Closed ended funds specialising in lending have been a huge growth area of recent years.
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Investment trusts capitalising on the rise of alternative finance and the retreat of traditional bank lending have hit £15bn of assets, according to research from AltFi Insights.
The figure demonstrate a rapid growth in assets being invested into non-bank lending but also the continued expanding array of investment trusts (closed ended funds listed on the London Stock Exchange) that have launched with dedicated mandates to step in where by banks are staying away.
Alternative Income is one collective name given to this 40-strong cadre of funds, most of which launched within the last five years or so. Whilst they are disparate in strategy, in the way they invest and what they invest in, the theme is constant; these are increasingly important players in funding the real economy.
Regular readers will be most likely be aware of those focused towards direct lending and peer-to-peer loans such as the Funding Circle SME Income Fund, Honeycomb, P2P Global Investments and, RM Secured Direct Lending and VPC Speciality Lending. Collectively these hold shares with a combined market cap of about £2bn.
In contrast P2P lending platforms hit £6.1bn of lending last year, according to Brismo.
Mark Thomas, an analyst at Hardman & Co says alternative income-focused investment trusts have fundamentally different risk profiles alongside a range of differing accounting policies, making comparisons fraught with challenges. Performance has also been hugely mixed with some trading on lofty premiums, some on double-digit discounts and some in the processing of wind-down owing to disappointing returns or worse.
All of the funds, however, have another thing in common: mainstream competition from banks has reduced because of their increased capital requirements, creating a structural growth opportunity for the portfolios that are looking to step in, most of which launched in the past five years.
Investors are attracted to the sector for its high-yield in a world where traditional fixed income has seen a squeeze. The average alternative income fund’s being 7.1 per cent, according to Thomas. The highest-yielding companies are Blackstone/GSO Loan Financing at 12.2 per cent, Fair Oaks Income at 12.2 per cent, Chenavari Toro Income Fund at 10.1 per cent, Doric Nimrod Air Two at 9.2 per cent and Volta Finance at 9.1 per cent.
The sector trades at a 4 per cent discount to the December NAVs. The largest discounts are Chenavari Toro Income Fund at 19.5 per cent, P2P Global Investments at 14.1 per cent, Funding Circle SME Income Fund at 11.5 per cent and Volta at 11.2 per cent.
While the collective alternative income investment trusts have grown rapidly in number in five years or so they still make up just a small fraction of the addressable market covered by mainstream banks. One reason for the strong growth aside from the flagging competition from mainstream banks is the specialist skill-sets that these funds claim within their niche markets.
Hardman & Co splits the alternative income funds into five broad categories; Specialist Lenders, Secured Lenders, Collateralised Loan Obligation (CLO) vehicles, Peer-to-peer/platform lenders, Mixed asset, Leasing and those in wind-down/harvesting.
The investment trusts within each segment are listed below.
Specialist Lenders: Alcentra European Floating Rate Income, Axiom European Financial Debt BioPharma Credit
CVC Credit Partners European Opps, JPMorgan Global Convertibles Income, NB Global Floating Rate Income and TwentyFour Select Monthly Income.
Secured Lenders: LCG-Longbow Senior Secured UK Property, Real Estate Credit Investments, Starwood European Real Estate Finance, UK Mortgages, GCP Asset Backed Income, Hadrian's Wall Secured Investments, RM Secured Direct, SQN Asset Finance, SQN Asset Finance Income, SQN Secured Income
Collateralised Loan Obligations (CLOs): Blackstone/GSO Loan Financing, Fair Oaks Income , Marble Point Loan Finance and Volta Finance
Peer-to-peer/platform lenders: Funding Circle SME Income Fund, Honeycomb, P2P Global Investments, TOC Property Backed Lending, VPC Speciality Lending
Mixed asset: Chenavari Toro Income Fund, M&G Credit Income Investment Trust and TwentyFour Income Fund
Leasing: Amedeo Air Four Plus , Doric Nimrod Air Two and Three , DP Aircraft and Tufton Oceanic Assets
Wind-down/harvesting: Carador Income Fund , NB Distressed Debt , NB Distressed Debt and Ranger Direct Lending.
Join AltFi for its third annual Alternative Income Forum, exploring closed-ended funds (investment trusts) specialising in generating an income using alternative assets such as specialist finance, P2P lending, direct lending, asset leasing and more. Hear from the leading investors and fund managers in this rapidly growing market.