Rumours first surfaced in June that Funding Circle was planning to launch a listed vehicle in order to provide investors with a broad based exposure to its SME loan book. Much of what we suspected to be true has been corroborated. The platform intends to raise £150m for the fund via an IPO, which will take place within the next two to three weeks. The fund will invest in both UK and US SME loans. The target NAV total return will be 8-9% per annum, with the target dividend yield sitting between 6% and 7%. For context, the Funding Circle marketplace has historically returned an average interest rate per annum of 6.8% to its investors. With the SME Income Fund targeting a similar return, it makes sense that the fund will not charge investors management or performance fees (a point which was also confirmed in today’s update).
Today we learnt that Funding Circle is actively engaged in discussions with the European Investment Bank (EIB) about a project to channel funding into UK small businesses via the Funding Circle platform. It appears that the SME Income Fund will be the EIB's chosen medium of investment.
The plan is to grow the SME Income Fund in line with the growth of the Funding Circle marketplace, but the fund will carry several caps and restrictions. A minimum of 50% of the loans into which it invests must have been originated in the UK, versus a maximum of 50% for the US. Desai made the point that the fund will, for the first time, provide investors with the chance to gain exposure to both US and UK Funding Circle loans through a single product. In time, we’re told that the fund will also incorporate loans from jurisdictions beyond the UK and US, with Western Europe cited as a potential expansion target. Desai stated that he and his management team are “assessing options across the world”.
The fund may apply leverage of up to 25% of the value of its assets under management, a cap which Patel says emphasises the fact that this will not be a highly leveraged vehicle. For context, the likes of P2PGI and VPC’s Specialty Lending Investments may obtain leverage of up to 150%.
As touched upon earlier, the fund will not charge any management or performance fees to investors. However, every investor that signs up to the Funding Circle platform is required to pay a 1% per annum servicing fee – and SME Income Fund investors will be no different.
Desai regards the fund as independent of the Funding Circle platform, citing the fact that the vehicle is governed independently, by independent Directors, as evidence. Richard Boléat, Chair of the Funding Circle SME Income Fund, offered his take on the vehicle:
“Funding Circle SME Income Fund is a differentiated new entrant to the alternative lending sector, with unrivalled access to the Funding Circle marketplaces, a focus on small business lending in the UK and US, a conservative gearing policy and a competitive cost structure.”
When asked about the investment trust’s target investors, Desai identified wealth managers, pension funds, mutual funds and asset managers as the most likely early adopters. All investors will be able to buy shares within the fund via the after market, but the initial fundraise will be led by institutional players, which Desai described as “long-term” investors.
Funding Circle loans will be allocated to the SME Income Fund in much the same way that they are to the likes of P2PGI. That means random allocation. Patel stressed the importance of this as a method of keeping the interests of both retail and institutional investors aligned.
In summary, the SME Income Fund’s central selling points are an uncommonly low fee structure, an exclusive focus on SME debt (P2PGI, for example, is roughly 70% consumer) and a strong emphasis on UK loans (again, rival funds tend to focus the majority of their energies on the US market). In Desai's words:
"This will be the first fund to exclusively lend to small businesses through the Funding Circle marketplaces, and is a response to the huge demand we're seeing from a wide range of investors for small business loans. Today marks an important step on our journey to creating a global marketplace where any investor, big or small, can lend to small businesses across the world.”