of the assets in which a Client invests will be dependent upon the efficient operation, maintenance and high availability of such assets. Inefficient operations, maintenance and low availability may reduce returns to investors. Operations are also subject to the risk of equipment failure due to wear and tear, latent defect, design error, operator error, or early obsolescence, among other things, which could have a material adverse effect on the assets, liabilities, business, financial condition, results of operations and cash flow of investments.
EJF may invest in portfolio investments that invest in and use newly developed, less proven, technologies. There is no guarantee that such new technologies will perform as anticipated. The failure of a new technology to perform as anticipated or become obsolete may materially and adversely affect the performance of portfolio investments that invest in or use such technologies.
Risk of Unsuccessful Exit Strategies
EJF, on behalf of a Client, may opportunistically sell, distribute or otherwise dispose of portfolio investments at any time. It is not possible to predict whether an exit strategy will be advantageous or available at the appropriate time. If a Client fails to execute an exit strategy successfully prior to liquidation, such Client may be forced to liquidate its assets on terms less favorable than anticipated and the proceeds from these portfolio investments and the remaining portfolio investments may be materially and adversely affected.
A Client’s investments may be subject to currency exchange rate volatility, including, without limitation, fluctuations in the rate of exchange between the U.S. dollar and the various non-U.S. currencies in which certain of the Client’s investments may be denominated and costs associated with conversion of investment principal and income from one currency into another. It is not possible to hedge fully, perfectly or at all against currency fluctuations affecting the value of investments denominated in non-U.S. currencies and it may not be economically feasible to do so. EJF may not be obligated to engage in any currency hedging operations and there can be no assurance as to the success of any hedging operations the Client may implement. Changes in non-U.S. currency exchange rates may also affect the value of distributions from, and the level of gains and losses realized on the sale of such investments. The rates of exchange between the U.S. dollar and other currencies are affected by many factors, including forces of supply and demand in the non-U.S. currency exchange markets. Exchange rates also are affected by the international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. It is likely that EJF will leave unhedged certain investments denominated in or generating cash flow in U.S. currencies and in any such case, such Client will be exposed to risk that such currency will decline in value against non-U.S. dollar currencies during the term of the investments such that the results of such investments will be worse in U.S. dollar terms than the results based upon the local currency.
Cybersecurity and Cloud Infrastructure Risk
As part of its business, EJF processes, stores and transmits large amounts of electronic information, including information relating to the transactions of its clients. Similarly, EJF’s service providers and its clients may process, store and transmit such information. Some information is stored on off-site servers (the “cloud”) by certain vetted cloud-based service providers. EJF has controls, procedures and systems in place designed to protect such information and prevent data loss and security breaches. However, such measures cannot provide absolute security. The techniques used to obtain unauthorized access to data, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time. Hardware or software acquired from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Network connected services provided by third parties to EJF may be susceptible to compromise, leading to a breach of EJF’s network. EJF’s systems or facilities may be susceptible to employee error or malfeasance, government surveillance, or other security threats. On-line services provided by EJF to its clients may also be susceptible to compromise. Breach of EJF’s information systems may cause information relating to clients (including client transactions) to be lost or improperly accessed, used or disclosed.
EJF, or an underlying Client investment may utilize financial instruments such as forward contracts, options, swaps, caps, collars, floors and other derivatives to seek to hedge against fluctuations in the relative values of their assets as a result of changes in currency exchange rates, market interest rates and public security prices. While these transactions seek to reduce certain risks, the transactions themselves entail certain other risks. Hedging against a decline in the value of an investment does not eliminate fluctuations in the value of such investment or prevent losses if the value of such investment declines, but instead establishes other positions designed to gain from those same developments, thus offsetting the decline in such investment’s value. These types of hedge transactions also limit the opportunity for gain if the value of such investment should increase. The success of hedging transactions will be subject to the ability to correctly predict movements in and the direction of, currency exchange rates, interest rates and public security prices. Therefore, while a Client or a portfolio investment may enter into hedging transactions to seek to reduce these risks, unanticipated changes in currency exchange rates, interest rates or public security prices may result in a poorer overall performance for the Client than if it had not engaged in any hedging transaction. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the investments being hedged may vary. Moreover, for a variety of reasons, EJF or a portfolio investment may not have established a perfect correlation between hedging instruments and the investments being hedged. This imperfect correlation may prevent the Client or a portfolio investment, as applicable, from achieving the intended hedge or expose it to risk of loss.
EJF may invest globally, including investments in the Eurozone. Non-U.S. investments involve certain risks not typically associated with investing in the United States, including risks relating to: (a) currency exchange matters including fluctuations in the rate of exchange between the U.S. dollar and the various non-U.S. currencies in which non-U.S. investments may be denominated, and costs associated with conversion of investment principal and income from one currency into another; (b) differences between the U.S. and non-U.S. markets, including potential price volatility in and relative illiquidity of some non-U.S. markets; (c) the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements and less government supervision and regulation; (d) certain economic and political risks, including potential exchange control regulations and restrictions on non-U.S. investment and repatriation of capital and the risks of political, economic or social instability; (e) obtaining non-U.S. governmental approvals and complying with non U.S. laws; (f) the imposition of non-U.S. taxes on income and gains recognized with respect to such non U.S. Investments; (g) differing tax structures; (h) rudimentary anti-fraud and anti-insider trading legislation; (i) limited anti-dilution protection; and (j) less developed corporate laws regarding fiduciary duties and the protection of investors. The legal systems in these countries may offer no effective means for EJF to seek to enforce contractual or other legal rights or otherwise seek legal redress on behalf of its clients. Moreover, once a judgment is obtained, enforcement or collection of that judgment may be difficult. In addition, investments are, to a significant degree, subject to business, economic, political and social developments in the countries in which the investment is located. EJF has no control over, and cannot predict, these developments or the policies or actions a national or local government may take in the future in response to these developments.
Fraud In Making Certain Investments
EJF may rely upon the accuracy and completeness of representations made by the issuer of such investment, but it cannot guarantee the accuracy or completeness of such representations. The issuer of an investment may make a material misrepresentation or omission with respect to the issuer of the investment. Such inaccuracy or incompleteness may adversely affect the strategies or the valuation of any investment. Instances of fraud and other deceptive practices committed by senior management of certain companies in which the strategies may invest may undermine the ability of EJF to conduct effective due diligence on, or successfully exit investments made in, such companies. In addition, financial fraud may contribute to overall market volatility, which can negatively impact the strategies’ investment programs. Under certain circumstances, payments to Clients may be reclaimed if they are later determined to have been made with an intent to defraud creditors or make a preferential payment, which can result in a mismatch of remedy to those harmed if Fund investors reduce or redeem their investment before such payment is received by the Client.
Failure of Custodians
The custodians and/or the banks or brokerage firms selected by EJF, may become insolvent, causing the strategies to lose all or a portion of the funds or securities held by the custodian, secondary custodian or such banks or brokerage firms or other counterparty acting as a custodian or to encounter delays recovering assets. A Client’s assets deposited with a bank or brokerage firm as margin (or collateral) in respect of noncleared derivative contracts such as OTC currency forwards are not currently required under CFTC regulations or any other regulations to be held in a segregated account for the benefit of the Client. Consequently, assets deposited by EJF or a Client with a bank or brokerage firm as margin in respect of non-cleared derivative contracts may be indistinguishable, for insolvency purposes, from the proprietary assets of such bank or brokerage firm and therefore may be subject to creditors’ claims in the event of the insolvency of such bank or brokerage firm, and may not be available for timely recall by EJF or its Clients.
With respect to management at the portfolio investment level, many portfolio investments rely on the services of a limited number of key individuals, the loss of any one of whom could materially and adversely affect the Client investment’s performance. Although EJF expects to monitor the management of each portfolio investment, unforeseen events may occur. In addition, certain portfolio investments may operate in highly regulated environments, such as United Stated financial institutions, and EJF will likely rely on the management teams to manage their activities in a manner consistent with applicable laws and regulations (including, without limitation, the U.S. Foreign Corrupt Practices Act and other anti-corruption, anti-bribery and anti-boycott laws, regulations and orders) and in a manner which will permit such portfolio investment to maintain a quality reputation. If a portfolio investment acts inconsistently with applicable laws and regulations or takes actions that cause such portfolio investment disrepute, such actions may adversely affect the investment, and may cause reputational harm and hinder EJF’s investment objective.
Risks Related to Specific Investment Strategies
The investment strategy for each of EJF’s Clients involve a substantial degree of risk. EJF has listed certain risks below; however, the list of risks is not comprehensive or complete. Clients and investors are strongly encouraged to review the risks of their investment strategy, as contained in the private placement memorandum, in organizational documents and/or as set forth in the Client’s investment management agreement. In addition, while certain risks may be more important for certain investment strategies, certain risks may overlap and apply to multiple investment strategies.
Fixed Income Strategy Related Risk
The overall strategy may be subject to such risks as interest rate risk, credit risk, extension risk, liquidity, market risk, default risk, concentration risk, geographic concentration and exposure, microeconomic and macroeconomic risk, prepayment risk, volatility, valuation, and inflation. Certain investments utilized in this strategy bear risks appurtenant to the type of security invested. Such examples include: i) fixed income securities, which may be unrated by a credit-rating agency or rated below investment grade and which are subject to greater risk of loss of principal and interest than higher-rated debt securities, ii) debt securities which rank junior to other outstanding securities and obligations of the issuer, all or a significant portion of which may be secured on substantially all of that issuer’s assets, iii) debt securities which are not protected by financial covenants or limitations on additional indebtedness, iv) certain asset backed securities and other instruments that bear a higher than normal prepayment risk, and v) mortgage backed securities and other structured products that may lack of standardized terms, have shorter maturities, bear real estate risk and have volatile valuation.
Public Equity Strategy Related Risk
The overall strategy may be subject to such risks as fluctuation in securities prices and interest rates, movement in the United States’ and certain foreign countries’ economic growth rates, political events that may have an impact on equity markets, concentration risk, macroeconomic risks, contagion risk, inflation risk, liquidity risk, volatility, and valuation.
Private Equity and Venture Capital Strategy Related Risk
As a general rule, investors can expect that investments with higher return potential will also have higher potential of risk of loss of capital or income. Prospective investors in the Funds should consider the following risks, which are not intended to be an exhaustive listing of all the risks involved in an investment in this strategy. Clients could have control positions in addition to advisory roles in private equity investments, along with certain contractual rights to protect their investments (including shareholder agreements, redemption rights and/or placement of a designee of the Firm or an affiliate on the boards of directors or as a board observer of portfolio companies), but such Clients do not always have control over their portfolio companies. A Client runs the risk of refusal of management or shareholders of portfolio companies to adopt the recommendations of such Client, disagreement with existing management and any resulting negative impact on the value of the portfolio company or such Client’s ability to exit from such investment at a profit as a result of such refusal or disagreement. Should such a refusal or disagreement occur, EJF or an affiliate may not be in a position to exercise control over the management of such companies, and, accordingly, may have a limited ability to protect such Client’s position in such companies. Certain investments advised by EJF will initially be in a newly formed entity which has not commenced operations and therefore will have no operating history upon which an investor can evaluate its performance. The prior experience of the investment team or the performance of other investment vehicles does not provide assurance of future investment performance or returns. A Client may be called upon to provide follow-on funding for its investments or may have the opportunity to increase its investment in private companies and other investments. There can be no assurance that a Client will wish to make such follow-on investments or have available capital to do so, and the inability to make such follow-on investments could have a substantial negative impact on a portfolio company or other issuer in need of capital or may diminish such Clients’ ability to influence the portfolio company’s or other issuer’s future development.
Investor May Experience a Partial or Total Loss of Capital
There is no assurance that the Excess MSRs allocated to an Investor (a “Cohort”) will achieve their performance objectives. The possibility of partial or total loss of capital exists, and the Investor should not enter into the Purchase Agreement and/or the LP Agreement unless it can readily bear the consequences of such loss.
Mortgage Servicing Rights (“MSRs”)
MSRs provide a mortgage servicer with the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages (the “Servicing Fee”). The Servicing Fee is paid to the mortgage servicer for servicing the underlying mortgages and undertaking certain associated obligations and liabilities. The owner of an MSR will often retain a subservicer to perform certain of such duties for a portion of the Servicing Fee (such “base” portion of the Servicing Fee, the “Base MSR”), while retaining the Excess MSR. SMS shall be the owner of the MSRs.
Dependency on Servicers
Success of an investment in MSRs depends significantly on the operations of mortgage servicers, including SMS and/or any subservicers. A default by a servicer relating to its obligations under any Acknowledgement Agreement, pooling and servicing agreement, Agency requirements and/or the failure of any servicer to perform its obligations related to any of the MSRs could result in a servicer termination event or event of default, which may adversely affect any associated MSRs. Such events of default may include, without limitation, the failure to comply with applicable laws and regulation, failure to perform loss mitigation obligations, a downgrade in servicer rating, failure to perform adequately in external audits, failure in operational systems or infrastructure and regulatory scrutiny regarding the foreclosure processes that may lengthen foreclosure timelines. In addition, servicers may be terminated in the absence of default or failure to perform. For example, servicers of obligations relating to mortgages originated to be sold to the Agencies generally may be replaced for any reason or for no reason. In addition, servicers of obligations relating to mortgages originated by private enterprises may also be terminated for various other reasons, including by a trustee of a trust established in connection with the relevant MSR. In addition, the rights of SMS may be affected by the bankruptcy of a subservicer, which could have adverse consequences, including, without limitation, challenges to the validity and/or priority of SMS’s ownership in the related MSRs, payments by the subservicer to SMS being voided by a court, recharacterization of the sale of the related MSR as a pledge of assets in a bankruptcy proceeding or the rejection of the agreement of purchase and sale of the related MSR. If the subservicer with respect to an MSR held by SMS is terminated, replaced or declares bankruptcy, the MSR may incur additional costs and lose value. Such costs could include the costs to transfer the assets and higher costs associated with the new servicer. Any such increased costs and losses in value may be material.
Risk of Defaults and Delinquencies in the Mortgage Market
The mortgage market in the United States has experienced and may experience a variety of difficulties and challenging economic conditions. Residential and commercial real estate prices in many parts of the United States have declined or have ceased appreciating. Any deterioration of the U.S. mortgage market and declines in real estate prices could result in increased delinquencies or defaults on the mortgage loans underlying MSRs in the Cohort or require advances in respect of such delinquencies or defaults that may not be recovered. An increase in defaults and delinquencies or unrecovered advances could reduce MSR cash flows, which would have a material adverse effect on the value of the Excess MSRs in the Cohort.
Accurate Evaluation of MSRs Affected by Assumptions
In evaluating potential MSRs, a number of assumptions may be made, including regarding rates of prepayment and repayment of the underlying mortgage loans, projected rates of delinquencies and defaults, future interest rates and cash flows. Another assumption that may be made in considering the value of an MSR is the expected prepayment speed (i.e., how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off). The use of different estimates or assumptions could produce materially different values for such MSRs, and there may be material uncertainty about the fair value of such assets. If any assumptions regarding the MSRs are inaccurate or the basis for such assumptions change, the prices paid to acquire MSRs may prove to be too high, resulting in lower than expected profitability or in losses.
Bankruptcy of a Mortgage Servicer
A bankruptcy by any mortgage servicer that services the mortgage loans underlying any MSRs in the Cohort could result in: (i) the validity and priority of the ownership in the mortgage servicing rights being challenged in a bankruptcy proceeding; (ii) an Agency’s termination of such MSRs such that the agreement governing the MSRs is not seen as an asset of the estate; (iii) payments made by such servicer, or obligations incurred by such servicer, being avoided by a court under federal or state preference laws or federal or state fraudulent conveyance laws; (iv) a re-characterization of any sale of MSRs or other assets to SMS as a pledge of such assets in a bankruptcy proceeding; or (v) any agreement pursuant to which SMS purchased the MSRs being rejected in a bankruptcy proceeding. The risks set forth in this paragraph may be enhanced by the fact that SMS intends to rely on a limited number of such service providers.
The value of the MSRs in the Cohort may be affected by prepayment rates. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors, and consequently, such prepayment rates cannot be predicted with certainty. The values of MSRs are highly sensitive to changes in interest rates. Historically, the value of MSRs has increased when interest rates rise and decreased when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. The adverse effects of prepayments may impact the MSRs in the Cohort in two ways. First, particular investments may experience outright losses in an environment of faster actual or anticipated prepayments. Second, particular investments may underperform relative to hedges, if any, that may have been constructed for these investments, resulting in a losses. In particular, prepayments (at par) may limit the potential upside of the MSRs to their principal or par amounts, whereas their corresponding hedges often have the potential for unlimited loss. Borrowers tend to prepay on their financings faster when interest rates decline. There may be reinvestment of the money received from the prepayments at the lower prevailing interest rates. Conversely, borrowers tend not to prepay on their financings when interest rates increase. Consequently, it might not be possible to reinvest money that would have otherwise been received from prepayments at the higher prevailing interest rates. This volatility in prepayment rates may affect the ability to maintain targeted amounts of leverage and may result in reduced earnings or losses.
Limited Due Diligence
For various reasons, SMS may only be able to conduct a limited due diligence review prior to purchasing MSRs. Further, the information reviewed may not be updated or revised and may be based on expectations, estimates and projections that are not current and therefore are not reliable. SMS has not, does not intend to and will not have the ability to verify the assumptions on which the information it reviews is based. As a result, there may be risks associated with investing in the Cohort of MSRs that are not disclosed in this Risk Disclosure and which might have been discovered had SMS been able to conduct a complete due diligence review of the underlying MSRs. These undisclosed risks, liabilities and other deficiencies may have a material adverse effect on the Cohort of MSRs.
MSR exposure will be allocated among the limited partners of the Applicable LP which acquires the True Excess Spread pursuant to the TESPA (collectively, the “Limited Partners” and each a “Limited Partner”) through an automated system that will take into account factors such as each Limited Partner’s committed capital and the exposure each Limited Partner has to varying credit qualities, loan sizes, geographies and other factors of the underlying mortgages. This automated allocation system seeks to spread such characteristics among the Limited Partners. However, although the goal is equitable distribution, characteristics such as credit qualities, mortgage sizes, geographies and other factors will in practice not be allocated evenly among the Limited Partners, particularly as Limited Partners enter into contracts on different dates over time. In addition, certain Investors may impose their own guidelines (including as to credit quality) for MSRs included in their Cohort. Limited Partners will therefore be subject to variations of concentrations in its MSR exposure relative to other Limited Partners.
Absence of Recourse
The Contracts limit the circumstances under which indemnifying party can be held liable. As a result, the Investor may have a more limited right of action in certain cases than they would in absence of such a limitation.