They are typically arranged by banks and then syndicated to institutional investors. The portfolio, which typically contains 175 to 225 loans, is diversified by borrower and industry.
Martin Rotheram, senior portfolio manager of the NB Global Floating Rate Income fund, said: “We are active managers and typically select higher quality assets – around 50 per cent of the portfolio is currently invested in credits rated BB or higher – with a focus on keeping duration low and limiting potential areas of volatility.”
Chenavari Investment Managers, the investment adviser of the Chenavari Toro Income fund, provides secured lending to niche and fragmented sectors with high barriers to entry through a precise partnership selection.
It has previously partnered with an Irish company to originate buy-to-let mortgages on the back of regulatory tightening for Irish banks.
At Hadrian’s Wall Secured Investments, the firm, which is a listed closed-ended investment company, focuses on lending only to UK real economy SME businesses secured by a range of underlying assets and collateral including transportation equipment, production equipment, plant and machinery, property, inventory and financial assets.
Ron Miao, chief operating officer at Hadrian’s Wall Capital, the investment adviser to Hadrian’s Wall Secured Investments said: “Among others, the company has provided loans to an auto-lease company, social healthcare developer, equipment manufacturer, construction and engineering company, renewable energy engineering company, and commercial property company across the UK. Typical loan sizes are between £1m to £15m. The borrowers are typically seeking funds for growth and expansion.”
Market growth
And the market is projected to grow further. Mr Miao said as banks have cut back on lending and tightened their criteria for UK SME lending, the prospect for direct lenders in the sector has never been greater.
He added: “SMEs are 28 per cent of the UK non-financial real economy. According to the Bank of England, the targeted market is greater than £200bn in size.
“Given the size of the sector, the company believes its lending opportunities will remain stable regardless of overall financial market sentiment, and its prospects should remain largely uncorrelated with other investment sectors.”
Mr Jaffe added: “The long-term trend is that banks are still pulling out of these segments, whether it be real estate lending, SME lending or consumer lending, people are increasingly going to alternative sources of funding.
“They have only captured a tiny part of the market so we are at the very beginning of what could be a huge transformation in the way people or businesses are borrowing money.
“The opportunities are ginormous and there are funds that have raised a lot of money. If you think about the proposition of lending that takes place in Europe alone, it has not even scratched the surface properly.”
