Funding Circle SME Income fund to tap market in ordinary share issue due to Brexit market fallout

By Daniel Lanyon on Wednesday 13 July 2016

Alternative Lending

The Funding Circle SME Income fund will issue up to £15m of ordinary shares at a small premium rather than raise capital through a C share issuance as previously reported, according to regulatory filings to the London Stock Exchange.

Last month the investment trust announced its first dividend since launching in November 2015 as well as revealing a plan to raise more cash through a C share issue. However, the company has now announced instead it will tap capital through the creation of new ordinary shares.

Ordinary shares are added to the existing pool of shares in existence whereas C shares reflect a new pool of assets added to the portfolio. This is particular relevant for P2P/marketplace lending funds as un-deployed cash takes time to put to work and can hamper potential returns.

The investment trust’s board decided to go for a tap instead of a C-share at this time as a result of Brexit, according to a spokeswoman for Funding Circle. However, they add there is flexibility in prospectus to do either and the fund will probably use a combination of both to grow the portfolio over next few years. 

Funding Circle’s Samir Desai, co-founder of the firm and a director of the funds says both routes to new capital remain on the table.

“As envisaged in the IPO prospectus, the Funding Circle SME Income Fund has a program to raise more capital through either a tap of the ordinary shares or a C-share issue,” he said.

“The former can be undertaken opportunistically where there is potential to quickly capture readily available funds. The board expects the fund to continue to use a mixture of taps and C-share raises going forward.”

Having invested more than 90 per cent of the £150m raised at its Initial Public Offering (IPO), the fund’s management has confirmed that it is seeking to undertake a capital raise of between £10-15m. However, the company is reserving the right to increase the size of the issue depending on investor demand.

The fund’s management said at IPO that it was targeting an annual dividend of between 6-7p per share once fully invest. It is on a current yield of 6.1 per cent. Like its peers, it has been hit by a movement to a discount in recent months although unlike its peers, it has more or less recovered. Today it is on a discount of 1.9 per cent. 

Performance of discount/premium since launch

Source: AIC

The capital raise will be in the form of new Ordinary Shares at a premium of 2 per cent to the net asset value of the Company to be announced on 14 July 2016.

The fund is the only investment trust to exclusively buy the loans of just one p2p/marketplace loans platform as well as the first fund structure to have been launched by a marketplace lending platform, Funding Circle.

Funding Circle SME Income targets a total return of 8-9 per cent per annum including a yield of 6-7 per cent with the rest made up from capital growth. It invests in a portfolio of loans to small/medium sized enterprises originated through the Funding  Circle platform. 

The firm secured a £100m injection to finance UK SME loans through its own platform from the European Investment Bank (EIB) recently, allowing it to become fully levered. This equity raise couldreduce the potential leverage provided by the EIB loan.

The tendering will close 19 July 2016 with pricing and allocations confirmed by 20 July 2016. Shares will be admitted to trading on 25 July 2016. 

Monica Tepes, director of investment company research at Cantor Fitzgerald, says if  ther team at Funding Circle believe there are sufficent opportunities in the marketplace, that will continue to deliver, it makes sense to raise more money, especially as the shares are not trading at a big discount. 

"In this case you could argue buybacks would be better in terms of performance. Whether they can raise the money is a different matter. They are currently trading on a small discount so there will not be mass appeal for issuance at a premium," she said. 

"They may however be able to do it if there are one or more large investors that specifically want exposure to funding circle originated loans (as opposed to those in the other funds trading at discounts - the loans can have quite different characteristics) and that would not be able to get a big enough position by buying in the market."

Sign up for our newsletters

Your daily 7am download of all things alternative finance and fintech.

Fintech and alternative finance headlines with an exclusive Editor's Note each week. Delivered Monday at midday.

AltFi's new weekly US newsletter breaking down the ins and outs of America's burgeoning fintech sector. Delivered Monday 9am EST/ 6am PST.