FundWatch: GLI Alternative Finance PLC – GLI AF
GLI Finance Ltd has now confirmed plans to launch a closed end fund (CEF), listed on the LSE, to invest in SME loan assets. Below we review this latest planned new entrant to the space for this edition of FundWatch.
|Launch date||Q3 2015|
|Fund manager(s)||Geoff Miller and Andrew Whelan|
GLI Finance Ltd has, since 2013, been an early mover in the world of market place lending taking a number of stakes in platforms that lend to SME’s. The new fund, GLI Alternative Finance PLC [GLI AF], will be a UK investment trust and will be a distinct entity – separate from the existing GLI Finance Ltd [GLIF] and separately capitalised. That said the two will co-operate in a way that the new trust will use GLIF as an asset manager and will specifically aim to deploy capital on platforms in which GLIF “is the principal external equity investor”. This in turn represents one of the key distinctions between this fund and comparable existing offerings e.g. P2P GI and Victory Park Capital. To quote directly from the press release:
“The loans invested in will be originated principally through the 19 alternative lending platforms with which GLI is strategically partnered. This gives GLI direct insight into each business, its underwriting process, risk management and the results thereof.”
This approach does bring some obvious advantages. Whilst the GLI fund does not expect any preferential treatment this may assist with deployment – certainly the new fund can expect to have excellent visibility over the deployment opportunities that each of their partner platforms can offer. That said the new fund does not rule out using other platforms to supplement. In fact, in the early stages of deployment there may be more immediate opportunities available at other non-partner platforms. In that context it will be interesting to see how their relationship with other platforms evolve given that over time their stated intention is to be lending on their own portfolio of partner platforms.
The flip side of these strategic platform relationships however is that this fund will need those underlying platforms to deliver the required loan origination to ensure that GLI AF can deploy the capital raised. Idle capital is the enemy of returns and GLI AF will need its partner platforms to deliver strong loan origination to ensure smooth deployment.
The other stand out feature of the fund is the fee structure which is undeniably competitive. The GLI AF fund has a management fee of 0.75% p.a., which falls to 0.50% for stakes of over £100 million, and a performance fee of zero. This compares to fees at P2P GI, arguably the existing market leader, of a 1% p.a. management fee and a 15% performance fee. It is notable to see not only that these fees are significantly lower but also that they seem to be specifically highlighting the low fees as a selling point – it could well be that this transparency will introduce some pricing pressure to this nascent industry.
Whilst not mentioned in the press release AltFi understands that the fund will be able to take warrants in partner platforms in return for funding commitments. This could over time enhance returns as GLI AF would be gaining equity exposure to the platforms that it deploys capital on. Given that this capital could catalyse growth these stakes could prove valuable over time. This characteristic is common to other funds in the space. It remains to be seen however if the rewards for commitments of capital are as significant as they were in the recent past. Here at AltFi we now hear far more platforms complaining about loan origination challenges rather than bemoaning a lack of investor capital.
Whilst targeting its partner platforms the fund should still be well diversified by both duration and geography. Its 19 partner platforms cover a spread of geographies including UK, USA, Continental Europe and Africa and a range of asset classes including invoice finance, trade finance and P2P loans. In fact, if they successfully allocate across their portfolio platforms, they would have a stronger UK flavor that their competitors which could prove to be a differentiator for a UK listed fund.
In conclusion this fund offers exposure to a broad spread of SME lending with a very attractive fee structure. Investors should however watch with interest to see the development of the GLI platforms. The fund may struggle for capacity on other platforms given its stated preference for the firms in which it has an interest so it is critically important that the portfolio of platforms that it favours thrive. The loan capital this fund brings should help those platforms significantly and whilst some of that return will accrue to GLI AF it is worth noting that the bulk of that return will accrue at GLIF itself.