The market for listed funds looking to tap into the marketplace lending scene might be cooling at a rapid rate but that doesn’t mean that money isn’t being raised for loans based propositions. Last week for instance (23 December) a new outfit called Honeycomb started trading on the Specialist Fund Market of the London Stock Exchange after raising £100m for a new UK domiciled investment trust. Once fully invested, and leveraged, the fund will target a yield of 8% pa on the issue price via quarterly dividends through investing in loans to consumers and small businesses.
Direct or alternative lenders may look and feel like alternative finance platforms but there’s a crucial distinction – they tend not to use marketplace platforms to do the lending, usually working through existing originators. This fund works through a separate business called Honeycomb Finance or other third parties. At the moment this roster of partners includes: Freedom Finance (the UK largest personal loan broker); entu (financing on its consumer energy efficiency products); Pay4Later (point of sale consumer credit); and Shawbrook (UK challenger bank). Loans may include everything from wholesale finance, secured against granular portfolios of loan receivables through to portfolios of credit assets acquired from third parties. No single consumer credit asset will exceed 0.15% of gross asset, with no single SME loan exceeding 5% of gross assets.
The majority of the portfolio is expected to be in unsecured loans to consumers (interest rates ranging from 6-15% and an approximate size of up to £100,000) as well as lending to small businesses, although it may also invest in secured loans. Crucially as much as 10% of the fund's gross assets can be invested in the equity of companies originating and broking consumer or small business loans and in companies processing and analysing data relating to lending to consumers/SMEs.
According to investment trust analysts at Numis, “Honeycomb will be managed by Pollen Street Capital which has invested over £1.2bn across a range of businesses. It was formed in November 2013 from the spin-out of the RBS private equity team. The team has focused on financial services since 2008 and has founded or invested in a number of financial services businesses including Shawbrook, Arrow Global (consumer debt purchases from banks), Target (outsourced software solutions to the loans, savings and insurance markets) and Freedom Finance”.
Fees on the fund are 1.0% p.a. of gross assets with no fee on cash until 80% of net proceeds are invested. In addition, there is a performance fee of 10% of NAV growth each year over a 5%pa compound hurdle from the NAV at admission. The initial NAV is £9.82 per share. The manager has also agreed to pay an affiliate of Liberum, the broker, 20% of the management and performance fee. As for gearing the fund is targeting borrowing of 50-75% of net assets, with a limit of 100%. Borrowing may be at the company level or via SPVs. Key shareholders include familiar names from the registers of P2P Global and VPC – Invesco and Old Mutual who between them will own over 75% of the shares.
Honeycomb is part of a much broader alternative lending scene that is fast emerging in the Us and the UK. These new players tend to focus on traditional loan structures – consumer loans – but effectively operate rather like shadow banks, directly lending to borrowers, frequently using internal leverage to amplify returns. These direct or alternative lenders – Ranger is another example – sometimes cross over into alternative finance by using market place lending platforms but for the large part they tend to prefer working with more traditional orignators of loans.