Paradigm Attracts New Institutional Investors

Culpeper Capital & Fortress Investment Funds have bought a majority interest in Paradigm Quest Inc.

Paradigm was Canada’s first dedicated B2B mortgage outsourcing company. It provides things like underwriting and customer service to 14 other mortgage brands across the country.

Fortress Investment Funds is owned by Fortress Investments Group LLP, a publicly traded investment management firm in the U.S. The parent company is a $1.35 billion institutional investor that also owns Texas-based Nationstar Mortgage.

Nationstar is one of the biggest mortgage servicing companies in the U.S., with over $300 billion in assets. Its stock price is up 172% since being acquired by Fortress last year.

Culpeper Capital Partners LLC is a private equity firm founded in 2011 that focuses exclusively on financial and business services.  The firm operates as a joint venture partner with Fortress Investment Funds.  Culpeper deploys capital in traditional management buyouts and other opportunistic situations involving financial services platforms and assets. Culpeper’s founders have invested over $3 billion of capital on behalf of themselves and co-investors in a variety of financial services businesses.

“Both of our new investors have enormous international experience in servicing and love our strategy,” says Paradigm founder and CEO Kathy Gregory. “They’re large international players that have done a tremendous amount of due diligence and clearly said, ‘we like the Canadian mortgage market’.”

Paradigm was founded by Gregory in 2004. In eight years, it has grown to $19 billion in assets — assets that are performing “exceptionally well,” she adds. Ninety per cent of its mortgage originations come from the mortgage broker channel, through names like Merix Financial and Canadian Financial, as well as private label Brands for Dominion Lending Centres, Mortgage Alliance, VERICO and TMG.

Fortress’s investment validates the Canadian broker model, says Gregory, who calls this a “very good signal” for our industry. Terms of that investment were not announced.

Paradigm was backed by private equity firm Five Fathom Partners. Five Fathom is well known in the industry as an early venture stage investor in Filogix, now the dominant provider of mortgage origination software in Canada. Five Fathoms has sold its entire stake to Fortress. But Paradigm’s management still retains a “significant ownership stake,” says Gregory, and will stay on to manage the company.

Fortress has also bought a majority stake in Merix Financial. Merix, which has funded over $15 billion in mortgages, was launched in 2005 by its CEO Boris Bozic. It has earned over 3% market share in the broker channel and was an early brokerage industry adopter of the trailer compensation model.

“To our brokers, I say we're excited about the future,” said Bozic. “Our new partners will assist us in finding new opportunities, and their global expertise will benefit all. It's also a sign of the confidence they have in the broker channel, and the Canadian market place.”

"Fortress provides a great foundation to take us to the next level," says Gregory, who says it will help the company expand its mortgage servicing capability and assets. It also provides increased clout with institutional investors, which are key to Paradigm’s mortgage funding requirements and growth plans. (Fortress Investment Funds, itself, will not be funding Paradigm mortgages at this time).

Overall, it looks like a win for Paradigm and its founders and a promising next stage for one of the mortgage industry’s top success stories.