GLIF’s background (many investors know the business by its old acronym when it was a fund) and subsequent transformation tells us a huge amount about how the Anglo Saxon financial system is changing in both the US and the UK - and where the future opportunity set is for unconventional financiers like Miller.
To tell this story properly though, one has to start in a world seemingly far removed from that of modern-day, technologically infused alternative Finance.
Back in the dim and distant past you may have encountered a term called a CLO which stands for a collateralised loan obligation. These cleverly structured derivatives were indirectly implicated in the Great Financial Crisis - many were rightly attacked as overly complex and frankly not worth the paper they were written on! But CLOs also offered a glimpse into a very real demand on the part of small and mid cap companies (many listed on the US stockmarkets) for loan funding for projects.
The world was and still is literally your oyster if you are a massive global business such as GE or Exxon Mobil. Bond investors will literally fall over themselves to offer you money at low rates, and the resulting liquidity (secondary market) in these pieces of paper is absolutely gargantuan. It helps of course that these huge bond issues can afford to pay equally huge advisory fees, but you get the drift - big is good.
Smaller companies by contrast found themselves (and continue to find themselves) virtually locked out of these markets and were forced to use more unconventional means of financing including what were in effect structured loans, bundled up in these CLO structures. The great advantage for investors was that they benefitted from a steady stream of diversified high yields that, hopefully, more than made up for the inherent riskiness of lending to smaller businesses. Sound familiar - thought so!
Greenwich Loan Income Fund, as Miller’s business used to be called, perfectly captured the ups and downs of this market. Advised by a US hedge fund this London listed closed end fund at first seemed like an obvious bet with high yields and a decent asset backing, helped along by the upside of decent capital gains as some of the loans turned into equity. But the global financial crisis soon put a stop to this exuberance and shares in CLO based structures such as GLIF crashed. Suddenly no-one would touch them with a bargepole.
Enter Geoff Miller as a very active director, brought in to sort out the resulting carnage of collapsing share prices and vanishing investor confidence.
Within the space of four years Miller had accomplished his main task - the share price was back up to sensible levels, income levels were bouncing up again, and everyone was happy. Except that the return of the good times in US corporate credit (the broad category including CLO structures) in recent years tells us another story. The crisis has now been forgotten and midsized public companies in the US can now raise money at increasingly low rates - its boom time again for corporate loan and bond advisers!
But in truth it's also hard to see where the obvious opportunity lies - lower yields and more risk?
Cue the next stage in the transformation of GLIF into a UK/European focused SME funder. CLOs may be back in fashion for bigger companies (most companies tend to have a market cap well in excess of $100m) but much smaller companies - SMEs and what are called micro caps - are still struggling to raise money. Listing a bond is still a hideously expensive business and, as we all know, high street retail banks are increasingly reluctant to lend to what is an obviously risky category of small businesses.
Enter GLI Finance and a growing army of 'alternative financiers' to British business - near rivals include the likes of Tungsten and their e-invoice business which recently listed on the London market. These new financiers are eying up an obvious opportunity - the retreat from SME funding by the major banks.
Their solution - using alternative finance and fintech to connect investors (institutional and retail) with borrowers.
Miller's transformation of GLIF is now almost complete - his existing CLO portfolio is likely to be spun off in the next few months - and what will emerge in its place is Europe's first listed Alternative Finance powerhouse.
In simple terms Miller is buying his way into the AltFi sector in a determined and aggressive way.
Only this week for instance GLI Finance announced its first Continental European investment - a 5% stake in the invoice funding platform Dansk Faktura Børs. According to GLI Finance:
“Dansk Faktura Børs is an online marketplace for crowd-funding invoice financing. The platform enables SMEs to get immediate access to capital tied up in their invoices by auctioning them online to investors seeking attractive short-term returns. Dansk Faktura Børs offers a new and alternative investment opportunity for professional investors who want a diversified portfolio, and who are looking for alternative investment opportunities in the current low interest rate environment."
But Dansk Faktura Børs is only the latest in a long series of acquisitions - see the box below in which Miller outlines each of his major investments in the space.
AltFinanceNews caught up with Miller to investigate what he's looking for next in the Alternative Finance space - and where he thinks the future lies for this fast growing sector!
AltFi: What's the logic behind your portfolio of Alternative Finance businesses?
Miller: Looking at the portfolio of transactions that we have announced, in aggregate they have provided us with a broad SME finance offering that can ensure that our capital is gradually migrated to what we regard as high quality SME finance assets, whilst helping a variety of Alternative Finance platforms develop their business models. We want to remove the one hurdle that early stage finance businesses can find most hard, and that is access to capital, by providing long-term support from a company that can work as a genuine partner, not just a financial investor. We are embedded in the Alternative Finance sector and we believe we will bring tangible benefit to each of our partner platforms through working with us and with other members of the GLIF family. Already the different platforms are discussing how they might work with one another and sharing best practice across the portfolio. We have our first get together of all of the CEOs the night before the Alternative Finance Summit, so thank you for giving me the catalyst to bring all of the platforms together at once! We like businesses that offer a product and service that is complementary to the rest of the finance sector, rather than trying to compete head on with the banks, because we are looking for business models that have a sustainable competitive advantage, not those that could find themselves squeezed out as the banks regain their competitive streak, particularly within SME finance where the banks are under pressure to do more. We also like businesses with unique IP. Simply building a white label platform might generate a little interest but we want to work with businesses that genuinely add value to the non-bank finance sector.
AltFi: Are you looking to turn GLI Finance into a dedicated Alternative Finance specialist for the SME space?
Miller: We are building GLI Finance into a leading investor in the broadly defined Alternative Finance space, which I would regard as non-bank finance-related businesses. This includes peer to peer platforms but also specialist finance businesses such as BMS Finance, online finance companies such as TradeRiver Finance that fund their book from their own equity and financial technology companies such as Finpoint UK that provide the infrastructure for the explosive growth in Alternative Finance. We do not restrict ourselves to any particular part of the value chain but would rather participate across the wide variety of non-bank finance-related businesses.
AltFi: Are you still looking to expand your investment in new platforms across Europe?
Miller: We will focus on the “beer drinking” countries predominantly, although there may be opportunities in Southern Europe should we find the right management team. As with our acquisition strategy throughout the five years that I have been involved with GLIF, we will dip our toe in the water of a new area before then jumping in with both feet once we have fully understood the risks and rewards.
AltFi: Back in the UK, there must be plenty of new startups eager for your investment. What exactly would you want in a future portfolio business?
Miller: Exactly what we would want to do is a difficult question, because in this ever-changing sector it doesn’t pay to predetermine exactly what the future strategy should be. Five years ago when I took over the helm at what is now GLI Finance it was a struggling investment company that invested in US loans. Five years on and over 1500% return to shareholders and it is a geographically diversified, uniquely positioned Alternative Finance business, but quite how we will develop our strategy in the next five years is impossible to answer with any clarity. However, it is fair to say that we now have a core of platforms that will represent the bulk of our offering to the UK, European and US markets. There are two obvious gaps in what we do, and that is bigger ticket trade finance and the leasing market, but neither I would regard as a “must have”, although we have looked at opportunities in both spaces.
It is more likely that further deals in our core markets will either be niche businesses that add a unique capability or specific businesses that have captured a unique part of the value chain within the peer to peer universe. As the peer to peer market continues to grow at the rapid pace set in 2013 during 2014, there will be bottle necks that some new companies are being set up to solve. Our unique positioning across a wide variety of platforms allows us to understand where these bottle necks are and to look to how we might back managements that are trying to solve these issues. I can’t discuss exactly what these are, but there are a number of interesting proposals out there.
Geoff Miller on GLI Finance's recent investments into Alternative Finance Businesses:
Miller has been busy in the month of January, adding to a portfolio that already included BMS Finance, FundingKnight and Platform Black. Below are his thoughts on the various recent investments of GLI Finance.
TradeRiver has a unique approach to trade finance, enabling the entire transaction to be processed online and is thus significantly scalable, limited only by access to capital to fund the book and demand for credit from SMEs. We have increased TradeRiver’s capital available to finance transactions and thus the company can focus on developing its customer base, and thereby enhancing the value of our equity position. The business also has the potential to work with a number of other platforms to widen the financing options for SMEs.
Raiseworks offered a unique opportunity in the US – a fully developed platform that is positioned to become a significant player within SME finance nationwide. We believe the potential opportunity is enormous and the management team have the potential and track record to deliver the growth we expect.
European Receivables Exchange
European Receivables Exchange has a tremendous existing model, creating a genuine exchange for buyers and sellers of invoices. Its core market is Denmark currently and we believe that there is the potential to take this platform both deeper into the Danish market but also out into a wider range of European markets to become a leading pan-European platform. It has exceptional management and first class systems.
Finpoint is already an incredibly successful business in Germany, bringing together larger SMEs and banks, in a model that is essentially a peer to peer business at an institutional level. We see the opportunity in the UK (for which we have a license to the software in perpetuity) as not only allowing the banks to provide finance to SMEs but also allow institutions to get exposure to loans directly from the SMEs and thus build their exposure to an asset class that is very difficult for them to access otherwise.
The offshore peer to peer market has been operated informally for centuries, as those with significant capital have lent directly to those with a need for capital. Sancus, with its diverse network of contacts across offshore jurisdictions, has the ability to formalise these informal relationships in a way that adds value for both sides of the transaction.
We do not want to become a property lender exclusively or even mainly, but we do acknowledge that it is an area that is significant and likely to become a major part of the Alternative Finance sector. Having looked at many models in this area the management of Proplend and the other shareholders struck me as the most aligned with our vision of providing finance in a way that will optimize risk and reward.
The peer to peer market is becoming crowded and that throws up many challenges and opportunities which we expect Crowdshed to be able to solve. Firstly there will no doubt be platform failures, and CrowdShed as a multi-asset, multi-jurisdictional platform can offer a consolidation vehicle; secondly there will be many finance businesses interested in the peer to peer model but unable or unwilling (especially post the introduction of regulation) to run their own platform and CrowdShed can provide a solution; and finally there is the difficulty of any emerging platform to stand above the melee of new entrants, and providing a wide variety of crowdfunding solutions offers Crowdshed the opportunity to build a wide and diverse investor base that could potentially end up seeing CrowdShed as a “one stop shop”.