How Capstone's First Loss Position Protects Your Capital

Investors are attracted to private credit because it protects their capital while delivering consistent returns. Robust risk-management that prioritises capital preservation is therefore critical. At Capstone Income Fund, we take a proactive approach to risk by employing a “first loss” position, where the management team contributes its own capital as a protective buffer for our investors. This structure demonstrates our commitment to safeguarding investor capital, ensuring our interests align with those of our investors, and enhancing the stability of returns. But what exactly does a first loss position mean, and how does it benefit our investors?

What Is a First Loss Position?

A first loss position is a structure in which management or certain initial investors allocate their own capital to absorb any initial losses that may occur within an investment fund. Essentially, it acts as a “safety net” for investors by placing management capital in the first line of risk. In Capstone Income Fund, the management team invests its own capital as a first loss layer, meaning management capital absorbs any downside before it affects our investors’ returns. This is on top of Capstone's conservative approach to risk management and low Loan to Value Ratios, providing another layer of protection to investors.

This approach aligns our interests directly with those of our investors. We, as the fund’s management, bear the primary risk, motivating us to maintain diligent risk-management practices and a conservative investment approach.

How Our First Loss Structure Benefits Investors

At Capstone Income Fund, we are committed to providing this additional layer of protection to investors because it provides:

1. Enhanced Protection: By absorbing the first layer of risk, we provide an extra level of security to investors, allowing them to participate in private credit with peace of mind.

2. Aligned Interests: With our own funds at stake, we share a vested interest in managing risk responsibly. This alignment builds trust and supports transparency.

3. Stable, Consistent Returns: Our first loss position adds stability to returns by providing another layer of defence to investors' capital, a priority for investors looking for security as well as yield.

   
   

Capstone’s Conservative Approach to Private Credit

Our first loss position underscores Capstone’s focus on capital preservation and low Loan-to-Value Ratios (LVR). We take a selective approach, prioritising quality and stability over aggressive risk-taking. This structure allows us to better manage market volatility while delivering on our promise of risk-adjusted returns for investors.

Capstone’s first loss position is part of our commitment to protecting investor capital. By absorbing initial losses ourselves, we provide additional security for investors, who can rest assured knowing we have “skin in the game”.