Funding Circle is poised to make a play into the fund space.
The UK’s largest marketplace for lending to SMEs is planning to raise £150m by floating a fund later this year, according to the FT’s Judith Evans. No other peer-to-peer platform has to date taken such a step. The Funding Circle SME Income Fund will invest solely in loans originated through the Funding circle platforms (both in the UK and US). Funding Circle has declined to comment for now.
According the FT, the fund will purchase loans on a passive basis, thereby differing from the likes of P2PGI and Victory Park Capital’s Specialty Lending Investments. The FT also revealed that the fund will look to return an annualised dividend of between 6% and 7% per annum to investors – which is about in line with what private investors have historically accrued by investing through the Funding Circle marketplace. The fund is reported not to be planning to make use of leverage, nor will it charge management or performance fees – which makes sense, given that it will not engage in active selection, or seek to provide “outperformance”.
Given that investors are already capable of passively investing in the platform, via the auto-bid tool, what then is the point of such a fund? In short, the Funding Circle SME Income Fund will provide another mode of accessing the platform. It opens the marketplace up to the pension funds and insurance firms of the world, which cannot by law invest directly.
Is the new fund a competitor to the likes of P2PGI? In part, but not really. The propositions are disparate. The existing Closed End Funds (CEFs) offer the promise of a superior return and inter platform diversification to investors. If anything, Funding Circle’s latest initiative should serve as a useful complement to investors that wish to achieve inter-fund diversification. CEF investors will soon be able to gain exposure to both active and passive models, to SME only, mixed, and consumer only (think Princeton Alternative Funding), to marketplace loans and to balance sheet loans (Ranger Direct Lending).
AltFi readers will be all too familiar with how quickly fund activity within the alternative finance space is evolving. Van Eck Overland Internet Finance filed an N-2 in the States last week, bringing the number of active or soon-to-launch funds in the sector to 7. The Funding Circle SME Income Fund brings that number to 8.
Funding Circle appears willing to take on just about anything. Take the mandatory referral scheme, for instance. We know for a fact that Funding Circle, alongside a host of neutral finance matchmakers (for want of a better descriptor) has been involved in the designation process. In other words, Funding Circle is attempting to position itself as a referral point for SMEs that are rejected for funding by the banks. This example is a long way removed from the fund space, admittedly, but the point stands that the Funding Circle team aren’t content simply to cede segments of the lending process to third party service providers, preferring instead to test the limits of their own platform.