By Daniel Lanyon on 5th April 2019
The investment trust launched in 2015 offering greater exposure to loans originated by Funding Circle across geographies but has seen return expectations fall below target in the past year.
Funding Circle will pursue institutional investors through single currency private funds following the announcement that the Funding Circle SME Income fund, the company’s listed portfolio, will cease investment in new credit assets and begin the process of winding down.
The fund said in a statement today: “Following consultation with shareholders accounting for over two thirds of the register, the Board hereby acknowledges their preference to cease investment in new Credit Assets and commence a process to return capital in an orderly and expeditious fashion with the objective of optimising returns to shareholders.”
Launched in 2015, the £307m investment trust provides public market investors exposure to a diversified portfolio of Funding Circle's SME loans across all of its lending geographies and has generated an annualised net return on assets of c.5 per cent.
The investment trust was a broad success in its first few years and increasingly raised new capital through share issuance. Ahead of its IPO it even said this could be accelerated to reach c.£1bn of assets in the near to medium term.
Its simplicity, straightforwardness and low fees appealed to a host of blue chip income focused investors including Invesco Perpetual’s Mark Barnett, the Railways Pension Scheme and BlackRock. Its performance, especially compared to many peers in the sector, also seemed consistent but recently its returns have been below target.
Last year it cut its dividend outlook citing increased costs and lower gearing. Earlier this year it began to also disclose that defaults were increasing above expectations for certain cohorts of loans in the fund.
Matt Hose, investment analyst at Jefferies, says that for the wider Funding Circle Group the benefit of having the ‘permanent capital’ of an investment trust was starting to be outweighed by the rules that make investment trusts need to report monthly net asset value (NAVs. The Funding Group is only required as a listeded company to report quarterly.
“[The monthly disclosures] ill-fit the quarterly release schedule of its underlying loan performance. In effect, the fund 'tail' was wagging the 'platform' dog!,” he said.
Funding Circle says it supports the wind-down and that its growing mix of funding sources has meant that the listed trust has become a declining part of its overall funding mix and was projected to fund only 3.5 per cent of Funding Circle's origination volume in 2019.
Funding Circle also said it has been developing new single currency private funds, which have both cost and operational benefit. These plans include firstly a £200m UK private direct lending fund structured in a similar way to the recently launched Continental Europe private direct lending fund for institutional investors. Secondly, the firm is looking at a UK bond product and is in discussion with the British Business Bank to transfer the £150m facility from its investment trust to Funding Circle, with the intention to use this facility to launch a UK ABS bond product in 2019.
Samir Desai, CEO and co-founder of Funding Circle said: "A global income fund providing access to a diversified portfolio of Funding Circle small business loans was the right strategy for investors and Funding Circle in 2015. However, there are now more appropriate and varied ways for investors to participate on the platform. We're pleased to soon introduce two new investor products to the UK market. They will further expand the universe of investors that can access loans on our platform and continue to diversify our sources of funding, in line with the strategy we set out at IPO."
Insurance AI & Analytics USA (June 27-28, Chicago) is the only forum bridging the gap between the analytical and data minds and the business transformation leaders. As carriers rush to meet customer demands and deliver continuous business growth without dramatically increasing costs, deploying innovative technologies such as AI, machine learning and advanced analytics can be the only way to remain competitive. But in order to deliver real value to the organization, these innovations must have a real application in the core business areas and directly improve operational efficiency and deliver a seamless customer experience