The Age of the Closed End Fund
Closed End Fund (CEF) activity is reaching fever pitch within the marketplace lending sector.
A new player emerged on Tuesday in the form of Van Eck Overland Online Finance Trust, which has filed an N-2 form with the SEC. The fund will be listing on the New York Stock Exchange at some stage in the near future. This will be the first instance of a marketplace lending focused fund going public in the States. A similar vehicle – RiverNorth – filed an N-2 of its own in June, but will not be listing shares on a stock exchange in the short term.
Van Eck bears much the same characteristics as the UK’s P2PGI. The marketplace lending centric fund will be purchasing everything from consumer loans, to small business loans, student loans, real estate and mortgage loans and “other types of loans”. In other words, Van Eck will cover the vast majority of the space. Whilst the company has indicated that its interests will span various platforms, asset classes, geographies and credit risk bands, the focus will seemingly be placed upon US operators and on whole loan purchases. Sub prime consumer loans will make up no more than 20% of the Trust’s managed assets.
Van Eck, like P2PGI, expects to obtain leverage of up to one third of the value of its managed assets. There’s also an equity option in play. The fund may apportion up to 10% of its managed assets to the equity of the platforms to which it will supply capital. For context, P2PGI may invest up to 5% of its NAV in platform equity.
We don’t yet know how much the fund plans to raise, nor do we know when that money will be raised. What we do know is that the US now has a pair of permanent capital providers waiting in the wings, one of which will be publicly listed. It's worth noting of course that most of the incumbent fund structures invest on a global scale, irrespective of where they are listed.
There’s been no slowing down in activity among the investment trusts listed in the UK. Only this morning, P2PGI confirmed the success of its latest fundraise – adding an extra £400m of firepower via a C Share raise. CEO Simon Champ tells us that the round closed ahead of schedule, at the maximum target size, owing to “very strong” investor demand. P2PGI has raised and deployed £470m to date, and will doubtless cross the £1 billion mark before long.
But P2PGI’s UK competitors have not been laying idle. Victory Park Capital is also hungry for more money. The US fund issued a portfolio update yesterday, which confirmed that the company “intends to proceed with an issue of C shares in the Company” in September 2015. The arrival of GLI Alternative Finance PLC (GLI Finance’s investment trust) is imminent. The LSE listed Ranger Direct Lending Fund currently holds over $200k in net assets. Rozes Invest (which is not a closed end vehicle) recently entered the fray. And all of this activity is being amplified by the fact that UK investors may now participate in a P2PGI-like fund via the medium of a stocks and shares ISA.
Perhaps the clearest sign of the high demand for permanent capital providers is that we’re simply not seeing a huge amount of variation between the growing number of investment trusts. Beyond being listed in the States, Van Eck looks a great deal like its predecessor P2PGI, and indeed the rest of the marketplace lending funds (with the exception of Ranger – which caters to balance sheet lenders, rather than to online marketplaces). Clearly these similarities are largely superficial, and there’s bound to be a great deal in the way of operational divergence between the models. But the point stands that the seven or so investment trusts enjoy demand enough that they can afford to appear reasonably homologous.
P2PGI is the clear leader in the field at present, having streaked ahead of the competition in terms of money raised. In the future, however, inter-fund competition will be less a question of volume and more a matter of “value-added”. Which of the fund structures will make good on the promise of out-performance, and how do we measure that peformance? What can the funds offer to the platforms beyond the provision of capital (in the field of, say, technology infrastructure or credit expertise)? These will be the battlegrounds of the future.