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Fund Watch: What next for pioneer GLI?




By David Stevenson on 27th May 2016


It’s easy to forget that the first real alternative finance fund listed on the stock market in the UK wasn’t the big daddy of the sector, P2PGI, but the much smaller GLI. This started out as a credit fund, listed on the LSE but almost exclusively investing in US businesses via structures called CLOs.

 

Over the last three years under former CEO Geoff Miller this fund morphed into a hybrid outfit, part fund with a big, diversified loan book, part venture capitalist investing in new lending platforms – linked by a real international focus on backing small to medium sized enterprises. This vision may have excited many in the alternative finance space but I’m fairly sure that most private investors (who until recently dominated the share register) probably only really cared about the dividend, which exceeded 10% per annum at one stage.

 

But this hybrid structure also presented something of a puzzle for more institutional investor types. Was it really a fund that put its money to work earning interest via a collection of platforms worldwide – including Platform Black in the UK and Sancus in the Channel Islands – or was it really interested in finding and funding tomorrows Lending Club?

 

Crucially that dividend payout needed to be kept up, requiring a steady stream of interest paying loans, cash which arguably might have perhaps been better spent building up the equity value of those venture capital investments which at one stage numbered 19 different businesses worldwide.

 

These strategic challenges have now been answered by a set of recent announcements from the group by new CEO Andy Whelan, who took over from Geoff Miller late last year. The  strategic review has delivered a new vision of the future for alternative finance funds. As you can probably guess from the title of the first part of the review, Project Clarity, this is all about simplifying the structure, by focusing down on core niche lending businesses within what’s called the first pillar of the new strategy. The second pillar includes a wider range of businesses including LiftForward, Finexkap, The Credit Junction, and Funding Options.  The third pillar of the business consists of Amberton Asset Management, which GLI co-owns with Somerston.  Amberton also runs GLI’s Alternative Finance Fund. I’m not going to dwell too long on the details of the review – two excellent articles by colleague Ryan Weeks explore the announcement in great detail. The main news article is here, which is in turn nicely complemented by an interview with the new CEO here

 

The company is bringing together its operating businesses under a new brand named Sancus BMS Group – of which Whelan will be CEO.

  • Sancus BMS Group will operate across 5 jurisdictions – Jersey, Guernsey, Gibraltar, UK and Ireland.
  • Intellectual property lending specialist BMS will form part of the new Sancus BMS Group. BMS will also become a wholly owned subsidiary of the group, with minority shareholders being bought out by GLI.
  • Sancus Gibraltar – a specialist offshore lender focused on shorter-term loans to asset-rich entrepreneurs – will also have minority shareholders bought out, and Sancus Gibraltar will then also be brought into the Group, alongside Sancus Jersey and Sancus Guernsey.
  • GLI also intends to transfer its 84% shareholding and £5m in preference shares in Platform Black to Sancus BMS – thereby renaming the entity as Sancus (PB) Limited.

What next for the new look GLI?

It’s important to say at this point that I am not an entirely disinterested party in any discussion about what might happen next to GLI. I’m a non-executive director of the investment fund spin out from GLI called GLI Alternative Finance. That said I have no special insight into what might happen next for what is now Sancus BMS Group beyond the obvious fact that it’ll likely continue to play an important role in the development of the fund on whose board I sit.

 

What does strike me though is that the changes announced do constitute a big change in GLI’s direction– with implications for the whole alternative finance space.

 

The first obvious observation is that for many players in the alternative finance space, the name of the game is increasingly an old fashioned concept – specialty finance. For the last few years there’s been a massive buzz around peer to peer lending – also known as market place lending - but the recent travails at Lending Club (whose share price has collapsed after it’s CEO resigned) remind us that fame and fortune can be incredibly fickle. One minute, p2p lending is changing the world, the next minute it’s old hat with the banks about to re-engage in the battle for lending volumes.

 

The sensible investor probably realises that the truth is somewhere in between which is why more alternative finance outfits are reminding us that what they do isn’t actually that cutting edge nor very hi-tech. For as long as there’s been a stock market we’ve had specialist finance vehicles dedicated to helping fund key sectors – the merchant banks of old were a classic example. These specialist financiers can be highly profitable if they focus on a niche, and the new look GLIF will indeed be focusing on a few particular niches. Sancus is clearly an interesting business that makes good money out of lending large chunks of money for relatively short durations to high net worths living offshore. BMS also has an obvious strength in lending to fast growing, asset poor tech businesses which also happen to own world class intellectual property. Between them these two businesses alone should be able to kick out profits of as much as £4m a year if all goes to plan – by focusing on specialist lending.

 

This brings us to the second observation – the dividend which is now targeted to hit 2.5p per annum. The group’s speciality finance strategy involves a sharp focus on a small number of already profitable businesses which hopefully should, in turn, be able to produce enough cash to pay that dividend, which on the current share price amounts to a yield of close to 9%.

 

The last observation is that there has been an important shift. GLIF used to be in reality more of a VC that paid a dividend, whereas now the much simpler group looks and feels less like a VC and more like a specialty finance business.  But this change in strategy doesn’t do away with the need to carry on funding these core platforms – and their lending in turn to borrowers. Which brings us nicely to the last piece of the puzzle, one which presents outside investors with a new opportunity in the shape of a new issue of bonds on the UK Bond Network platform.

 

To help fund the transformation the group also announced the issue of 5 year £10m 7% unsecured bonds issued for the Sancus Gibraltar acquisition, listed on the Cayman Islands Stock Exchange, tradeable on UK Bond Network (still very much part of the group portfolio). In particular, there’ll be an additional £4 million of bonds issued via UK Bond Network to Eligible Investors - proceeds will be applied towards repayment of the existing syndicated loan facility with Sancus (Jersey) Limited of £14.86m.

 

Traditionally I’ve been a big fan of the auctions on UK Bond Network – it’s a respected platform helping to fund mature businesses with sensible investment terms. This new bond issue ticks many of those boxes, as GLI is obviously a much, much lower risk than many of the earlier stage businesses that tend to issue bonds. The fact that it has substantial asset backing and a steady stream of cash profits sets this bond apart from nearly all the competition.

 

But in truth, I'm a tad underwhelmed by the terms of the bond on offer – the interest rate of 7% for five years strike me as a bit parsimonious. Much bigger stockmarket listed outfits such as litigation funder Burford have been issuing equally long duration bonds with yields of between 6 and 6.5%. GLI is substantially smaller than these retail bond issuers and arguably we think a more appropriate yield would have been 8% or more. Five years is a long time in investing terms, and I’d argue that bond investor’s deserved a bigger yield to compensate them for the risks. Still, there’s no getting around the fact that this is an innovative idea and we wouldn’t be surprised to see the issue snapped up anyway.

Comments

Gary Cook

09 Jun 2016 04:18am

Why buy the Bond at 7%. When you can currently buy GLIF shares at 31.70, giving a Yield of 7.88%, plus potenial growth in the share. Estimated NAV is just under 40p,so you are buying with a discount to NAV of around 21%

Bjorn Lindvall

27 May 2016 05:03pm

David - interesting that you are picking up on the Merchant Banking angle - I happe to agree fully and have said a word or two about it in my article on LinkedIn: https://www.linkedin.com/pulse/mid-market-sme-funding-changing-return-genuine-bank-bj%C3%B6rn-lindvall?trk=mp-author-card


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