First US Closed End Fund Nears Launch

By Ryan Weeks on Wednesday 17 June 2015

Alternative Lending

RiverNorth Marketplace Lending Corporation is on the cusp of becoming the first marketplace lending-focused Closed End Fund (CEF) in the US.

AltFi readers will by now be supremely familiar with the names P2PGI, VPC Specialty Lending Invsetments and Ranger Capital. Indeed, only this morning we covered the news that UK investors will be able to invest in these funds through a stocks and shares ISA. Between them, these London Stock Exchange-listed CEFs have raised a grand total of £800m through IPOs and subsequent share issues. But until now we’ve not seen a similar vehicle emerge in the US.

RiverNorth Marketplace Lending Corporation filed an N-2 with the US Securities and Exchange Commission on Thursday, June 11th. RiverNorth is a Chicago-based investment management firm which specialises in opportunistic investment strategies. Once the filing is finalised, RiverNorth will begin marketing the offering to investors, and will likely become the first investment vehicle of its kind to launch in the US.

Bill Ullman, Senior Advisor to Orchard platform, described the CEF structure as manna from heaven to origination platforms – primarily because this model of investment vehicle supplies permanent capital. Mr. Ullman called CEFs “exactly the type of long term investor that origination platforms crave”.

The Orchard Senior Advisor also made an intriguing point about how the CEF structure could in fact play an impactful role in dragging marketplace lending back towards its peer-to-peer origins. His argument hinged on the fact that the majority of CEF investors tend to be (high net worth) individuals. Mr. Ullman argues that such a structure serves to reconnect individual investors to a diversified and managed pool of marketplace loans.

The argument carries some weight in the US, where banks and other institutional investors now consume over 80% of the loans originated by the largest marketplace lenders. Individuals simply cannot compete with these hyper-efficient investment vehicles through a strategy of hand-selecting loans. The CEF structure allows those individuals a more level footing, and may well become the machinery that exhumes a measure of “peer-to-peer” from the marketplace lending marshlands of the US.

But only in such an institution-dominated market does this argument have much in the way of legs. AltFi Data have been doggedly tracking institutional investment levels in the UK P2P space, recently finding that Funding Circle and Zopa remain over 70% funded by retail investors, while RateSetter is for the time being entirely financed by “the crowd”. The c.20%-30% of institutional encroachment that we have seen in the loan books of Funding Circle and Zopa has in fact come from the likes of P2PGI – itself a CEF.

One has to remember of course that the CEF installs an extra degree of separation between the individual investor and the borrower. It is a form of intermediary, meaning an added layer of fees. In short, the idea that the CEF as an investment medium brings the industry closer to P2P only holds true in the States, where the norm is now forms of institutional investment that are closed to individual access.

Circling back to RiverNorth, a minimum of 80% of the company’s managed assets will be comprised of loans “originated through online platforms that provide a marketplace for lending”. The exact fees charged to investors in the CEF were not disclosed in the N-2 filing. The fund’s investment objective has been described as “a high level of total return, with an emphasis on current income”. The fund may invest in other private investment funds that purchase marketplace loans. RiverNorth also appears to have the option of taking equity in an origination platform – a feature it shares with P2PGI.

The fund will not initially be listed on an exchange, but will be seeking a listing in the future. RiverNorth will also be able to leverage and borrow up to 50% of the value of its total assets, again similar to the P2PGI model.

The news of RiverNorth’s arrival has sparked frenzied reaction in the US, with many going so far as to suggest that this will be the first in a domino effect of filings, within a market that is crying out for the CEF structure. 

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