Collateral Health Management for Alternative Assets: The Dials You Actually Need to Turn
Collateral Health Management for Alternative Assets: The Dials You Actually Need to Turn
Note: Aaim uses "Collateral Health Alert" (CHA) terminology rather than the traditional "margin call" language common in securities lending. The underlying protective mechanisms are equivalent, but our terminology emphasizes proactive monitoring and borrower communication. Throughout this article, we use Aaim's evolved terminology with traditional equivalents noted for readers familiar with securities lending conventions.
The Core Problem
Alice's loan is secured by publicly traded equities. The price drops 15%, the collateral health alert is issued by 2pm, and by 4pm she's wired cash or her broker is selling shares. The infrastructure has been doing this for decades.
Now consider Bob, who borrowed against his private equity fund interests. The fund reports NAV quarterly, 60 days in arrears, so by the time Bob's lender sees a 15% decline, the drop happened three months ago. Same-day liquidation is impossible; same-quarter is realistic if the GP cooperates.
Traditional collateral monitoring fails for alternative assets because the monitoring frequency, alert thresholds, cure periods, and collateral protection procedures all need recalibration for assets that behave nothing like public securities.
Monitoring Frequency: Match the Asset
The first dial to turn is monitoring frequency, which should match how often valuations actually update.
Cryptocurrency requires real-time monitoring because the market trades 24/7 and can move 20% overnight. Continuous monitoring is the minimum standard for risk management.
Private Company Equity updates quarterly at best, triggered by funding rounds or 409A valuations. Between updates, monitor for material events including layoffs, down rounds, and key customer losses.
Private Fund Interests provide quarterly NAV with 60-90 day lag, meaning you need to build your framework around receiving December values in March because that's the reality.
Real Estate Syndications typically have annual appraisals with quarterly operating metrics, so track occupancy, rent collections, and market comparables as interim indicators.
The mistake is forcing alternative assets into a daily mark-to-market framework because you cannot monitor what isn't priced.
Alert Thresholds: Build in Buffer
Traditional securities lending might trigger at 75% LTV with liquidation at 80%, but alternative collateral requires more cushion because rapid liquidation is impossible.
Collateral Health Tier Structure
| Tier | LTV | Action |
|---|---|---|
| Green (Healthy) | Below 55% | No action required |
| Yellow (Review) | 55-60% | Internal flag, increase monitoring frequency |
| Orange (Action Needed) | 60-65% | Senior credit review, prepare cure documentation |
| Red (Alert) | 65-70% | Formal Collateral Health Alert issued, cure period begins |
| Protection Active | Above 70% | Cure expired, begin orderly collateral protection |
Compare that to traditional securities lending where alerts occur at 75% and liquidation at 80%. The alternative collateral thresholds start lower because the time to resolution is longer.
Asset-Specific Calibration is essential. For high-volatility assets like crypto, you need wider bands and faster responses with initial LTV of 40-50% rather than 65% and cure periods measured in hours rather than weeks. For illiquid assets like PE interests, you need more cushion above the protection threshold because if liquidation takes 90 days, you need 90 days of buffer before the loan goes underwater.
Cure Options: Give Borrowers Real Choices
When Jane hits an alert threshold, she needs options that actually work.
Additional Collateral means she can pledge more assets, but the challenge is whether your documentation and perfection can happen fast enough. Pre-approved collateral types with standing documentation accelerate this process.
Partial Paydown is often the preferred option because reducing the loan balance brings coverage back in line. Wire instructions should be on file rather than negotiated during the crisis.
Collateral Substitution replaces volatile collateral with stable assets, requiring equivalent value and proper documentation but potentially resetting the risk profile entirely.
Combination Approach uses partial paydown plus additional collateral, and flexibility here serves everyone because the goal is restoring coverage rather than rigid adherence to a single mechanism.
Cure Periods: Reflect Reality
The cure period should reflect what's actually possible:
| Asset Type | Realistic Cure Period |
|---|---|
| Public securities | 2-5 business days |
| Cryptocurrency | 24-72 hours |
| Private company equity | 10-30 days |
| Private fund interests | 30-60 days |
Giving someone 3 days to cure a collateral health alert on illiquid PE interests is performative because compliance is impossible, while giving someone 30 days to cure on crypto while the price continues dropping is irresponsible. The cure period is a dial you need to calibrate per asset class rather than a one-size-fits-all policy.
Collateral Protection: Orderly Rather Than Panicked
When cure fails, collateral protection needs to happen, but "liquidation" means different things for different assets.
Public Securities involve market sale, same day or next day, relatively straightforward.
Cryptocurrency spans multiple exchanges with 24/7 trading. Time the execution, consider market depth, document the venue selection.
Private Company Equity goes through secondary market sale (Forge, Equityzen, Nasdaq Private Market), direct buyer negotiation, or company repurchase if available, with timelines measured in weeks to months.
Private Fund Interests require secondary market sale through advisors or GP-facilitated transfer if the relationship supports it, with timelines measured in months.
The Fiduciary Consideration is that you have an obligation to liquidate in a commercially reasonable manner, meaning orderly sale, staged liquidation when size requires it. Document the process, the timing decisions, and the rationale. The borrower is an adversary during a liquidation, but reasonable execution protects everyone.
The Mechanics: What Automation Can and Can't Do
Automate data ingestion from custodians and pricing feeds, coverage ratio calculation and threshold detection, alert generation and notification delivery, and report production and dashboard updates.
Reserve human judgment for alert response decisions, extension approvals (relationship context matters), collateral protection decisions (commercial reasonableness), and policy exceptions (senior review required).
The temptation is full automation, but alternative collateral has too many edge cases, and the wrong automated decision creates liability.
Reporting That Matters
Daily (for liquid collateral): Coverage ratio by loan, alert status and cure period tracking, outstanding alerts requiring action.
Weekly: Trend analysis showing which loans are moving toward thresholds, watch list changes, market condition assessment for volatile assets.
Monthly: Portfolio performance and concentration metrics, alert event statistics showing how many alerts and what cure rate, protection activity and recovery rates.
Key Metrics: Alerts issued vs. resolved without protection action, average time to cure, protection recovery rates by asset type, portfolio coverage distribution showing whether you're creeping toward thresholds.
Documentation: The Examination Test
When examiners review your collateral health program, they want to see written procedures (actual procedures covering what happens at each threshold, who does what, what's the approval chain), valuation support (how do you know the collateral is worth what you think, with source documentation, methodology, staleness thresholds), communication records (every alert, every borrower response, every extension decision, complete audit trail), and decision rationale (why did you extend this cure period, why did you initiate protection on this timeline, documenting the reasoning rather than just the outcome).
The institutions that struggle in examination are the ones that managed collateral events through email threads and verbal approvals. The infrastructure needs to be systematic.
The Uncomfortable Truth
Collateral health management for alternative assets is harder than for public securities because the data is delayed, the liquidation is slow, and the procedures are more complex.
But that's exactly why the institutions that get it right have a competitive advantage: they can offer lending products that others avoid because they've built the infrastructure to manage the risk properly.
The institutions that try to shortcut this by applying public equity frameworks to illiquid assets are the ones that blow up when markets turn. Build the infrastructure first, then scale.
This article addresses collateral health management practices for alternative assets and does not constitute legal or financial advice. Consult qualified professionals for guidance specific to your institution.
